The Path to a Common Currency

27 November 2013

On 25 November, Andreas Rödder, Professor for Modern History at the University of Mainz, illustrated the history of the creation of the Euro on the invitation of the Center for Financial Studies and the Institut für bankhistorische Forschung. His lecture was entitled: “Primacy of Politics? The Origins of the European Monetary Union“.

Rödder started his journey through history in the early 1970s. During this time, Europe had experienced many changes triggered by the oil crisis and the collapse of the Bretton Woods monetary system. The post-war boom, promoted by cheap oil and fixed exchange rates, had come to a sudden end. Most European countries had returned to a system of floating exchange rates which, however, did not prove stable either.

From 1982 onwards, the continuous growth of the Federal Republic of Germany had become a real boom and, among other European countries, the desire had grown to integrate the German strength into a pan-European project through a common currency and an independent central bank. Whereas Germany had not only been interested in a common currency but also in a political union, the interest of Great Britain had been first of all focused on a single European market. In 1985, France and Germany had started negotiations about the establishment of a monetary union.

Rödder pointed out that there had been two opposite parties in the discussion about a common currency: economists and monetarists. The first group was convinced that the common currency should only be introduced after a sufficient economic convergence had been achieved. In Germany, the Deutsche Bundesbank and the Federal Finance Ministry shared this opinion. The monetarists, on the other hand, wanted to introduce the common currency as soon as possible. The economic convergence of member countries should then come as a result of the monetary union.

The Madrid European Council of July 1989 had adopted the “Delors Plan” on the introduction of the Economic and Monetary Union. Part of the plan had been to establish an independent common central bank. The next step towards a common currency had to be made at an intergovernmental conference. France had already wanted the European Council in Straßburg in December 1989 to agree on holding this conference in order to introduce the common currency as soon as possible. Germany had initially objected to this idea. On the one hand, because the German Chancellor at that time, Helmut Kohl, had first wanted to push the political union in Europe and, on the other hand, because assuring stability had been regarded as a priority. Kohl had been concerned about stability because of the high budget deficits of some European member countries and had thus wanted to postpone the decision about holding an intergovernmental conference.

Due to the fall of the Berlin Wall in November 1989, the position of Germany in Europe had changed. In exchange for the French vote in favor of the German reunification, Kohl had agreed on holding the intergovernmental conference one year later on the summit in Straßburg. Next to this concession, Kohl had to abandon the idea of a political union and to agree on a more monetarist approach which was not focused on stability. In 1992, the member countries had passed the European Monetary Union with the Maastricht Treaty.

According to Rödder, the monetary union had been an economic project for policy purposes, namely the greater integration of Germany into Europe. In the end, political motives had taken precedence over economic concerns. Thus, creating the monetary union there had indeed been a primacy of politics. Finally, Rödder stressed that the common currency had been a leap into the dark: The consequences of the introduction had been completely unclear at that time.