Today’s encore selection — from War and Gold by Kwasi Kwarteng. European countries have high levels of trade with each other, so they needed currency exchange rates that are relatively stable. In the early twentieth century, having their currencies tied to gold provided that. After World War II, it was provided by the Bretton Woods agreement, which tied these major currencies to the dollar, which was in turn tied to gold. But after President Richard Nixon took the U.S. off the gold standard in 1971, the need reappeared and a number of European countries created a mechanism called the “snake,” which constrained fluctuations of currencies, and then the “exchange rate mechanism,” which did much the same thing. But the ultimate dream was to create a single currency — the euro — in one of the boldest monetary initiatives in history. For something so resolute and so laden with potential moral hazard, and for something that has in recent years contributed to so much European economic pain, it was surprisingly the creation of technocrats, and never taken to any country’s voters for their approval:
“The fiscal situation of the European countries which aspired to join the single currency [in 1997] did not inspire confidence. All through the late 1990s, the lack of preparedness of certain EU countries to join the euro was a subject of open debate. ‘There has, of course, been some sleight of hand,’ wrote Rupert Cornwell in the Independent in February 1998. ‘It remains mysterious quite how Italy, which for years regularly ran double-digit budget deficits, conveniently slashed last year’s to a mere 2.7 per cent of GDP.’ It was obvious, even before the euro was launched, that the single currency was an almost purely political project, which would be pursued without any real regard for the underlying economic reality. As the Frenchman Jacques Rueff had said, ‘Europe will make itself by money or not at all.’ The words of the Portuguese Prime Minister António Guterres at the Madrid summit in December 1995 were even more grandiose and emphatic: ‘When Jesus resolved to found a church, he said to Peter, “You are Peter, the rock, and upon this rock I will build my church.” You are the euro, and upon this new currency we will build our Europe.’
“There was never any idea that the people of Europe, the citizens of the individual states, would be consulted before this momentous step was taken. As [Otmar] Issing [the German economist who also served as a member of the European Central Bank’s first executive board], himself later admitted, it was ‘doubtless in Germany that resistance to EMU was the greatest’. The decision to ‘abandon the D-Mark required a great deal of political courage’, he remembered. In opinion polls conducted as late as the autumn of 1995, only 34 per cent of Germans were in favour of the single currency, while 45 per cent were against. Needless to say, these figures were reversed as the decade wore on and the single currency became more imminent. By the spring of 1999, some 55 per cent of Germans now supported the single currency while only 36 per cent continued their opposition.
“In the same poll from 1995, the Finns were shown to be the least in favour of the currency among the nations which eventually joined: 53 per cent of Finns were hostile to the currency, while only 33 per cent approved. It is important to grasp the extent to which Europe’s political elites were committed to the single currency. The reasons why numerous political figures and bankers became strong advocates of the euro differed. For the Germans, it was often as much a symbol of fiscal discipline as a badge of European unity. For Issing, the benefits of the euro were explicitly focused on the need for fiscal discipline. This was a view widely held in Germany and the Netherlands.
“The people of Europe, of course, had not been consulted before the single currency was officially launched on 1 January 1999. The euro was always conceived as an elite project, conjured up by technocrats, to be foisted upon a largely acquiescent and amorphous European public. There was as yet no European superstate, a fact which worried Germans, unsure of whether a monetary union was possible without a political union.”
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War and Gold: A Five-Hundred-Year History of Empires, Adventures, and Debt
Author: Kwasi Kwarteng
Copyright 2014 Kwasi Kwarteng
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