A Historiography on the Formulation of the European Monetary Union

The founding of the European Monetary Union (EMU) has been characterized in a series of ways. For generations, political scientists, economists, and historians have been debating the effectiveness and utility of an economically cohesive Europe. The presentation of this kinship has varied over time, but at the heart of this continental economic shift has been a conversation characterized by a discussion on political unity in favor of economic utility. In this historiography, I am going to discuss the varied ways in which some historians have presented the agreement of the European Monetary Union across a paradigm of political and economic gamesmanship. To do this, I will compare and contrasts the works of Harold James a historian of European economic history, versus those of American economist Benn Steil. The end result is the detailing of interesting tale of financial history, through the eyes of history and the world for which it creates.

Background on Benn Steil

Benn Steil is a famed American economist who holds the position of director of International Economics at the Council on Foreign Relations (CFR) in New York. At the CFR, Steil writes on the role of currency in international politics and the ways in which “elite trading currencies” diffuse across borders. His most recent publications for the

CFR focusing in on the growth of the Yen in international trade in the face of a shrinking dollar. Outside of his role as director, Steil has published three books on economic and financial history, of which all three will be referred to in this paper. Steil’s works typically take upon an institutional analysis bend. Focusing on the biases and influences of political actors and the general interests of organized groups I.e. networks. His writings aren’t under the guise of “conspiratorial” but his most famed work, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order does deal with shady smoked filled back door dealings and stories of Soviet spies. As an economist and a writer Steil is eloquent in the telling the entirety of the economic story, from the back door dealings at the foundation of the story to the vast complexities of common currencies and the worldwide ramifications of their implementation, Steil’s focus on the totality of the story its nothing short from intriguing.

Who’s Starting Point?

Often, Steil’s historical works tend to have an American lean to them however his writings do take on an international perspective and are typically couched within long arcs of historical story telling that criss cross the Atlantic. As such is any telling in modern financial history. His general presentation on the history of the European Monetary Union (EMU) is analogous to this long arching narrative. While the works of Harold James and Tony Judt point to a teleology of the EMU starting with the passage of the treaty of Rome. (1) Steil’s description of the arch comes about as a response to events that unfolded in quite ski town in New Hampshire during July of 1944. The

Bretton Woods Conference (BWC), as it came to be known, was an international monetary summit devised by FDR Treasury Department member Harry Dexter White in 1936. White, who methodically planned the conference for eight years, wanted to end English sterling dominance in world trade.

The BWC would set in motion the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD). These two organizations would place European economic redevelopment following the conclusion of the war under the influences of a set of multinational organization based out of Washington. Pinning aid to the dollar, and thus to the influences of American economic dynamics. More importantly, in regards to currency, the BWC would establish a new set of international standards for monetary exchange that pegged prices to the gold standard. This move, Steil argues, was critical in enabling US dollar hegemony over the British pound sterling. (2) As following the conclusion of the war, European caufers were empty of gold and being that new international standards required the transmission of gold, European treasuries became dependent upon Washington. Furthermore, with nations in debt to the US treasury due to war budgets and economic stagnation besieging Europe in the first years of the postwar era, the dollar became ever more increasingly valuable. This agreement would shift international trade over time into a market dominated by the transmission of the dollar and as such, a European economic scenario dependent upon Washington and its willingness to inflate or deflate its own currency. (3) Harry Dexter White and his fellow American counterparts were so successful at the meeting, Steil argues, that even with the presence of some 43 other nations, the final version of the agreement would favor 95 percent of the original American solution. Steil would conclude that this event would lead to the end of the English empire and create the political and economic hegemony of the United States that we see today. (4)

Steil’s usage of the Bretton Woods Conference as a launching point for the European Monetary Union comes about through the narration of the story arch. Where, the creation of the EMU is done so as a necessity to a post Bretton Woods era. (5) The EMU, by design, was created to thwart the American fiscal dominance in the international market system by creating a secondary “elite currency.” (6)

What is an Elite Currency?

An elite currency is one which retains value and interest outside of its own economic zone primarily through its ability to stave off inflation and be of use outside its own boarders. Take for example a Mexican import export business with ties to German pharmaceutical manufacturing. The company would choose to hold on to a portion of their payment in euro or dollars instead of converting the payment back to their own national currency. In hopes of retaining value in the face of possible inflation to their own national currency and exchange fees which can vary drastically by country, but also if they wish to expand their interests into other markets. Continually converting payments back and forth between peso and euros or dollars would results in wasteful taxation. As such, it becomes conducive for a Mexican company to prolong their holdings in euros if they wish to function within the market.

Steil retains the old economist adage that their is a “natural harmony between money and nationhood,” and that for a currency to maintain this, it must in tangent thwart off rapid inflation. (7) So how does does Steil see the EMU and the Euro as creating a form of national sovereignty through currency? An existential value in the euro like that not seen in the Mexican peso? Well, he sees the validity of such a claim through the EMU’s two part goal of “fiscal sustainability.” Where through the EMU’s founding document, the Maastricht Treaty, EMU nations are given a guideline to retain a, “fiscal deficit [which] should not be larger than the long-term rate of growth of the economy,” so the states debt does not grow over time, and second, “the ratio of public debt to GDP should not exceed 60%.” 8 9 He states in his 2006 book Financial Statecraft that following the end of the Bretton Woods agreement, European currencies were typically pegged to the deutschmark, but due to speculation, moments of economic instability in

West Germany, and a lack of support by Britain the deutschmark peg resulted in “episodes of forced devaluation.” (10) He saw the adoption of the euro, by twelve large nations as a powerful, “political commitment to a constitutional mandated low-inflation regime.” (11) Finally, Steil sees the multinational euro adoption as a means of solving what he calls the “original sin.” Which is where their is an “inability [for] most of the world to borrow abroad in its own currency.” (12)

Steil finds that the EMU solves Europe’s currency problem in the modern era, one which is dominated by American hegemony. In an ever increasing transnational world its now easier than ever for European businesses to conduct trade across boarders without the issues associated with currency exchange. This action alone streamlines balance sheets for small and large business alike, but also eases the regulatory burden associated with international trade and inter-European trade. The EMU, EU, and the euro in its very nature create a synergistic economic climate and one that obviously an economist highly values. Steil’s works, particularly his book Financial Statecraft focuses on the dominance of international finance on national governments and their foreign policy legislation. Steil argues that now, through the creation of the EMU, European banks can once again establish dominance in world financial markets through the purveyance of their “elite currency” as a central bank reserve currency, reminiscent of a bygone era. (13) Though Steil finds such claims more and more unlikely in later literature through the continued purveyance of eurodollars. (14)

Steil’s value of the EMU on this hypothetical political vs economic valuation scale, full heartedly comes down on the economics side. He does touch upon the political stability through controlled inflation angle which Harold James writes on, but Steil’s work is that more so of an economist vs that of economic historian or at least the writing dynamics of such. In the The Battle of Bretton Woods Steil truly crafts a great historical work chalk full of historical research and he focuses in on all the actions that lead up to Bretton Woods and the historical events of that meeting, while his skills as a economist describe the story that plays out after in his later texts. His two other books mentioned in this piece, Financial Statecraft and Money, Markets & Soverignty less so describes the events that lead up to the EMU, as per Harold James, and more so the reasons why it needed to come about in a post Bretton Woods world. The distinction is also clear in comparison to the source material between the two authors and is distinct even in between Steil’s own historical book. The Battle of Bretton Woods focuses on data from nearly 80 years ago and relies upon primary sources directly from the era. While his economic books rely upon data driven evidence, contain countless charts and financial advisory material, but also contain a plethora of contemporary works. Steil isn’t writing directly on the institutional history of the EMU therefore he’s going to have a different avenue of information to rely upon to formulate his ideas. Interestingly enough,it’s almost a guarantee that Steil’s future works will rely upon Harold James and his, much more so, historical look at the European Monetary Union.

A Background on Harold James and His Project

Harold James is a historian of economic and financial history and modern European history at Princeton University. While, earlier in his career he focused more specifically on German history now, after the publication of his “tome” Making the European Monetary Union, James is considered by some the perennial expert on all things EMU and such a claim comes well deserved. His book is nothing short of ground breaking and his a continuation highly earned, but in some regards, James is surprisingly lucky to have worked on such a historic project. (15)

In 2008, the European Central Bank (ECB) and the Bank of International Settlements (BIS) set out on a public search, via an advertisement in the Economist, to find someone with skills to write the institutional history or, “calculated insider perspectives” of the Committee of Governors of the Central Banks of the Member States of the European Economic Community (Committee of Governors for short) in their quest to create a unifying European currency. (16) After James sent in his resume and went through the interviewing process, he was selected and granted unprecedented access to the archives of the Committee of Governors (CoG). Both organizations, the ECB and the BIS, opened the near their entirety of their archives to James, and in doing so waved their thirty-year archival restriction for him.

Source Material and Outset

The breath of material in the book is quite astounding. Of course, James includes material on the actual legislative process and various acts that were passed which enabled the EMU to come into legal existence, but what’s uniquely available through this archival access is the intimate discussions conducted between actual members of the Committee of Governors. There aren’t any apparent juicy stones overturned leading to a next best selling Niall Ferguson book, but what James does do in a beautiful way is detail the long and arduous process of developing a new international currency from scratch. Be that from the selection of the actual members of the CoG to the physical building location that houses the committee. James explores the vastness of factors that enable such a history to exist.

Goal of the Project

At the onset of his research James set out to dismantle the pervasive myths that he saw surrounding the development of the euro. The first and most apparent question was wether or not the development of the euro was fundamentally a political project with no clear economic rational. (17) The main crux of the idea behind the question is the fundamental nature or political ethos that money has surrounding it. Since the early 19th century, the state has maintained their monopoly on money production, until most recently with the creation of digital assets. However, the effects brought on by hyperinflation have plagued European political dynamics. With the most apparent being the inflation of the German deutsche mark and Italian lira in the 1920s and 30s. The inflated price in staples like flour lead to a cloud of discontent across the middle and working class population and laid the rhetorical foundation for the extremism that typified the interwar years. (18)

The central banks of Europe had a politicized history as well. In the years just prior to the signing of the Maastricht act, monetary authorities in Moscow were using inflation as a crippling economic act against breakaway states. While in Yugoslavia hyperinflation was fueling some of the underlying economic issues of separatists. (19) Though inflation and currency have been politicized negatively in the past, many political thinkers theorized the creation of a common currency across Europe could help link the economies of the various nation-states and bring about a form of political unity just like was through the myriad European economic integration plans in postwar Europe.

The notion of politicization comes about through a cautionary tale against inequality and corruption in the formulation process. Is it possible the Committee of Governors, a committee of some of the most power bankers in the world, be held to the interest of the people? This notion of conspiracy brings up James’s second prevailing myth, would development of the euro and the underlying modus operandi of the Committee of Governors be truly the perpetuation of German banking dominance, particularly by Bundesbank, on mainland Europe or is the production process honest and earnest? (20) With the creation of a new currency comes great power andcould it be possible that this committee of central bankers, be at the will of the strongest financial institution in mainland Europe or will the curtain be pulled over the system?

The answer to both myths can seemingly be answered in the same way. James’ conclusion was that, “there was a clear economic as well as a political logic behind the creation of a single European currency,” but the process through which it was created was inherently unbiased. (21) There is a real clear advantageous political advantage towards the creation of a denationalized currency in Europe, along with a geopolitical advantage in creating a second international reserve currency. (22) However, the process through which the euro was theorized and created, via the Maastricht act, was done so, as James deduces, “free of any possibility of political interference.” (23) James describes the original concept of the CoG, as the creation of a transgovernmental, “money issuing authority,” which removed the state as the orbiter of money making. (24) In becoming a non politically aligned organization, the creators of the CoG theorized that the actions taken upon by the committee could not be of the benefit of one singular political body or entity.

“The German Question”

The creation of a common currency sought economic goals that were beneficial to the entirety of the signer nations. A common currency would create a system of price stability, but without the need of a secondary political process such as a trade agreement. (25) A common currencies would negate the past tensions of “imbalanced currencies.” An economic effect caused by the variability of inflation rates amongst trading partners, and a problem that typified German and French economic relations prior to the institution of the Euro, in what was known as the “German question.”

The German question was a catchall term focusing on the imbalances presented by the overall economic strength of Western Germany in the later half of the 20th century. The deutsche mark, Germany’s native currency, was considerably strong in comparison to its neighbors, and was the financial market’s preferred European “peg currency” following the conclusion of the Bretton Woods agreements. It’s strength was multifaceted but relied upon two core attributes of the German economic system. The first was trade imbalances. (26) Germany was considered an exporting nation with a highly skilled and highly valued manufacturing industry. This over sampling of German goods abroad resulted in “full employment” and currency flows out of Germany which became a natural control mechanism towards deutsche mark inflation. (27) Second, full employment which typically results in higher wages, due to supply vs demand factors, was more controllable in Germany due to a long legacy of union involvement in the executive boards of German industries. In comparison to France and Italy, who also experienced moments of full employment throughout the decades, long term controlled wages in German industries resulted in lower production costs in comparison to nations were wages were variable and increasing. As a result of the legacy of controlled wages and high exports, the deutsche mark saw considerably low rates of inflation in comparison to the lira and franc over time. Without politicized corrective measures within regards to the artificial deflation and inflation of the deutsche mark, Germany’s economy would slowly consumes it neighbors. Resulting in another inevitable conflict spawned by currency tensions.

James also concurred that the introduction of a shared currency would also be a limiting factor on the German Bundesbank, as the bank would no longer be able to apply an additional higher rate competent on foreign banks and business loans due to fears on native currency inflations, as such a potential would no longer exist. (28) Also, the inability to hedge the Deutsche Mark against other currencies becomes null and void.

Furthermore James concludes, and shows via the archival works of the central banker debates, how the linking of currencies into a singular common currency, or at least the argument there of, would reduce the strains that inflation caused on price stability. Central bankers and economic theorists saw the main benefit, and continually stressed the importance of this factor, as one that creates price stability. A phrase used extensively throughout the text. Existing monetary policy, following the end of the Bretton Woods agreement created the, “snake arrangement.” A complex interdependent system of European currencies pegged to the deutsche mark. (29) However, the deutsche mark alone could not compete against the dollar and was still directly influenced by the dollar’s growing variability which was seen most dramatically during the 1970s oil crisis. Like economist Ben Steill, the CoG saw a unified currency as an underlying economic necessity in a global economic system. (30)

Lastly

The publication of historian Harold James’ book comes about at a unique time in the history and infancy of the Eurozone. The four year process, starting in 2008, allowed James to explore the unique history of the creation of the Euro while simultaneously seeing it face its first crisis. The global financial crisis played havoc, once again, with the notions of autonomy and the manufacturing of currency. (31) Monetary policy, the umbrella term for budgetary spending practices, was a strong central debate of the Committee of Governors. The CoG theorized they were the sole European agency able to implement such due to the heavy political nature of national monetary policy and even more so considering the decades long struggle of coping with the German question. (32) The CoG and particularly the French and German subset, created a guideline called the Stability and Growth pact. (33) In it the CoG established a soft “set of rules” that would enable a “convergence in economic performance” a the benefit of all involved. (34) Karl Otto Pöhl, a father to the Euro and former head of Bundesbank opined a euro inflation rate below 3% with nations agreeing to reduce their budget deficits to levels to, “say below 3% of GDP.” This quotation and its easiness, by one of the highest members of the CoG, shows the looseness of the CoG tangible controls on fiscal and monetary policy. Euro nations would eventually be “required” to implement a series of budgetary measures designed to manage debt spending, however the enforcement arm of such guidelines were non existent. By the 2000s, material outside of the original research criteria, James would the monetary convergence policies as nothing but “dissolved.” Along with an expansion in high risk high yield loans by Europes growing bank sector in the 1990s and 2000s a shock to one country’s bank system, say through a high default rate, could now easily cascade across all of mainland Europe. (35)

A Subtle Contention

In James’ book, the historian typifies the aura around the CoG as an apolitical organization, and I just can’t resonate with such a claim. I find it to be unlikely to be true. There is the possibility of an inherit bias within the archival information. Any supposent self motivated interest on the part of central bankers would not be recorded. Nor is the notion that housing the CoG in Basel Switzerland an act of truely shielding the institution. Granted the actions were done in the early 1990s which predates the instant communication and organizational effects of internet access and email, but surely members had access to an assortment of other technologies like, hmmm telephones, that could potential enable instant access over distance and shield discussions. Basel is also in the near center of mainland Europe and is easily accessible by train and plane, which I have done both to get there. In the words of financial historian Niall Ferguson, the “state and financial markets have always existed in a symbiotic relationship.” The creation of the Euro benefited the European people, but it also gave massive power to the new European Union system and enabled European banks to once again compete against American financial interests in global markets. I don’t believe it is fair to call the making of the euro and inherently neutral event. It does create a new concentrated system of power, which like most, is tangibly out of the hands of the average person, for better or for worse. However, I can not but appreciate James’ works and I must contend that this somewhat shadowy networks centric approach is more apparent in James other publications, which I feel gives not reason to question his book but be aware of the subtle bias that exists within the archival material.

Sources:

Due to the inability to reasonably parlay Chicago style sourcing within this medium I’v included the footnotes here in numerical sequence

1 James, Harold. Making the European monetary union. Harvard University Press, 2012. pg. 27

2 Irwin, Neil. “How a Soviet Spy Outmaneuvered John Maynard Keynes to Ensure U.S. Financial Dominance.” The Washington Post. March 14, 2013. Accessed May 12, 2018. https:// www.washingtonpost.com/news/wonk/wp/2013/03/14/how-a-soviet-spy-outmaneuvered-john-maynard- keynes-and-ensured-u-s-global-financial-dominance/?noredirect=on&utm_term=.12a3c609e7ad.

3 Steil, Benn, and Robert E. Litan. Financial Statecraft: the role of financial markets in American foreign policy. Yale University Press, 2008. pg.165

4 Irwin, Neil. “How a Soviet Spy Outmaneuvered John Maynard Keynes to Ensure U.S. Financial Dominance.”

5 Steil, Benn, and Robert E. Litan. Financial Statecraft: the role of financial markets in American foreign policy. Yale University Press, 2008. pg. 109,110

6 Steil, Benn, and Manuel Hinds. Money, markets, and sovereignty. Yale University Press, 2009. pg. 132

7 Steil, Benn, and Manuel Hinds. Money, markets, and sovereignty. Yale University Press, 2009. pg. 140

8 Steil, Benn, and Manuel Hinds. Money, markets, and sovereignty. Yale University Press, 2009. Pg 147,148

9 The debt requirements ended of up not becoming a necessity when nations like Greece became indebted to private German banking interests. Whom underwrote Greek budget deficits significantly past the EMU’s guidelines. This budgetary imbalance often plays into the north south dynamics that exist between several of the EMU nations.

10 Steil, Benn, and Robert E. Litan. Financial Statecraft: the role of financial markets in American foreign policy. Yale University Press, 2008. pg. 110

11 ibid Published in 2006, Steil is able to predict the European debit crisis by stating that the “low inflation regime” can be thwarted by nations not following financial secure debit practices.

12 Steil, Benn, and Robert E. Litan. Financial Statecraft: the role of financial markets in American foreign policy. Yale University Press, 2008. pg. 111

13 Steil, Benn, and Robert E. Litan. Financial Statecraft: the role of financial markets in American foreign policy. Yale University Press, 2008. pg. 11–13

14 Steil, Benn, and Manuel Hinds. Money, markets, and sovereignty. Yale University Press, 2009. Pg 221–223

15 PrincetonPIIRS. “Making the European Monetary Union.” YouTube. March 07, 2013. Accessed May 13, 2018. https://www.youtube.com/watch?v=9f1SfFHps00&ab_channel=PrincetonPIIRS. Time 1:15

16 James, Harold. Making the European monetary union. Harvard University Press, 2012. pg. IX

17 PrincetonPIIRS. “Making the European Monetary Union.” YouTube. March 07, 2013. Accessed May 13, 2018. https://www.youtube.com/watch?v=9f1SfFHps00&ab_channel=PrincetonPIIRS. 6:30

18 James, Harold. Making the European monetary union. Harvard University Press, 2012. pg7

19 James, Harold. Making the European monetary union. Harvard University Press, 2012. pg. 3,4

20 PrincetonPIIRS. “Making the European Monetary Union.” YouTube. March 07, 2013. Accessed May 13, 2018. https://www.youtube.com/watch?v=9f1SfFHps00&ab_channel=PrincetonPIIRS. 7:30

21 James, Harold. Making the European monetary union. Harvard University Press, 2012. pg. 1

22 James, Harold. Making the European monetary union. Harvard University Press, 2012. pg. 6

23 James, Harold. Making the European monetary union. Harvard University Press, 2012. pg. 5

24 James, Harold. Making the European monetary union. Harvard University Press, 2012. pg. 4,6,9

25 James, Harold. Making the European monetary union. Harvard University Press, 2012. pg. 12

26 James, Harold. Making the European monetary union. Harvard University Press, 2012. pg. 11

27 James, Harold. Making the European monetary union. Harvard University Press, 2012. pg. 499–500

28 James, Harold. Making the European monetary union. Harvard University Press, 2012. pg. 12

29 James, Harold. Making the European monetary union. Harvard University Press, 2012. pg. 88–89

30 James, Harold. Making the European monetary union. Harvard University Press, 2012. pg. 76

31 James, Harold. Making the European monetary union. Harvard University Press, 2012. pg. 9

32 James, Harold. Making the European monetary union. Harvard University Press, 2012. pg. 14–15

33 James, Harold. Making the European monetary union. Harvard University Press, 2012. pg. 18

34 James, Harold. Making the European monetary union. Harvard University Press, 2012. pg. 251

35 James, Harold. Making the European monetary union. Harvard University Press, 2012. pg. 18–20