The
Battle Over the Euro
In
the book, The Euro: The Battle for the New Global Currency, David Marsh
offers a historical account of the development of the continental currency, the
Euro, and explains what challenges Europe’s monetary union faces today. In this
essay, I wish to summarize some key events of its development, followed by an
analysis of some of the vital political and ideological aspects that have laid
the foundations for its current challenges. Finally, I will conclude this paper
by offering my personal assessment about the prospects of the Euro’s future.
Marsh’s
story begins with the financial tensions that began across Europe in the wake of
World War I. According to Marsh, the fiscal damages that both world wars
incurred “provided an inkling of the self-feeding effects of a breakdown
in political and financial cooperation” (p.28, Marsh). By the 1970s, Western Europe
had emerged from the monetary recovery provided by the Marshall Plan and the
Bretton Woods fixed exchange rate system.
The
stability of this system, however, appeared to be waning in light of the
changing landscape of U.S. monetary policy and the emerging global markets. Soon
enough, European fears of the U.S. abandoning the Bretton Woods system were
confirmed. This declaration shifted Western markets from a “fixed” to a
“floating” exchange rate system, thereby usurping any security that European
nations previously held about the stability of their currency values.
Fearing
that drastic devaluations of their currencies as a consequence of turning away
from the U.S. Gold Standard, European leaders looked to the European Commission
of the European Economic Community (EEC) for a program to re-stabilize their
national currencies. Although there was a general consensus among European
states for necessity of establishing a single currency, France and Germany soon
became advocates of conflicting, and mutually exclusive, monetary theories. This
ideological fissure would prove to be a major obstacle on the path towards total European economic
unity (p.59, Marsh). This fissure will be discussed at greater length later on
in the essay.
One
of the first programs attempted to mediate the exchange rate fluctuations
inherent in the Bretton Woods system was the colloquial “Euro Snake” (p. 66,
Marsh). This program was set up by the EEC to control floating rates among its
member states by limiting their currency oscillations (p.66, Marsh). However, a
few weeks after Bretton Woods ended, this ‘floatation tunnel’ came to a halt,
proving to be an EEC failure. The implications of this were proof that “the
beginning of generalized floating left Europe with a de facto D-Mark bloc” (p.71, Marsh). Succeeding years showed how
the “Snake had shrunk from a major European Community policy instrument to an
informal mechanism” (p.80, Marsh). Clearly, a new monetary instrument was
needed.
This
new instrument came in the form of the Exchange Rate Mechanism (ERM) within the
European Monetary System (EMS). The ERM was intended to reduce volatility
between European currencies, and did an adequate job. Despite surviving these
challenges, pressures on the EMS were soon to far exceed the expectations that
its original authors could have imagined.
Over
the course of the 1980s and 1990s, efforts towards solidifying a single
currency union were stifled by various factors, some coming from within the
leadership of the EEC member countries, and some coming from external global
events. By the turn of the millennium,
however, the EEC—now the European
Union—managed to enact a single currency, the Euro. While this was certainly a triumph of
political and economic coordination, the years immediately following its
inauguration proved to challenge the strength of this project to the core, as a
global recession was dawning and pushing
European Union’s peripheral member nations to the fiscal brink. To reiterate, the
remainder of this essay will analyze some significant political and ideological
issues present during the Euro’s development that may have unnecessarily
increased the burdens facing the Euro area today. This will be followed by my
personal assessment of the Euro’s future.
Perhaps
the most intractable obstacle to successfully implementing a single European
currency is the longstanding ideological discrepancies between the French and
German monetary policies. Fearing a devaluation of their national currency and
the unlimited strength of the D-Mark, French politicians aggressively
campaigned to create a single continental currency after Bretton Woods.
Advocates of French monetary policy came to be known as “Monetarists.”
The
reasoning behind their theory was akin to the “strength in unity” theory, in
the sense that through cooperative economic policies, Europe would be able to protect
itself from global financial shocks. France, Belgium, and Luxemburg leaders
generally believed that a single European currency would insulate economically
weak states from global predation or obsolescence be instituting mandatory—yet strategic—capital
redistributions funded by more economically viable states (p.46, Marsh). This
would be done by capital redistributions from wealthy countries to weaker
countries in order to “provide
governments with the right tools to produce the convergence budgets, growth and
incomes that was both the goal of, and an essential support for, monetary
union” (p.46, Marsh).
Hence,
Monetarists believed that taking early steps to fix exchange rates were “a
prelude to full monetary union later,” and that successful monetary convergence
mostly depended on establishing “a common approach to monetary issues” across
member states.
While
one may find this fiscal ideology intuitively compatible to his or her sense of
justice, we must consider the rational of its ideological opponent before we
judge its real-world merit. Opponents to Monetarism mainly came from Germany
and the Netherlands, and operated under the label of “Economists” (p.48, Marsh).
Although Economists found a continental
monetary union for the sake of
maintaining Europe’s global competitiveness agreeable, they differed on the process by which this union should
occur.
This
ideological divergence “hinged on a crucial issue: whether money should be the
instrument, or the objective, of economic convergence” (p.46, Marsh). While
Monetarists saw money as the instrument, Economists saw it as the objective of economic unionization. Hence,
they “believed countries had to run convergent economic policies before they
could permanently fix exchange rates…monetary union would come at the end of a
long journey” (p.45, Marsh).
Pursuant
to this point, German and Dutch leaders resisted French unitization proposals that
could potentially obligate them to give monetary relief to those economically
“weak” countries. Such averseness towards this type of economic relief stemmed
from the Bundesbank’s “desire to prevent any repetition of the economic
waywardness that, in the 1920s and 1930s, had promoted the rise of Hitler”
(p.41, Marsh). It is no surprise then, why Germany was for so long completely
unmoving in its position to retain its D-Mark. The buildup of external
political pressures, however, would wear down the “divisions of responsibility
for the ‘internal stability’ of the D-Mark set by the Bundesbank’s interest
rate policy, and the ‘external stability’ governed by the Government’s stance
on the exchange rate” (p.40, Marsh).
When
put side by side, it is easy to see why nearly all of the early attempts at
economic integration either ended in stalemates or in policies that were too
weakened by their shortsightedness to survive the various
economic pressures placed upon them. It seems plausible that these prejudices
carried over between the successive administrations of France and Germany,
frustrating attempts at concessionary negotiations until less ideological
leaders emerged on both sides in the forms of Mitterrand and Kohl. Only then,
with their more politically oriented policy goals, and with younger, more
open-minded constituent bases, could these leaders afford to take the policy
risks they did pursuant to the dream of a unified continental market.
Another
obstructing theme in the Euro’s development manifested itself throughout Marsh’s
account in the form of more logistical apprehensions of managing a transnational currency: that is, German concerns about
the contingency strategies of a single monetary system. With our understanding
of the French and German attitudes towards monetary policy, the following
contingency concerns are sure to appear consistent with each party’s respective
beliefs.
One
major contingency issue concerning non-German EEC members ironically played on
Germany’s own apprehensions about obligatory financial bailouts for weak
states. This issue came about when West Germany was faced with the task of
reunifying with East Germany.
The
unanticipated collapse of the Soviet Union in 1989 left West Germany unprepared
for this challenge. This was a major undertaking for Chancellor Kohl, whom was in
the midst of resisting increasing pressures from President Mitterrand and the
EEC to make a definitive decision on Germany’s commitment towards creating a
single currency. Given West Germany’s preexisting position as the monetary
‘anchor weight’ of the EEC, and the massive economic discrepancy between the East and West,
it was vital that Germany reunite with the impoverished GDR with tact to
prevent continental currency devaluations. Unfortunately, tumultuous currency
fluctuations are exactly what happened.
This
is due to Kohl’s “blatantly political” unilateral move to “introduce the West German currency to East
Germans,” as a means of persuading East Germans not to migrate to the Western
territories (p. 145, Marsh). This was an unprecedented departure from the
traditional “principles of financial probity on which West Germany had built
its forty-year post-war success” (p.145, Marsh). This move caused “the terms of
the monetary conversion” to be “greatly exacerbated” by the “East German
economy’s lack of competitiveness and inflated the overall German monetary
supply,” causing higher interest rates all over Europe (p.145, Marsh).
Kohl’s
blatant disregard for pursuing cooperative monetary policy initiatives, I
believe, set a precedent for the behavior of other nations, like Greece, to ignore
the rules set by the EMS. As the events of the 2000s unfolded, Greece and other
prospective Euro member nations repeatedly disregarded EMS policies themselves,
or became the beneficiaries of delegated ‘exceptions to the rule’ in the
European Union’s monetary proceedings. Such a lack of authority, combined with
the absence of an independent fiscal institution that could act like an arbitrator
for the continent’s capital flows, has pushed Europe’s economic future to the
brink of existence.
Although
idealistic, Europe’s crises have proved the inadequacy of the Monetarist
approach to creating a unified currency. I believe that the economic problems
Europe faces today—that of their ever amounting debt obligations among member
states and abroad—could have been avoided if leaders chose to establish an
independent and stringent fiscal institution to monitor and regulate capital
investments.
With
these considerations in mind, my assessment about the future of the Euro is
bleak. I think that both French and German leaders mishandled the process
towards unification. Both sides seem to have allowed their ideologies to get in
the way of progress, yet when they abandoned their policy principles, they
failed to fully commit to the cause. Such perpetual second-guessing of their
positions on the project and the ad hoc programs that ensued have proven that
perhaps Western Europe was not economically nor politically prepared to take the plunge into a
monetary union. In this sense, I would have to side with the Economist’s
approach, because it seems that the Monetarists relied too much on the D-Mark’s
power to alleviate their woes.
It
seems that after such a long process of integration, the Euro project will not
be abandoned easily, if at all. With the limited understanding of global
financial markets I have gained from Marsh’s history, it seems that the only
way that Europe can resolve its economic crisis would be to absolve all of the
debts of its insolvent member states. After this process, I think the Euro
would have to be put onto an economic respirator, to be closely monitored by an
independent central authority, much like the Federal Reserve. This massive
centralization would benefit the Euro states by avoiding the corruptive affects
of political and nationalistic interests that the leaders of its member states
have for so long pursued.
Although
strongly resisted in former years, this prospect is likely to become attainable,
as national leaders grow increasingly desperate for a solution to their
economic woes. This will not occur without stark resistance, but I think that
European leaders will be able to swallow their national pride and agree to
forfeit some of their economic sovereignty if it means saving their states from
financial chaos.
Bibliography
Marsh, David. The Euro: The Battle for the New Global Currency. Yale. 2011.
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