European Monetary System

The European Monetary System was created on March 13rd, 1979 after 13 month of hard negotiations. It is the successor of the European Currency snake with which it should not be confused.

Its objective is to stabilize the European currencies and rests on three pillars: the EMS envisages indeed

a framing of the limits of fluctuations around a course pivot of reference, the ECU (European Currency Unit). For as much the ECU is of nothing a common currency, it is not that a virtual tool daily deduced according to the rates of exchange from the currencies from the Member States.
a mechanism of exchange which ensures a solid bond between the national currencies.
a system of credit which manages the monetary solidarity of the countries.

Like shows it the genesis of the EMS and the history of the negotiations, the EMS could exist only because France and Germany had decided it. The secrecy of the negotiations in the beginnings was finally a very important asset for the success of the talks. Too many crossed, political and economic interests, would have made fall the project if the financial community, the senior officials and the public opinion had been informed of the file before the European Council of Bremen. Thus, the idea was acquired that the Europe cannot be built without a very strong political will.

March 12th, 1979, after very long and very rough negotiations, a communication of the European Council announces: “ the conditions from now on are met so that the mechanism of advantage of the European Monetary System is implemented”. Curiously there will be other communications neither of the French President, Valery Giscard d'Estaing, nor of the German Chancellor, Helmut Schmidt. In fact few persons in charge believed in his future and the majority of the experts were very skeptics on his future, persuaded which it would not be viable good a long time, a few months hardly or even a few weeks, and which it would be in any case unable to resist the serious speculation.

In fact the system appeared stable and achieved its main aim which was to contribute to the stability of the exchanges. As of the first two years - 1979 and 1980, the European currencies were more stable than during the seven previous years. Then it resisted the second oil crisis well. Moreover it facilitated well the European fight against inflation and caused a certain bringing together of the economic policies.

However, in spite of first encouraging results this monetary system will appear disappointing. As decides one to go further as the EMS

Genesis of the negotiations

In 1977 at the beginning of the negotiations of the long process which was going to lead thirteen months later to the EMS, Europe was limited to the common agricultural policy, that of coal and steel and with more or less awkward attempts to discipline foreign exchange rates. This discipline wanted to be ensured by the European Currency snake, but which at that time there, gathered nothing any more but the West Germany and the Bénélux. In fact, as Jean-Yves Haberer said it, then director of the Treasury: “ Europe was born without monetary identity. The negotiators of the Treaty turned their attention on the free trade of the goods, the common external tariff and the harmonization of the policies which can influence the movement of the goods and the people ”; but not large monetary matter thing.

Had this discretion been desired in 1957 for political reasons - indeed, which could really have imagined a common currency between outgoing country of Second world war? - and for reasons of stability then ensured by the Agreements of Bretton Woods. It is questioning of these Agreements in 1971 which was going to be born the awakening from the need for a zone of monetary stability in Europe. As of 1972 is created the European Currency snake (1972 - 1978), economic device which includes/understands for each currency a threshold of intervention to the sale and a threshold of intervention to the purchase. Thus, a currency cannot fluctuate compared to another from more or less 2,25% around its bilateral parity.

In December 1975, Léo Tindemans, then Prime Minister of Belgium, written in his report/ratio on the European Union: “ a monetary reinforcement would enable us to seek a better dialog of the economic policies and monetarists between great units in order to reduce the fluctuations, which were excessive in a recent past between several great groups of currency and more particularly between the Snake and the dollar ”. However, the confrontation of two approaches seems to block the opening of the negotiations:

France is favorable to the immediate creation of a mechanism of European exchange what in its opinion would facilitate the bringing together of the economic policies.
For Germany and the Netherlands, the convergence of the economic policies must be the obligatory precondition before any harmonization of the monetary policies. These two countries estimate that the countries with the economic policies laxists must initially make significant efforts in term of inflation and control of the exchanges. Virtues of the ones not having to repurchase the defects of the others.

The problems economic at the time period 1977-1978 are important: generalized inflation, crisis of steel, collapse of the dollar, which of March 1977 to March 1978 loses 12,34% compared to the German currency, passing from 2,35 DM with 2,09 DM whereas the American trade balance records a deficit of 31 billion dollars for 1977. The US government does not support its currency and the other European currencies the ones after the others must leave the European Currency snake.

the French franc which had to leave it as of March 1976 plunges again at the time of the legislative countryside of March 1978.
the Italian lira knows more and more sudden starts with the participation of the Communists in the government coalition.
the pound sterling, in spite of a devaluation of 30% in 1976, is always very weak.

October 27th, 1977, the British Roy Jenkins, then President of the European commission, proposes in its speech of Florence, to strike a great blow by creating a single currency for the nine countries and a community budget which he proposes to fix at 10% of each GDP, because he estimates that no progress can be carried out by a policy of small steps.

Beginning 1978, monetary instability is generalized and the situation is such as same the Community exchanges from now on are threatened. According to the historian Peter Ludlow, at the end of January or at the beginning of February, the German social democrat chancellor Helmut Schmidt, conscious of the economic situation and stakes, makes the decision secretly, outwards even of its cabinet, to be diverted of its American ally and to start again European construction. The regard shared which binds it to the French president Valery Giscard d'Estaing and with the British Roy Jenkins will be the heart of this new alliance. According to Renaud of Genière, then deputy governor of the Banque de France: “ progress made in the agricultural domains, policies or economic could be done only because there was at the base a Franco-German agreement ”.

February 28th, 1978, the German chancellor entrusts to both, his secret decision to start again the economic and monetary union countries of the EEC, and on April 2nd, 1978, it meets with Rambouillet, the French President. This last left politically reinforced by the victory its majority at the time of the legislative elections of March 1978 and the German chancellor has the freehands also politically. They develop the proposals that they will present together at the time of next the European Council to Copenhagen, April 7th and 8th 1978, for them it does not act more to discuss on opportunity of a new monetary device for the European Union, but to reflect on its contents and its calendar.

History of the negotiations of the EMS

The Summit of Copenhagen

April 7th, 1978, at the time of the top of the European Council to Copenhagen, after the plenary meeting, the heads of state and government, meet in the Château of Marienborg, where after the dinner, at a discrete meeting, Helmut Schmidt and Valery Giscard d'Estaing reveal their plan of a new device different and more ambitious than the Currency snake, including/understanding the creation of funds European monetarist, the increased use of the European currencies at the time of the interventions of the central banks on the Foreign exchange market and the increase in the role of the European Unit of Account, with as ultimate goal which it becomes in the long term, a currency of reserve.

The listeners are very surprised and dissatisfied to be held with the variation and the reception is rather cold, particularly on behalf of the Italian Giulio Andreotti and the British James Callaghan. Blow the only decision taken is to preserve the greatest secrecy from this point of view, and at the time of the press conference of the following day held by Roy Jenkins and Danish the Prime Minister Aker Jorgensen, it is made right mention that “ the question of European monetary stability was evoked ”. However nobody knows that a private mini-top took place in great secrecy the morning even of April 8th, 1978; and at the time of this mini-top, which joined together Helmut Schmidt, Valery Giscard d'Estaing and James Callaghan, it was agreed to entrust the continuation of the negotiations to an abstract and secret small group of three experts made up of the governor of Banque de France, Bernard Clappier, of the principal private secretary of the chancellor, Horst Schulmann and of the secretary to the British Treasury, Ken Couzens.

The official negotiations begin on the level from the Community authorities:

the committee of the governors of the central banks in his report/ratio of June 19th, 1978 takes again the traditional position of the central banks accurately: it is necessary to initially carry out a greater coordination of the economic policies before planning to bind between them, the currencies of the EEC.
the monetary committee, which influenced by its president Jacques Van Ybersele had as of January 1978 started a basic reflection on the monetary situation and monetary instability in Europe, is shown much more open and presents four possible solutions to the Ministers for Finance:

the maintenance of the Currency snake with two levels of margin, a margin with 2,25% for the German mark, the Belgo-Luxembourg franc, the Dutch guilder and the Danish crown and a second margin widened for the other currencies of the EEC (French franc, Italian lira, pound sterling and deliver Irish).
the maintenance of the Currency snake with only one level of margin for the first four currencies and an objective for the others by a report/ratio with a basket of great international currencies.
the creation of a Funds European monetarist.
the creation of a new mechanism, to replace the Currency snake, authorizing each currency to be fluctuated in a margin reduced compared to a basket of currencies of the nine other countries.

On its side, the secret group of the three experts works on a project of plan which could be proposed at the time of the next Summit of Bremen, but on June 26th, 1978, the British weekly magazine “ The Economist ” creates a dramatic turn of events by revealing the existence of this group of expert. Obliged to go to be explained near all the governments of Europe, outraged to be held well off such a process and of especially to have learned it by the press, they are received coldly, but little by little, and with this time a little more frankness, they succeed in the exploit of all more or less rejoining them with their project. According to the first Belgian minister, Léo Tindemans “ the contents was so fundamental that no reserve of our share on the principles was possible ”, and Denmark, Ireland, Luxembourg and the Netherlands follows the same opinion, whereas the governments Italian and British are most reticent. The British, close to the United States estimate that the solution with monetary instability must above all be required near the Fonds international currency and of the the World Bank.

The Summit of Bremen

July 6th, 1978, at the time of the Summit of Bremen, the heads of state and government receive the document prepared primarily by Bernard Clappier and Horst Schulmann, the British Ken Couzens there having little contributed. They estimate that a “ system of closer monetary co-operation will be able to succeed only if the participating countries continue own policies to ensure a greater stability inside and abroad ”. Their project proposes:

“ to create a system as strict as the Snake ” with the possibility for the countries with soft currency “ of profiting from limits of fluctuations a little more important around the rate-pivots ”.
to create the ECU ( European Currency Unit ) as “ pillar of the system ” and “a used for the payments between the Monetary authorities of the EEC ”.
to create funds initial intended for the central banks of the country of the EEC “ made up with the help of the deposit, on the one hand of an amount out of gold and dollars (at a rate of 20% of the reserves held per the central banks of the Member States) and on the other hand, of currencies of Member States for a comparable amount ”.
that “ the countries taking part in the new system will coordinate their policies as regards foreign exchange rate with respect to third countries ”.
that “ two years at the latest after the coming into effect of the system a Fonds European monetarist will replace current the Funds European of co-operation monetary ”.

Immediately some governments express their hostility and their will that such a plan can never be born; among them the governments British, Danish, Dutch and Italian. In FR of Germany, the chancellor Helmut Schmidt must immediately face many lobbies and at the financial community, Bundesbank at the head, which fears the return of the Inflation and it must pass more than 200 hours to convince his compatriots. But after Luxembourg the Prime Minister Gaston Thorn proposes to publish the project by accompanying it by a preamble mentioning the dissensions and the wishes of each one, the British James Callaghan finds himself completely isolated in his attitude from systematic opposition and finally accepts this proposal. A work schedule is stopped in the tread: the requests for modifications must be given before October 31st, 1978 but the negotiations can finally start.

Negotiations

From the beginning in spite of their agreement on the bottom, the Germans and the French defend two different designs. The Germans want to stick to the European Unit of Account, a fictitious currency and think that the ECU does not have real utility; whereas according to Renaud of Genière: “ the French wanted to make ECU the monetary personification of Europe, the keystone of the system. Initially, we wanted to create a currency only intended for the transactions of the central banks. An embryo of unit of payment and payment. We proposed that the central banks lodge with an organization, part of their gold reserves and dollars, and that the liabilities and the receivables of the new countries are regulated in ECU. ” Finally it is the point of view of the French who will carry it but after rough negotiations.

A second point of divergence in the negotiations appears with the methods of intervention of the central banks, the agreement of Bremen not saying anything on this subject. The Germans and the Netherlanders are rather minimalists and estimate that the obligations of interventions must only depend on the needs to defend the parity between currencies; variations of each currency being defined compared to each other currency, a kind of vast system of bilateral relations between the currencies. Whereas for the French, each currency must be defined compared to an average of the European currencies, defined by the ECU and the obligation of intervention on the foreign exchange markets starting, as expressed it Jacques Van Ybersele: “ for a determined currency, since would be reached the maximum variation authorized between the course pivot and the value of market of the ECU in this currency. ”

September 14th, 1978, at the time of the Franco-German top with Aachen, Valery Giscard d'Estaing and Helmut Schmidt work out a compromise and immediately make of it share with the Ministers for the Economy and Finances, then they will be collected in front of the tomb of Charlemagne and the President French declaring simply with the press: “ the spirit of Charlemagne blew on our work. ”

September 18th, 1978, at the Council of Ministers of the Economy and Finances of the nine countries, an agreement is found on the methods of intervention on the foreign exchange markets in the direction of the German proposals: the central banks will have the obligation to intervene as soon as the limit of fluctuation of a currency compared to each other currency is exceeded, a little as within the framework of the European Currency snake, but moreover the evolution of the limits of fluctuation of each currency compared to the ECU will be supervised. The possible drift of the currencies will be identified thanks to an indicator of divergence. However, the negotiations stumble on the level of responsibility for the faulty country: this one will have only one “presumption of action”; it is committed leading actions of stabilization to the level of its monetary policy and budgetary, but without that being obligatory.

Another important matter is treated but without real solution, it is that of the distribution of the appropriations assigned to the Funds monetarist. In fact it is a question of installing a mechanism of assignment and transfers of the resources in order to help the least prosperous countries - Ireland and Italy - with being durably integrated in the EMS. During the months which followed this question gave place to a true battle of ragmen - Pierre de Boissieu spoke about “ organized begging ” - largely popularized in the press and the public opinions, more especially as the countryside of the European elections of 1979 is committed. The tone goes up:

In October 1978, in Great Britain, the left wing of the workers party refuses to follow James Callaghan on the way of the EMS, whereas the 26, Humanity, the newspaper of PCF, writes that “ Valery Giscard d'Estaing became the West German broker of the interests ”.
on December 6th, since its bed of hospital, Jacques Chirac lance her call of Cochin and declares: “ As always when it is about the lowering of France, the party from abroad is with work with his voice peaceful and reassuring. French, do not listen to it. It is the numbness which precedes peace by dead the ”.

After several meetings of the Ministers for the Economy and Finances, during negotiation and November and October, rough, a presentable agreement at the European Council of the December 4th and 5th seems found:

About the limit of fluctuation, the Italians obtain a limit of fluctuation extended to 6%.
About the amount of the assigned appropriations, the imagined device comprises three elements:

a short-term financing - 45 days - giving place to advances of amounts unlimited between Central banks;
a monetary support at court term - up to 9 months and of a maximum amount of 14 billion ECU - intended, in the event of unforeseen difficulties, to cure a temporary deficit of the balance of payments;
a financial assistance in the medium term - of a maximum amount of 11 billion ECU.

At the time of the European Council joins together December 4th and 5th 1978 in Brussels, it proves that no area of agreement is possible with the Italians and the Irishmen on the file of the “parallel contests”. The financial transfers required to reinforce their economies are considered to be exorbitant and the French president Valery Giscard d'Estaing does not want to give a centime moreover, the EMS will start without them. However, the negotiations begin again and at the end of one week the Irishman Jack Lynch and the Italian Giulio Andreotti decide to take part to the EMS as of his creation, on January 1st, with eight country - without Great Britain.

But, another problem arises with the French who would like to obtain the removal of the compensatory units striking the exchanges of agricultural produce and threaten not to take part to the EMS as long as a solution will not be found. The negotiation on this point will last three months and it is only on March 13rd, 1979 that the EMS finally which been able to be born.

Chronology of the EMS

March 13rd, 1979, the EMS between into force, but as of on September 23rd, 1979 it undergoes its first refitting - the German Mark is revalued of 2% and the Danish Couronne is devaluated of 3%. The foreign exchange markets remain calm.

In December 1980, the European Council joins together with Luxembourg defer to the Greek calendars the creation of the Fonds European monetarist and the provisions which were to ensure “the use full and whole of the ECU as having of reserve and instrument of payment” by declaring that the passage to the institutional phase will be done “at the convenient period”. This retreat is with the many ones and powerful internal political pressures in particular those of the Bundesbank in Germany and RPR in France.

In October 1981, first devaluation of the French franc, followed in June 1982 by a second devaluation, marking the first failures of the socialist policy of the governments Pierre Mauroy.

February 21st, 1982, the Belgian Franc is devaluated of 8,5%. This important devaluation marks a major turning in the Belgian political life which from now on will know the Austérité.

March 21st, 1983, third devaluation of the French franc which marks the need for Austérité and of change in the economic policy and financial of the country. Since June 1982 and the second devaluation, France knows a great debate between pro-Europeans of right-hand side as of left who preach the rigor and the maintenance of France within the EMS and most of the left which militates for the exit of the EMS, the introduction of constraining tariff barriers, the revival of the economy by a massive injection of free currency so that the Franc French undergoes a massive devaluation. Pro-Europeans ended up gaining the part - concretized victory on July 17th, 1984 by the arrival with the businesses of the Gouvernement Laurent Fabius.

March 15th, 1985, the governors of the central banks end up signing an agreement with an aim of inciting the official use of the ECU in the place of the American dollar like instrument of reserve and in their interventions on the foreign exchange market when they should ensure the stability of the courses of the European currencies. For that it is decided to revalorize the interest rates been useful on the ECU.

December 2nd, 1986, the European Council with Luxembourg decides that the monetary union will have to be written in the revised text of the the Treaty of Rome, institutionalizing of this fact the EMS and the ECU.

June 16th, 1989, the Spain decides to integrate the Peseta in the European Monetary System.

../.

Notes and references of the article

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