In sum, there has probably never in history been an economic and financial disaster on the scale of the monetary union in Europe.
If there are no feasible solutions for the euro crisis without withdrawals, possibly even complete breakup, what does that imply? One can have little doubt that serial withdrawals and, a fortiori, a breakup of the euro area will have horrible consequences, quite possibly including a new and bigger global financial crisis. But some such crisis is – that word yet again – inevitable. The biggest credit bubble in history will bring the biggest credit losses in history, come what may. The longer the charade of attempting to ‘resolve’ the crisis goes on, the bigger the losses and the more devastating the inevitable crisis will be.
Europe – continental Europe, at least – is in economic disarray; political legitimacy, based on feelings of cohesion – of nationhood – within states and on the principle of ‘live and let live’ among states, is in clear and present danger; the trust between people and rulers that must underlie democracy, and the trust among countries that must underlie peace and stability, are both disappearing. None of this can be repaired if discussion and reasoned argument about European problems are treated as disloyalty and lunacy.
This book tells the true story of the Exchange-Rate Mechanism, the ERM. It is about why the mechanism is a bad thing – economically perverse and politically perverted – and why so many politicians, bureaucrats and commentators have fought so hard to hide this reality.
Even after the ERM ceased, after the market triumph of July 1993, to be a functioning economic mechanism, ‘the authorities’ did not want its true story to be told, for the myths, misconceptions and taboos that sustained the ERM are exactly those that underpin the relentless drive towards monetary union and a federal superstate in Europe.
I came to realize that the mechanism was part of a programme to subvert the independence – political as well as economic – of Europe’s countries. Anyone who stood in the way of the European superstate had to be cut down.
The techniques and modes of thought of twentieth-century secular religions have marked the attitudes of the European Establishment to the ERM ‘common good’ and to the ‘historic inevitability’ of monetary and political union.
In the face of this relentless and overbearing propaganda and worse, this book will attempt to expose the double myth of the ERM: that it economically rational and beneficial, and that it was politically a symbol of friendship and cooperation. I will argue instead that the mechanism was a major reason for economic failure, for impaired political legitimacy, and for the unhappy state of affairs recently described by a German newspaper as ‘the pitch-black distrust with which European Union members today regard each other’.
The ERM is a mechanism for subordinating the economic welfare, democratic rights and national freedom of citizens of the European countries to the will of political and bureaucratic élites whose power-lust, cynicism and delusions underlie the actions of the vast majority of those who now strive to create a European superstate.
In 1978, the political geography of Europe had been frozen for three decades. Another decade was to pass before the Yalta settlement crumbled. But the monetary geography of the Western part of the Continent already reflected the breakdown, at the beginning of the decade, of the Bretton Woods system of fixed exchange rates among the non-communist industrial countries.
It had initially been intended to cover all Community countries in the belief that the Common Market (as it was still called in those days) could not work if the currencies of member states fluctuated widely against one another.
These economic arguments – or, at least, arguments couched in terms of economics – were secondary to explicitly political ones.
Just as Germany wanted European cooperation and, ultimately union, to help it bring its economic weight to bear diplomatically, so France wanted it to give economic muscle to its diplomatic ambitions. As De Gaulle had once said, ‘The EEC is a horse and carriage: Germany is the horse and France is the coachman.
The devaluation of March 1983 marked the acceptance by Mitterrand and Delors that, in the modern world economic order, ‘Socialism in One Country’ was economically impossible. Instead, they set their sights on the creation of ‘Corporatism in One Continent’, along lines similar, as it happens, to those envisaged by Nazi and Vichy theorists, to confront the ‘Anglo-Saxon’ world.15 A little less than nine years later, the Maastricht Treaty seemed to have brought that vision within reach.
The only way to gain German respect for France sufficient to gull Germany into handing over monetary sovereignty was to reduce French inflation to German levels and to maintain a strong currency.
Perhaps even more satisfying to the German mind, the ERM had, since March 1983, turned into an undeclared DM-zone, thus enabling the benefits of German price stability to be exported to other members of the system – along with economic stagnation and unemployment.
The years of undisputed Bundesbank domination of the ERM were also the years of the most concentrated ‘Europessimism’. In Britain the fruits of the Thatcherite revolution, the antithesis of Rhenish capitalism, were beginning to ripen in the sunnier climate outside the ERM.
There was to be a trial of strength between the Bundesbank and those, notably the French, who were determined to get their hands on the levers of monetary power.
In short, there is no meaningful economic argument for a single currency in Europe – now or ever.
A currency has meaning because it expresses national monetary sovereignty. The circumstances that might make a country want to give up its national monetary sovereignty irrevocably can never have anything rationally to do with economics – though the connection is often falsely made. A reason can be found only in politics or, more accurately, in the desire of certain groups of people to create, extend or buttress power for themselves at the expense of the electorates they are supposed to serve.
Hans-Dietrich Genscher, the German Foreign Minister, as wily and determined as any énarque, had his own reasons for supporting the idea. He wanted to change the perception of Germany as ‘an economic giant but a political pygmy’. Whether or not there really had been a Kohl–Gorbachev Pact, the task of increasing Germany’s political weight in the world, and especially in relations with the Communist states of Eastern and Central Europe – the GDR above all – would need to be handled carefully, however, given the sensitivities arising from Germany’s historical record.
Thus Genscher was prepared to offer France the bait of a diminution of German national sovereignty in monetary policy, an area that did not interest him a great deal, in order to increase Germany’s diplomatic weight.
Thus it was that the might of the German industrial-financial and union complex swung behind the idea of monetary union.
It was not to be until the day after (quite literally) the signing of the Maastricht agreement that the German press – in the shape of the ‘vulgar’ tabloid, Bild – spilled the beans.
EMU was all about power and about national interests, not about a mythical Community interest. If countries were ever to engage themselves in an exercise that so explicitly gave priority to the Community interest (whatever that might be) over national interests, then the whole EMU project would be put in jeopardy. Ideas of ‘solidarity’, ‘community’, ‘fraternity’ and the rest were fine as cover for the power play of European monetary politics, but heaven forbid that anyone should ever try to put them into practice!
It was no wonder the Commission’s scheme and the reaction to it were not made public: at almost exactly the same time, Continental politicians were laying and implementing the plans for the imposition of EMU and for the political liquidation of the one figure prepared to tell the truth about it: Margaret Thatcher.
Mrs Thatcher had to be got rid of quickly. An ideal opportunity was at hand. A European Council was scheduled for late October, under Italian presidency.
To keen observers, however, it became clear that something was in the air when… The something in the air began to smell even nastier when…The ambush had the expected result. Mrs Thatcher refused to accept that…
On the Monday morning following the Rome Council, Jean-François Pons was debriefing his staff. One naive soul asked if the Council had not been a failure, since unanimity had not been achieved. On the contrary, affirmed Pons, the Council had been an outstanding success, since it had re-established an eleven-to-one situation in the Community and would destabilize Mrs Thatcher at home!
That afternoon, Mrs Thatcher made her famous and impassioned ‘no, no, no’ report to the Commons on the Rome ambush, criticizing Delors particularly severely.
Two days later, Howe – identified approvingly by Charles Grant as a potent Delors ally – resigned, setting in motion the sequence of events that was to end three weeks later in Mrs Thatcher’s tearful departure from Downing Street
In France, the technocratic/political élite had been able to get away with such an outcome because nearly the whole of the traditional political class saw it as a necessary evil – necessary to pursue the goal of taming Germany and confronting the Americans and Japanese. In Britain, that obsessive fear of Germany and hatred of America and Japan was just not there (except perhaps in the left wing of the Conservative Party). Murdering the economy would never find popular support on ‘geopolitical’ grounds.
If Britain had stayed in the ERM, the country would soon have been in the position of Italy, Sweden, Finland and Belgium – all of them countries in which exchange-rate ‘discipline’ had led to fiscal irresponsibility on a grand scale. As it was, Britain was pushed out in time to avoid irretrievable fiscal catastrophe.
As we shall see in subsequent chapters, the increasingly evident success story of British monetary policy outside the ERM led to vituperation from those who felt most threatened by it – the Commission, the French government and, not least, Tietmeyer. It threatened to expose the theatre of cruel deceit in which the ERM story was still playing. Somehow, the ERM myth had to be maintained.
As politicians, bureaucrats, economists and ‘opinion-formers’ across Europe surveyed the wreckage of the ERM on the morning following White Wednesday they began an intellectual damage-limitation exercise.
To subordinate domestic (that is, national) economic considerations to national foreign policy goals almost always corresponds to subordinating the preferences of the population at large to those of a political élite, and can never be unconditional, except – possibly – in the most ruthlessly efficient totalitarian state.
From then onwards, the story of the ERM would revolve around the frantic efforts of non-German would-be members of the ‘hard core’ to prove their virtue by undergoing a trial by ordeal – while within Germany the battle raged for the right to determine who would be judge in that trial.
John Major had any sense either of humour or of justice, Soros would have been granted an honorary knighthood in the New Year’s Honours of 1993. He was the White Knight who, on White Wednesday, administered the coup de grâce to the ERM dragon that was destroying the British economy.
France was not Britain, nor even Italy or Spain. The ruling caste reacted ferociously to what its members saw as an attack on their whole concept of ‘l’état’. The power of the French state still extends much further in the financial area than does that of the British government, and it was used to the full.
Their ability to do this came in part from the nationalized status of many of the largest French banks. As for the ‘privatized’ banks, most still run by people who were énarques or other members of the ruling caste, their attitude to the ‘pouvoir public’ was deferential.
With Germany seen, once the dust had settled, to have borne all the adjustment to the exchange market movements, for the first time ever, it was hard to see where the anchor of the ERM was to be found. What was the system for?
The idea of a monetary union covering the whole Community was seriously wounded on 16 September. By 23 September it had been killed stone-dead. The ‘peripheral’ countries – Spain, Portugal, Italy, Denmark (despite its referendum result), Ireland and Greece – still clung desperately to the notion.
From then on, the tactics of all these countries, and of unreconstructed Euroenthusiasts in the British government, would be determined by calculations about whether trying to get into the hard core would pay greater or smaller dividends than trying to disrupt it. And within the hard core itself, the great questions remained unresolved.
On 9 November 1991, the Irish, Spanish, Portuguese and Greek foreign ministers had left a secret meeting with Jacques Delors in which he had promised fabulous amounts (6 billion ECUs to Ireland) of other people’s money if they pledged to support his federalist, corporatist ambitions in the final Maastricht negotiations. The Irish government had sold the country’s soul to Delors.
The Maastricht Treaty had seemed to bring the goal of getting French hands on the Bundesbank within sight, since one hand had already been gripping Frankfurt since September 1992. If the grip was now relaxed, the prize might be torn away forever. If that happened, more than just ‘monetary Europe’ could be lost to France’s corporatist fonctionnaire, industrialist and financier class: ‘Europe’ itself, with its promise of ‘Corporatism in One Continent’ in which bureaucrats, indigenous multinationals and trade unions could hold at bay the tide of the Anglo-Saxon market economy, would be at risk if ERM superstition had to give way to economic rationality.
Indeed, it is unlikely, with capital movements increasingly free after 1988, that the ERM could have survived at all without the belief, drummed into the markets by unremitting official propaganda in almost every EC country (and above all by Commission propaganda), that monetary union was inevitable, the ERM a smooth ‘glidepath’ to monetary union, and that political commitment to unchanged ERM parities was unbreakable.
Economic analysis aside, the Irish pound devaluation represented a key moment in the whole history of the European Community. On the Monday immediately following the devaluation, there went ahead in the Central Bank of Ireland a long-planned party, a party attended by several hundred guests.
Most of them were old enough to have paid off their mortgages, or rich enough never to have needed one.
So the fact that the devaluation was about to set Ireland on a swift path to reduced mortgage rates, a surge in economic growth and – wonder of wonders – even a fall in unemployment did little to cheer their spirits. The Irish Establishment had suffered a major defeat.
The hope of those who believed in the ‘European’ strategy was that the tough budget rules of the projected EMU would provide discipline on Italian governments that could not be generated within the country’s internal political processes, and that inside EMU, Italian governments would be servant, not master, of a powerful central bank whose independence was guaranteed by international treaty.
Italy’s ejection from the ERM in September 1992 was politically salutary as well as giving the chance of economic salvation. It exposed the Euro-aspirations of the élite as mere delusion; and the collapse of the ‘European strategy’ hastened the demise of those corruption-ridden and scandal-racked parties, the Christian Democrats and the Socialists.
Unhappily, not everyone in the Banca d’Italia was pleased. The potential, at least, for a more democratically credible political system was emerging.
There is a general point here of some importance. Many central bankers are intelligent, cultured, courteous and affable: your typical central banker is quite a high class of person, much nicer, one imagines, than your average politician. But politicians have at some point to confront the consequences of their mistakes; their unaccountable central bankers do not. And politicians have to engage in trade-offs between the scores of issues, interests, disputes and conflicts that they have to deal with – or choose to create; independent central bankers are single-issue fanatics, and are beholden to one group in society – bond-holders – above all others.
The point of defending the franc was to avoid derailing a process whose momentum would lead to the right sort of political union: one whose institutional structure would enshrine German dominance in the Community, thus allowing it to pursue its objectives in Central and Eastern Europe by leading Western Europe.
So deep and apparently unbridgeable were the clefts between the positions of the EMS members that the reports of the two committees would have to be banal if they were to be produced at all. Yet, when they were finally released, following discussion at an informal Ecofin on 22 May, they were fatuous even beyond expectation. The ERM had produced so much misery; it was some small consolation that the two reports on the mechanism should at least have been good for a laugh.
What about coming clean and admitting that the EMS was a political tool, intended to start the Community moving along a conveyor belt to political union?
Events, rather than reports, were again the focus of attention. Events in France had positioned the pieces on the ERM chessboard for the endgame. Events in Spain had pointed to the way the unbearable tensions of the ERM would have to be resolved.
Who in his right mind could ever have thought that the franc fort was anything to do with economics? It was about power. Like Hitler, like Stalin, the énarque believes that power will always prevail over economics.
What had Alphandéry done that caused mouths to gape with horrified surprise? In short, he was The Man Who Told the Truth about the ERM. What Alphandéry did was, by mistake, to state the bleeding obvious, when the whole myth of the ERM, from the very beginning, reposed on a determination to avoid stating the bleeding obvious.
Schlesinger had been absolutely right when the previous December he had denounced the ERM as a machine for enriching speculators.
Trichet was also appealing to Tietmeyer for help: the newly independent Banque de France was under a lot of pressure within France. Its attempt at establishing a monetary framework was, as we shall see below, nothing more than a cover for shadowing Bundesbank interest-rate decisions.
The new Bundesbank argument not only had the tail wagging the dog, but had the dog chasing its own tail at the same time.
Banks thought bond prices would go up, non-banks that they would go down. So how could the Bundesbank be ‘credible’ if the two elements of its domestic constituency had diametrically opposed sets of expectations? How could such a divergence arise? The answer, like everything else in this book, lies in the distortion of economic reason by the struggle for political power uncontrolled by any democratic process.
French technocrats see in ‘Europe’ a way of preserving their power against the free world market in which competition, not state diktat, decides what gets produced, where and by whom.
The Bundesbank and the énarques do not like the modern world. They cannot hold back the tide, but they will do a lot of damage in trying to.
The economic risks can be rendered acceptable only if, as we argued in chapter 3, the ‘economic culture’ is basically the same in all regions of the union. For this to happen, there has to be a union-wide harmonization of many aspects of political, economic, social and educational life. In turn, this requires a central government with significant power relative to the regions.
It is highly unlikely – let us avoid absolute determinism – that this ‘solidarity characteristic of a nation’ will ever be created in Europe; and it is even more unlikely that it will ever be created by ‘Europe’.
It was further confirmation of the death of democratic politics in France under Mitterrand. As Raymond Barre has recently put it: ‘A financial, political and administrative oligarchy is claiming to be the sole embodiment of the well-being of the nation … Our very conception of the democratic state is being thrown into question.’
It is this impossibility theorem of a viable EMU that must occupy us in the final chapter of this book. But is not EMU supposed to be about more than just an inner core? The continuing travails of Spain suggest not. Indeed, the way that country has recently been treated by France and Germany indicates a degree of selfishness and contempt that the Spanish politicians may well have brought on themselves yet still shows up the hollowness of idealism about ‘Europe’.
(It is worth a parenthesis to note once again the shocking lack of historical sensitivity of those who think that the Bundesbank model can be transposed to ‘Europe’ via an European Central Bank: the Bundesbank, at conception if not always in practice, and the Banco de España have been successful buttresses of democratic pluralism in societies scarred by Fascism, necessary, if perhaps temporary, adjuncts to the process of learning to live with democracy – an ECB would be a totally anti-democratic institution that hastened the decaying of political life in ‘Europe’ and a probable precursor of an authoritarian reaction to mounting chaos.)
The true story of the ERM has been one of duplicity, skulduggery, conflict; of economic harm done to every country in the caste interests of the élite; of the distortion of economic logic and the dilution of political accountability. The contrast between ERM reality and ERM myth should of itself be warning enough against accepting the even more dangerous myths of EMU and European ‘union’. *
Can ‘Europe’ ever be a nation? What kind of nation would it be?
Whether one likes it or not, the argument often goes, increasing globalization of economic activity and the mobility of factors of production have already destroyed the nation-state as a meaningful entity in economic terms.
Liberals will rejoice that the globalization of the world economy, combined with the technological revolution, is making many aspects of the state redundant and enhancing individual freedom.
Only by extending the borders of the state from the French nation to ‘Europe’ can that state hope to retain its domestic power.
The solution, seen from Paris, is the European
Union, in which the énarques, the true inheritors in Europe of the Prussian state tradition, would ‘tie down’ and tame Germany.
In essence, the French technocratic dream was to be able to present European union as a move from the nation-state to the state-nation.
Of course, the two great historical examples of the creation of state-nations other than by military subjugation are the forging of the United Kingdom in the eighteenth century and the transformation of the United States by immigration in the final quarter of the nineteenth century and the early years of the twentieth. It is no coincidence that the ‘functionalist’ and ‘neo-functionalist’ theories of European integration were born in America, where the US State Department has been a tireless patron of the idea of ‘Europe’. If America could become a state-nation, why not Europe?
That idea of politics is, literally, foreign to French technocrats. What they are interested in is power – first imposing their will on France and then imposing their conception of France’s will on everyone else. Where they differ among themselves is in their idea of who should decide the General Will.
The technocrats have a contempt both for history and for democracy so total that the present tactic of the French administration seems nonetheless to be to go hell for leather for monetary union.
The history of the ERM is one of repeated rejection of the basic requirement of monetary union – that the people in every country should be prepared to let governments and central banks care more about economic conditions in the Community as a whole than about economic conditions in their own country.
Despite the attention I have given to British problems, I suspect most readers will view those problems as essentially peripheral to what the ERM was really about: to repeat a phrase I used earlier, Britain is not at the heart of Europe, it never has been and it never will be.
Even Euroenthusiasts rarely if ever even attempt to adduce positive arguments for Britain to join a monetary union. Instead the anti-reason of fear is employed: the supposed costs of peripherality are played up.
The first and, in some ways most important, thing the British Euroenthusiasts have neglected is that within a European shell Britain, like Mercia in the eighth and ninth centuries, would be an offshore island, but with considerably less independence. It would be influenced by the Continent, forced to obey its laws and to pay tribute to it, but would have no influence on it. Britain’s ‘peripheral’ status would be confirmed, not miraculously transformed, by * participation in Europe.
As for ‘Europe’, a monetary union cannot survive without a political union, as the Bundesbank has said time without number.18 But there will not be a political union cohesive enough for everyone to put ‘Union’ interests above national interests.
And if foreign politicians’ anger at failing to impose their will on Britain did ever overwhelm economic self-interest, those politicians would be revealing themselves as so hostile and irrational that Britain would surely count some trade difficulties a small price for keeping out of their clutches in other areas.
On this question, as on every other question about the ERM and monetary union, the propaganda steamroller attempts to flatten analysis. For analysis can only mean dissent. And dissent cannot be tolerated.