Orchestrating Europe (Text Only)

It was the duty to promote the economic and social development of the Overseas countries and territories associated with them by letting these countries and territories share in the prosperity, the rise in the standard of living and the increase in production to be expected in the Community.

The trade-off between access to industrial and agricultural markets had been a central cornerstone in negotiating the EEC. Yet there was so little chance of agreeing on the form of the policy or the level of protection during the negotiations that, unlike the sections on the customs union, the clauses on the Common Agricultural Policy remained largely procedural. Ehrard, who was anyway opposed to much of the Treaty of Rome, argued that the vagueness of the clauses proved that they were designed to be forgotten. The key to ensuring that this did not happen lay not in the paragraphs concerning agriculture but in article 8 which made progress through the three stages towards the customs union contingent upon equivalent progress in agriculture.

As commissioner in charge of agriculture, Sicco Mansholt started his work by rallying national agricultural pressure groups behind a European policy. In June 1960 he submitted his first proposal to the Council of Ministers. This foresaw free trade in agricultural products within the Community but with uniform target prices and variable levies on imports. In addition there would be structural policies designed to raise productivity. In 1962, after intense negotiations, market unity, Community preference and financial solidarity emerged as the principles of a future CAP. However, this still left important issues such as the level of support prices and the financing of the system to be settled before the CAP could become operative. Meanwhile a regulation was passed establishing the FEOGA (Fonds Européen d’orientation et de garantie agricole) whose provisions extended until mid–1965.

The level of common prices as well as the financing of the CAP proved to be very controversial and the fierce negotiations almost brought the EEC to the brink of collapse. It took until the end of 1964 before German reluctance to accept a target price for grain below their prevailing national level could be overcome and before a common price level for cereals could be introduced. Proposals for common financing of the CAP were submitted in March 1965. Since these envisaged augmenting the EEC’s institutional powers, through increasing the budgetary competences of the European Parliament and the introduction of majority voting, France flatly opposed the move. In summer 1965, it withdrew its representation from all EEC meetings and, with this ‘Empty Chair’ policy, precipitated a major crisis within the Community which was only resolved in January 1966 with the Luxembourg Compromise – usually described as an ‘agreement to disagree’.

The Luxembourg Compromise stipulated that the Commission would consult with governments before adopting any important proposal, notwithstanding its rights of initiative enshrined in the Treaty of Rome. More significantly, it stipulated that if a country felt its vital interests to be at stake, even on issues normally decided by majority, the Commission was bound to continue discussion until unanimous agreement was reached – or drop the proposal altogether. Although at the same time the financing of the CAP was resolved, with a fixed scale of contributions agreed to run until January 1970, these events emphasized that the balance of power lay not with the Commission, but with member states.

Relatively high price levels within the CAP soon led to serious problems. Besides raising the cost of living, high guaranteed prices contributed to a rapid growth of agricultural surpluses. By the beginning of the 1970s, the EEC had turned a deficit in wheat and barley into a surplus of 10% above requirements. An equilibrium in butter had been transformed into a surplus of 16%, and a 4% surplus in sugar beet had been bloated to closer to 20%. Mansholt responded in 1967 by calling for more emphasis on structural policies that would allow a reduction in prices, but this appeal foundered on violent oppostion from agricultural organizations. The Council of Ministers capitulated to pressure by rejecting any consideration of price cuts and by diluting considerably the proposals for structural policies.

One of the principles of the CAP was that the same price and marketing conditions prevailed throughout the Community. Thus, when the CAP began, unified support prices were expressed in units of account (u/a), a measure of value equivalent to the US dollar. However, changes in exchange rates between currencies would also require an alteration in producer prices expressed in the national currencies concerned. Thus, when the French franc was devalued in 1969, domestic producer prices should have been raised by an equivalent percentage. Similarly, domestic returns for German producers should have been reduced to make allowance for the revaluation of the deutschmark. However, governments were reluctant to adjust farm prices in the direction of, and to the degree indicated by, fluctuations in exchange rates. As a temporary solution they therefore established a system of Monetary Compensation Amounts – i.e., subsidies and levies for imports and exports – to bridge the gaps that had emerged between domestic and ‘common’ European prices. Later this ad hoc provision was virtually institutionalized by the introduction of special exchange rates, the so-called ‘green’ rates, that applied exclusively to agriculture and allowed the agricultural support prices expressed in national currencies to diverge.

This procedure increased the costs of the CAP, perpetuated and aggravated distortions in competitive conditions in national markets, returned effective control of agricultural prices to national governments and undermined the entire logic of having a ‘common’ policy. Indeed, divergences in national prices sometimes exceeded those experienced before efforts at price harmonization began in 1967.

On balance, the major achievement of the first fifteen years of the CAP was the removal of arbitrary quantitative controls that had characterized intra-European trade since the late 1920s and early 1930s. It also erected an external regime that created an EEC preference zone (although this could also have occurred without common policies). Finally, it attempted to implement a single system and level of protection throughout the Community. All these factors generated a sizeable increase in intra-European trade, but at considerable cost. Nobody in the post-War period questioned whether agriculture should be protected and all economic protection has to be paid for in some way. The ‘consumer pays’ principle chosen for the CAP was, in its nature, a regressive tax on food that augmented the cost of living. The effect of this was compounded by the increasingly high price levels that repressed domestic consumption whilst stimulating output. As production swung towards structural surpluses, so the costs of intervention, buying and storage increased and ate into the funds intended for structural renewal. The solution of disposing (or dumping) the surpluses on the world market also served to undermine relations with external trading partners who had already been disconcerted by being squeezed out of EEC markets and who now had to sustain the impact that the sporadic sale of large commodity stocks had on the fragile levels of world prices.

The removal of tariffs and quotas ahead of their original schedules was, as we have seen above, a milestone in the histories of both the EEC and EFTA. Since EFTA, too, had in 1961 and again in 1963 decided to accelerate its own timetable, within the blocs of the Six and the Seven tariffs had vanished completely by 1969.

Yet, as it was understood at the time, the dismantling of tariffs and quotas was a necessary but not sufficient condition for ensuring free competition:

* Both organizations allowed the retention of some quotas for cultural and similar reasons.

* Both faced customs formalities for the restitution and reimposition of indirect taxes (and EFTA also had to contend with certificates of origin).

* Both saw individual administrative and technical obligations assume a more restrictive character.

* Both had to confront the effects of methods of levying taxes on business, incentives for investment and the granting of subsidies – which all acted to distort competition.

* Both still had to tackle the problem of cartels and restrictive practices.

EFTA ducked many of these issues by only investigating complaints made by governments (and there were not many), whereas the Commission dedicated itself to eliminating these sources of trade distortion in principle. Yet the EEC only really started to address these problems at the end of the 1960s and even then made very slow progress. Even discounting the new protectionist measures introduced after the 1973 oil crisis, the Commission’s own judgment in 1981 is revealing: ‘The customs union, the implementation of which is intended to ensure the internal market, is proving to be increasingly inadequate for the achievement of this aim.’

As tariffs and quotas were dismantled, so the impact of non-tariff barriers became more apparent. Some argue that their incidence became more prevalent as business turned to new protective devices to compensate for the loss of traditional forms of protection. However there have been no historical studies to substantiate or deny this. The Treaty of Rome stressed the need for a general system to protect competition from distortions (art.3(f)) and developed the areas of policy, the competences of the Commission and Council, and the rules and procedures in articles 85ff. Articles 85 and 86 declared that agreements between enterprises, together with dominant market positions capable of distorting trade, were incompatible with the Common Market. Furthermore, they prohibited dumping and state subsidies (though the latter came with a long list of exceptions). Lastly, state monopolies (art.37) should be reshaped, and fiscal as well as legal dispositions should be adjusted.

All these provisions remained sketchy, however, and it was the task of the EEC institutions and Commissioner, Hans von der Groeben, to flesh them out. Given the different interests and perceptions in this field, the problem was formidable, but it was by no means the only one. Competition policy was ambiguous as a concept, and the possible negative sides of a stringent competition policy were much resented. On the other hand, it could be articulated in more positive terms by suggesting that what Europe needed was more, rather than less, concentration in the interests of maximizing efficiency.

On the question of state monopolies, the Commission could, after the first stage, recommend measures for reshaping them, which it did in several cases, usually by proposing gradual modifications which increased imports, eliminated the disparity of margins and adjusted to market conditions. There is insufficient evidence available to judge the impact of these rulings but in some cases, such as tobacco, it was shown that imports from other member states increased considerably. Yet given the facts that the Commission tried to work with, rather than against, member states, and that these had often and publicly voiced firm opposition, analysts generally agree that the policy of the Commission in this field was rather cautious. Moreover, celebrated successes such as tobacco need to be counterbalanced by equally significant setbacks: the reintroduction of a French petroleum monopoly represented a de facto break of the standstill agreement of art.37, to the effect that no further state monopolies should be introduced.

State subsidies also presented a thorny and difficult problem, the more so since subsidies were poorly and ambiguously defined in the Treaty. Generally, subsidies were deemed incompatible with the Common Market since they could distort trade between member countries. Yet industrial or regional policies were seen as necessary adjuncts to a mixed economy – and this implied financial aids. Thus it was necessary to distinguish between ‘adjustment’ and ‘unfair government aid’ and the Commission had the power to scrutinize existing state subsidies. Should they distort trade, it could ask that they be abolished or amended. It could also rule that the subsidy was compatible or necessary. Similarily, new ‘other’ subsidies could be introduced with a qualified majority vote of the Council.

The Commission became active in this field early in 1959 and demanded information on the financial aids in use among the member states. Following this, it had some success in persuading governments to amend and/or end subsidies – as in the case of German synthetic rubber, or on the more rapid depreciation allowances for French producers buying French equipment – together with similar practices in Italy. Moreover, considerable progress was made in the early 1960s in completing the inventory of existing aids and agreeing on information procedures. Yet as late as 1974, so Cairncross and Giersch argue, the praxis of state aid was still not transparent and, on the whole, EC policy failed adequately to tackle the problems of state aid. Matters grew worse after the Luxembourg compromise, when the Commission’s attitude can best be described as pragmatic awareness of the difficulty of successfully challenging determined member governments. Difficulties with financing subsidies from the EEC’s own funds contributed, though this problem diminished over time. Not surprisingly, the level of government subsidies showed little inclination to decline. What is more, the Community had still failed to define uniform criteria and conditions for judging the admissibility of aid.

The Treaty of Rome empowered the Commission to submit proposals on restrictive business practices and dominant positions which were able to distort competition – i.e., cartels and imperfect competition. It did so in 1960, and in 1962 the Council adopted Regulation 17, which was called by Swann/McLachlan ‘an obscure legal document’. It reaffirmed the prohibition on restrictive business practices (art. 85 (1)) and ruled that they could be dissolved. It also subjected the firms concerned to a fine. First of all, though, it provided a notification of such agreements and a procedure to determine the action taken. This succeeded in attracting the notification of more than 35,000 restrictive agreements, most in the hope of securing acceptance and many involving fairly innocuous trading practices. By the end of 1962, however, Commission officials had isolated almost five hundred as constituting serious impediments to international trade.

Even so, many of the ‘traditional’ cartels had not registered at all.

After some struggles with the Council, which initially refused to give the Commission regulating powers, a policy emerged via a combination of exemptions, rulings of the EJC and Decisions by the Commission; which tried to ban price fixing, market sharing, production quotas, vertical distribution agreements, certain aspects of the exploitation of commercial property rights, and collective exclusive dealing. Implementation of this policy, however, remained fraught with difficulties. Obviously, restrictive agreements which the participants felt unlikely to be accepted were rarely notified. The villains of the piece were secret, large, international, horizontal producer agreements where the Commission had problems in securing evidence and prosecuting cases. Progress on this front was halting and sporadic but, since there is still no assessment of the prevalence of cartels in the 1960s, it is difficult to assert the effectiveness of the Community’s efforts. The contemporary merger boom and the spread of multinationals in these same years complicated matters; and to some extent these new commercial arrangements built on tacit measures of cooperation existing earlier.

The Spaak Report (1956) had argued that the advantage of a Common Market ‘lies in the fact that it reconciles mass production with the absence of monopoly’. It was assumed – and hoped – that European enterprises would adapt to the new situation by becoming bigger entities, enjoying economies of scale and enhanced productivity. Herein lay the route to improved competitiveness, above all, through the example of US firms. Throughout the discussion on the ‘technological gap’ and the ‘American challenge’, the size of US enterprises was seen as the main reason for their superiority over their European counterparts. On the other hand, the Treaty of Rome hoped to avoid dominant positions – or at least their abuse (cf. art. 86) – and to ensure competition. The European Communities had to find some way through this dilemma to define their policy.

The Commission initially adopted a largely passive stance: in 1963, the question of ‘concentration’ was handed to a group of experts who produced a first memorandum in 1966. Although this reiterated the need to preserve competition, it laid more stress on the positive aspects of concentration. The Commission’s first aim was to reduce impediments to certain forms of merger. The reason may have been the poor results of cross-frontier mergers within the EEC (only 257 in the period 1961–9) compared with domestic mergers (1861) and those involving third countries (1035). At the same time, the Commission demanded powers to control mergers that threatened to acquire a dominant market position. It did not acquire these powers then, and when it did, in 1973, it was only in the form of rights to prior notification. The intervening years had been marked by complex legal arguments on the way in which the relevant articles were to be applied, arguments that could have been avoided, ‘if there had been any real political will amongst the member states for a merger policy’.

It was obvious that the dismantling of tariffs by both the EEC and EFTA, as well as the EEC’s introduction of a CET, was going to have some impact on the international pattern of trade. Modern customs union theory predicted two effects from the dismantling of tariffs and the introduction of a CET: trade creation, that is a shift from higher-cost producers to other EEC sources whose goods had become cheaper with the dismantling of tariffs; and secondly, trade diversion, that is a shift from lower-cost foreign sources to higher-cost EEC sources that benefited from tariff preferences whilst the external tariff was maintained. Intra-area trade would expand; in the first case because of a more optimal use of resources and in the second at the cost of less optimal sources. Much empirical research has been done to determine the balance of advantage.

Trade within the blocs rose considerably. That of the EEC increased from $7530m to $49,830m between 1958 and 1971 and within EFTA in the same period from $28oom to $ 11,190m. In both cases, trade between bloc members grew faster than their trade with the rest of the world. EEC exports to EEC countries rose from 32.1% to 49.4% in these years while the percentage share for EFTA exports to EFTA countries rose less dramatically from 17.5% to 24.3%. Before trying to apportion the balance of advantage, one has to consider that increased intra-bloc dependence is not exclusively a function of the manipulation of commercial conditions. In a period when the growth centre of world trade lay in the exchange of increasingly sophisticated manufactured goods, it would not be surprising to see developed economies in close geographical proximity doing particularly well. Equally, performance within groups may be determined by differential growth rates. EFTA, which included the relatively sluggish UK economy, may appear less ‘successful’ than the EEC, with the rapidly-expanding German economy at its core. For example, EC exports to EFTA fell from 21.1% to 16.6% whilst the share of EFTA exports to EEC countries rose from 22.8% to 25.4%, despite the maintainance of tariffs or the deflection of agricultural trade.

Singling out an EEC-effect is not easy and the various attempts that have been made to do so have been much discussed. The so-called ex-post models cover a period when the EEC was in operation, and try to find out what the world would have been like if the EEC had not existed. To estimate trade in such cases, one has to rely on some ceteribus-paribus assumptions, so that the findings are always problematic. Hence Sellekaerts’s warning ‘that all estimates of trade creation and trade diversion by the EEC are so much affected by ceteribus-paribus assumptions, by the choice of benchmark year (or years), by the method to compute income elasticities, by changes in relative shares and by structural changes not attributable to the EEC but which occurred during the pre- and post-integration periods (such as the trade liberalization among industrial countries and autonomous changes in relative prices), that the magnitude of no single estimate should be taken too seriously’. Notwithstanding this destructive comment, it has to be admitted at, despite the different methodologies employed, most studies suggest that trade creation outweighed trade diversion, so that a net gain was achieved. Furthermore, Davenport has stressed the fact that ‘the divergence in estimates is relatively limited, with the majority clustered in a range going from $7.5bn to $11.5bn for trade creation and from $0.5bn to $1bn for trade diversion.’

Very few estimates break this ‘gain’ down into individual national components. Two studies that do this come to broadly similar conclusions. The Benelux countries benefited least, since they already had the lowest tariffs and because the mutual Benelux preferences had to be diluted in the common market (a case of trade erosion). There is a noticeable gap between these countries and the other three. Despite having the next lowest tariffs, Germany benefited the most, reflecting both its export structure and its ability to make inroads into the markets of partner states. France and Italy followed close behind.

Some authors contend that these calculations underestimate the impact of trading blocs. They stress that increases in market size and the impact of certainties in irreversibly reduced frontier barriers to trade induced a favourable investment climate and economies of scale, at least in sectors engaged in trade. Indeed, in the Italian case, the difference between a hyper-efficient export sector and a more backward domestic sector had led to the economy being analysed in terms of ‘economic dualism’, even before the full impact of the EEC was felt.

Growing commercial interdependence especially among the EEC states prompted concern among their governments over whether or not to tie their currencies closer together. The implications of moving to convertibility in 1958 quickly became apparent because the US balance of payments deficit remained acute. In the 1950s, this had been the main source for replenishing reserves. By the early 1960s, however, central banks in the EEC member states held about all the dollars they wanted. Yet the inflow of dollars continued unabated, attracted by the investment opportunities offered by the rapidly expanding EEC economies, or seeking a quick return by exploiting the relatively high interest rates on offer in Europe. Some of these funds were exchanged for US gold, some remained in the vaults of European central banks, and some were held by the private banking system. The latter formed the basis for the so-called Eurodollar market and provided a growing wash of international liquidity highly responsive to changes in, or rumours of changes in, market conditions. International speculation in foreign currencies became a daily fact of life. In such circumstances the desire for some preemptive, collective defence mechanism assumed a higher place in the aspirations of the Six.

Unfortunately, as Tsoukalis has pointed out, the Treaty of Rome provided ‘very little, if any, guidance with respect to monetary policy’. This was hardly surprising since conventional wisdom at the time assumed that the multilateral arrangements enshrined in the Bretton Woods agreements could be fulfilled – and did not envisage their imminent demise. Expectations were high, but the Treaty’s provisions for monetary integration or cooperation (arts 104ff.) were rather pale and dim, stipulating the liberalization of payments on both current and capital accounts. Within a framework of overall equilibrium in the balance of payments, member states were enjoined to pursue policies directed at high employment and stable prices. To accomplish this, it was seen as necessary – and apparently sufficient – that there should be a loose coordination of economic policy accompanied by the creation of an advisory monetary committee to observe, report and comment on current problems. Although exchange rate policy fell within the purview of this body, it remained a national prerogative. Should countries face difficulties, the Community could offer financial assistance in addition to making recommendations, but no fund for this was created.

The first decade of the EEC’s existence brought various proposals but few achievements. It was characterized by almost uninterrupted balance of payments surpluses for the EEC-members and a parallel decline in the position of both reserve currencies, the dollar and sterling. After the devaluations of the French franc in 1958, the payments situation within the Community attained some equilibrium. The small, five-per-cent revaluations by the deutschmark and the guilder in 1961 stemmed largely from the size of their respective surpluses with non-members. The only internal EEC crisis was the Italian deficit in 1963–4 which was resolved by non-Community credits and without recourse to changes in exchange rates. Several initiatives for institutional change and closer monetary integration came from the European Parliament and the Commission.

Suggestions for closer consultations and the creation of a separate committee of central bankers were accepted in 1961 and 1964 respectively. However, more radical proposals, if not rejected outright, found little positive support among the member states, partly because monetary reform was seen as an issue that required the involvement of the USA and the UK, and partly because the ever-open question of British membership of the Community made several members reluctant to press ahead with more drastic schemes.

Nonetheless, the increasing outflow of dollars and the need for a common line by the ‘surplus’ countries (which included all the EEC states) kept the issue of regional monetary reform on the agenda. In 1964 the French finance minister Giscard d’Estaing proposed the creation of a new reserve unit to eliminate use of the dollar and to serve the needs of intra-European trade. This idea was killed by a combination of the point-blank refusal of the US to contemplate such arrangements, the reluctance of some EEC partners, and a policy conflict within the French government. Jacques Rueff, architect of the French reform programme of 1958, favoured instead an attack on the pre-eminence of the dollar, through using the ‘rules’ of the international system rather than through changing them. Since the dollar was convertible into gold, France decided in 1965 simply to do just that; a decision that provoked d’Estaing’s resignation. Although member states shared France’s underlying concern, they were uneasy about these tactics; and varied in their degree of susceptibility to American diplomatic pressure. On this last point, West Germany was particularly sensitive to US pressures, since the country depended upon the large American troop presence for its security.

A further impetus towards creating a Community attitude on monetary problems came from the decision in 1964 to adopt a common ‘unit of account’ for determining national prices. This implied that domestic prices would need to adjust proportionately to any future change in exchange rates. Although such adjustments were considered unlikely, the Commission wanted mechanisms to reduce the chances further still. At this point it faced opposition on the grounds that tying down one part of the monetary equation made no sense without tightening other components – a line of argument which had already been voiced by German delegations at various international gatherings for over a decade. They demanded economic policy coordination as a prerequisite for monetary union.

The essential underlying assumption that international parities were somehow immutable was punctured by the crises of 1967–8. When sterling devalued in November 1967, a two-tier gold market was introduced in March 1968. As speculation built up against the franc, France introduced exchange controls in spring 1968. Germany provided a safe haven for funds but the government denied that an overvalued DM had caused the problem. Instead, in autumn 1968, it imposed extra taxes on exports and took fiscal measures to encourage imports. The Bundesbank’s stubborn refusal to revalue, despite massive pressure, worried all concerned and pressure for a realignment of exchange rates could not be avoided. But it was a symptom of the depth of the conflict that when the decision was made, the action was not coordinated. France, unilaterally, devalued by 11.1% in September 1969. With German honour thus satisfied, the DM was allowed to float that same month and was formally revalued by 9.3% the following month.

These events produced a surge of interest in regional solutions. The Commission tabled two memoranda in the course of 1968, and in February 1969 the so-called ‘Barre Report’ was submitted. Although the reports differed in emphasis and tactics, they agreed on creating a new reserve unit, improving policy coordination and a establishing a mutual aid system. The Council of Ministers responded, since it also ‘recognized the need for fuller alignment of economic policies in the community and for an examination of the scope for intensifying monetary cooperation’. Even so, there was no immediate follow-up. Meanwhile, the need for some initiative was underlined by the situation created by the 1969 currency realignment. Since neither France nor Germany had wanted national farm prices to change in line with the new exchange rates, (rather than allow the CAP to collapse) the Commission had to produce a system of ‘green’ exchange rates to preserve the fiction of common price levels.

It was some relief when, prompted by the German chancellor, Willi Brandt, the Hague summit of December 1969 endorsed the aim of ‘Economic and Monetary Union’ (EMU) and set up the Werner Group. Although Brandt’s proposal seemed a major departure from the usual German line of insisting on the primacy of prior policy coordination, the Werner Group very soon found itself embroiled in old conflicts. Two schools of thought prevailed: the ‘monetarist’, which saw fixed exchange rates as a means of forcing policy coordination, and the ‘economist’ school, represented by Germany and the Netherlands, which saw the maintenance of fixed parities as impossible without convergent economic policies. The Werner Report, submitted in October 1970, adopted a compromise position. It called for the realization within ten years of complete and irreversible convertibility, closely aligned exchange rates, the full liberalization of capital movements and the creation of a common central banking system.

To achieve these ends it recommended a narrowing of the margins of fluctuation (from 1.5% either side of par) and a better organization of policy cooperation, especially in the area of foreign monetary policy. It took until March 1971 before the measures were approved. Although the French endorsed the monetarist approach, they wanted to avoid at all costs any discussion on the political and institutional aspects of EMU. But it was exactly a commitment on these aspects that Germany and the Netherlands saw as the price for their concessions. As a result, the resolution approving the goal of EMU left the questions of the transfer of power and institutional reform undecided.

Thus nothing was in place when the Bretton Woods system experienced its next, and ultimately terminal, crisis. In 1970 the USA, still experiencing mounting balance of payments deficits, had eased its monetary policy; consequently, speculative funds flowed back to Europe and, in particular, to Germany. The thinking of the German Bundesbank now moved quickly in the direction of a DM revaluation as a means of reducing the attraction for foreign funds, but there was still the question of how to reconcile this with maintaining parities within the EEC. In spring 1971, the German finance minister, K. Schiller, apparently against the feelings of the majority within the Bundesbank, proposed a joint flotation of all EEC currencies against the dollar. This was resisted by those countries that did not want their currencies dragged upwards in the slipstream of the DM. Instead something reminiscent of the 1966 Luxembourg ‘agreement to disagree’ was decided. The DM and the guilder floated, while other countries introduced capital controls. The decision by Nixon to suspend dollar convertibility in August 1971 only reinforced the divide. Italy now joined Germany and the Netherlands in advocating flexibility of exchange rates, while France, Belgium and Luxembourg preferred a system of exchange controls. Action was further delayed by a general agreement that the key to a global currency realignment lay in a dollar devaluation and not in a revaluation of other currencies. Thus another four months elapsed before the Smithsonian Agreement validated a change of most EEC rates against the dollar of between 7.5 and 16.9%.

The Smithsonian Agreement also allowed currencies to float by 2.25% on either side of the new central rates, which implied that EEC currencies could diverge by as much as 9% before triggering intervention to stabilize the exchange rate. This prospect produced a compromise whereby European currencies would maintain a tighter rein on their rates with each other, whilst moving jointly against the dollar: the so-called ‘snake in the tunnel’. The system was also briefly joined by the aspirant members. However, there was still no mechanism to produce convergent policies, nor were convergent policies adopted. Soon the new rates appeared as unrealistic as the old ones they had replaced. In June 1972, sterling left the snake and floated downwards. Ireland and Denmark, heavily reliant on the UK market, immediately followed suit, although Denmark rejoined after four months.

These mutations notwithstanding, the ‘success’ of the system prompted new moves, agreed in October 1972, to reinforce EMU but, significantly, no agreement was reached on the second step towards attaining the ultimate goal. Meanwhile divergent policies continued to exact their toll. Attempts to get the UK to rejoin the float in January 1973, when it joined the EEC, were rebuffed by a government that did not want to sacrifice recovery for exchange rate equilibrium. The following month, the Italian lira was forced out of the system. The fact that Sweden joined was little consolation. However, the final blow to the system (and to the chimera of economic and monetary union by 1980) was the fate of the French franc which in January 1974 was also left to float. As Tsoukalis comments, by this stage a group comprising Germany, Benelux and Scandinavia had to be understood as ‘little more than a DM Zone’.

The 1966 Luxembourg Compromise had allowed the Council, and thus the EEC, to resume its work by postponing the introduction of majority decision-making and allowing the right of national veto. For many observers who had looked for further progress towards supranationality and contributed to a body of neo-functionalist literature to rationalize their aspirations, the Community appeared interesting but no longer exciting. Moreover, the issue of UK membership again strained relations among the member states. The second British application in May 1967 – followed by applications from Norway, Ireland, Denmark and Sweden – was again aborted by a negative French vote in December 1967. It was clear that on this particular question France was immune to the feelings of its European partners. The Five tried to maintain pressure on France by using the WEU for initiatives to extend cooperation to the political as well as monetary field. This ‘rebellion’ could only be prevented by de Gaulle’s intervention, using the so-called ‘Soames Affair’ (in which the British had leaked details of confidential conversations with the General that suggested a revival of a free trade area to include agriculture) which produced another ‘Empty Chair’. The mood deteriorated further: if the Community were ever to be enlarged to embrace the UK, something in France itself would have to change.

In fact French attitudes shifted surprisingly fast. It is possible that there were objective factors behind the change. For example, new concern about German economic power emerged, especially as France’s balance of payments weakened. Germany’s refusal to revalue during the monetary crisis of 1968 reinforced the fear about the balance of power within the Community which may have produced a feeling that the UK could serve as a countervailing force. Secondly, the Warsaw Pact’s invasion of Czechoslovakia had led de Gaulle to repair relations with the USA. It has been argued that this made it senseless to persist in seeing the UK as an Anglo-Saxon ‘Trojan horse’ in the Community. Although both of these arguments are plausible, until evidence is provided to the contrary it seems most likely that the contemporary view, which attached the greatest importance to the shift in power from de Gaulle to Pompidou, was closest to the truth. Although the government was still ‘Gaullist’, under Pompidou it contained four ministers who were members of Monnet’s Action Committee for a United States of Europe. Whatever the ultimate reason, in July 1969 Maurice Schuman announced that France was willing to countenance some European rélance. Proposals linking the completion, strengthening and enlargement of the EEC would be forthcoming at the Hague summit in December.

The Commission quickly wrote the Hague summit into its hagiology calling it a ‘turning point in its history’ (EEC Bulletin, 1/1970). It would be churlish to deny that much was accomplished, although different countries laid different emphasis on different parts of the package. France was most interested in completion of the Community and, specifically, the financing of the CAP. The others were primarily committed to enlargement. Nevertheless the decisions at the Hague, taken together, represented an ambitious programme for future development. It was agreed to find a definitive financial arrangement for the CAP by the end of 1969. By July 1970, ministers had requested a report to deal with possible developments in the field of political unification. By December 1970, they wanted a further report on Economic and Monetary Union (EMU). Last, but undoubtedly not least, it was agreed to open negotiations with candidate-countries.

Implementation of the agenda began immediately after the conference. Between 19 and 22 December, agreement was reached on financing the CAP and on the EEC’s financial resources. The latter involved allocating to the Community all receipts from levies and customs duties, as well as national contributions to cover any deficits, and their gradual replacement by receipts to be calculated on the basis of an assessment of harmonized VAT. Committees were installed to draft the requested reports. Two major reports were published in 1970: July saw the publication of the Davignon Report on political unification, while October saw the Werner Report on Economic and Monetary Union. The fate of EMU has been dealt with in the previous section, but the cornerstone of Davignon’s recommendations was foreign policy coordination, described as ‘European Political Cooperation’ (EPC), which rested upon regular meetings of foreign ministers and high officials. Its first achievement was to produce a concerted position during the Conference on Security and Cooperation in Europe that produced the famous Helsinki Accord in 1975.

However, the Hague summit’s main achievement was to re-open enlargement negotiations. Within the UK, a range of studies had attempted to balance a calculable economic ‘loss’ (attributable entirely to the structure and funding of the CAP and the structure and direction of UK foreign trade) against potential economic gains (as the economy benefited from both the static and dynamic effects of customs union). Most managed to arrive at a favourable result. Nonetheless, the negotiations did result in the adoption of new policy areas, noticeably in the creation of a regional fund, from which the UK was likely to emerge as a net beneficiary, in an effort to redress at least part of the transfer problem. These measures, however, stopped short of any automatic redistributive mechanism. No such problems arose with Denmark or Ireland, which were expected to emerge as net beneficiaries from the system.