Here is a chapter of mine, published in 2005, about the origins of the Euro. I am publishing it in the light of the ongoing saga about the Euro’s future, the Greek meltdown, discussions of a possible “Transferunion”, and efforts to start a Eurobond market. From the start, the Euro was a political project. Analyses of it from an economics perspective are seriously deficient, one-eyed.
Following on the launch of the internal market programme in 1985, monetary union is the most far-reaching enterprise that the European Union (EU) had ever undertaken. The ambition to create a “common market”, one capital market and monetary union was present from the very start of the post-war history of European integration. But their achievement took much longer than their supporters expected. The key link between all three—the common or “internal” market, one capital market and monetary union—is policy on liberalisation of capital movements. This was always the stumbling block on the road to monetary union, as illustrated by the history of three major attempts since 1957 . The constant thread was the problem of reconciling different ideas and interests in a multinational society of states such as the EU. National economies must converge if the transition to a single monetary regime is to be successful. Whether monetary union is beneficial remains speculative until the experiment has been made and the currency has a history of at least a couple of decades—the time horizon required by the DM (Deutsche Mark), for example, to emerge as an international reserve currency.
The Treaty of Rome, establishing the European Economic Community (EEC) in 1957, avoided the subject of monetary integration as too controversial. Instead, the chosen approach was to set up a customs union, which by dint of a “spillover effect” would create conditions to integrate commodity as well as capital markets. An integrated market in turn could create demands for a single currency so that investors bore no currency or exchange rate risk, and that all firms would face equal conditions in their access to a common pool of savings. Monetary union, in turn, would require political integration, which would be only possible if the member states were prepared to abandon to a significant degree their separate macroeconomic policies. But experience showed that “the spillover effect” could go into reverse.Whenever monetary union hovered on the horizon, the temptation to turn back tended to grow, prompting a refusal or postponement of monetary union back to an explicit avowal of autonomous credit policies, to a rejection of the customs union as a goal, and possible retrenchment from freedom in product markets. Since its inception in 1958, the EU has moved uneasily along this spectrum between integration and the assertion of national identities. Member states retained their powers in the Treaty “to take the necessary protective measures”in the event of a sudden crisis in their external accounts. But the treaty required that member states act in the “common interest” when formulating and executing exchange-rate policies. In particular, Articles 66 to 78 pledged member states to abolish restrictions on capital movements related to current payments only, while stipulating that member states were progressively to abolish “between themselves all restrictions on the movement of capital belonging to residents of the Community”. To this end, the authorities were “to endeavour to avoid” introducing new exchange restrictions, and to grant exchange permits as liberally as possible. This became more problematic as inflation rates edged upwards in the 1960s, and the fixed rate arrangement based on the dollar, often referred to as the “Bretton Woods” system, began to unravel.
In 1970, the Werner Plan proposed a three-stage move to monetary union, with a single currency, free capital movements, centralised EEC economic policy-making and a European central bank. At theirParissummit in October 1972, the heads of government decided to aim for full European economic and monetary union by 1980. This meant that policies and performances among member states would have to “converge” on a sustainable fixed or stable exchange rate regime. For an exchange rate between two currencies (such as the DM and the French franc) to be sustainable, there must be convergence in expected real interest rates, that is, in nominal interest rates and over the longer term in expected rates of inflation. This convergence can be brought about at any rates that are politically acceptable to participating countries. The credibility of the exchange- rate link in the eyes of the financial markets requires convergence to come sooner rather than later. In 1972, it was divergence which came the sooner, prompting the member states to adopt a floating exchange rate regime, where the smaller countries pegged their currencies to the DM and sought to adjust their policies in line withGermany’s. Meanwhile, global markets confirmed the dollar’s status as the world currency, and the US Federal Reserve as the world’s prime central bank. The Federal Reserve helped to absorb the US’s “double deficit” on the federal budget and current account by either allowing the dollar to slide against the DM and the Japanese yen or to rise as funds flowed in from the rest of the world to feed US capital markets. TheUSeconomy experienced over three decades of export- or import-driven expansion. Meanwhile, governments around the world were to counter disorderly conditions in foreign exchange markets essentially by giving priority to domestic price stability in their national economies. This did not preclude major subsequent swings in exchange rates, notably between the DM and the dollar—the two key currencies in the Euro-Atlantic area. But it did mean that the parameters of monetary and exchange rate policies of weaker currency countries were set by policies made in Frankfurt and Washington. Convergence under these conditions was asymmetrical, signifying the alignment of weaker currency country policies on those of theUSandGermany.
There were two further dimensions to the subsequent history of the internal market and monetary and exchange rate discussions in the EU: One was the more visible politics of the discussions among and within the member state governments, and the other was the important developments in EU law, elaborated within the EU institutions, notably between the Court of Justice and the Commission. Which weighed most heavily in the final outcome is a matter of dispute among inter-governmentalists, who locate the decisive contributions as originating in the politics of the states, and other scholars who emphasise the policy autonomy conferred on EU institutions by the Treaties.  What is less controversial is that the final outcomes, particularly the all important steps taken to liberalise capital movements, would not have been what they were without a very close and intricate interplay between politics and law within the EU. This interplay paralleled the development of asymmetry between Germany and other member states regarding exchange rate policy. Both fed into the politics of the EU “relaunch” in 1985, and then into the complex package which led to the deal on monetary union, and the key component of which was the way in which the member states negotiated their way toward liberalisation of capital movements. The politics on monetary union then merged into the politics of German unification. The monetary deal was a key component of the security negotiations ongoing across the continent as the cold war structures sustaining the post-1945 European peace crumbled, or were fundamentally transformed.
The development of markets and of EU law.
The Single European Act of February 1986, which may be considered the catalyst for the internal market initiative, would not have been possible without prior developments in European law. The Commission’s June 1985 White Paper, Completing the Internal Market, had put forward a new strategy with regard to harmonisation of laws and procedures. Rather than continue to rely on previous attempts to force harmonisation of EU standards, the Commission adopted a new approach involving harmonisation of only essential laws and regulations for goods and services. According to this approach, the harmonisation of essential standards was to provide the basis for member states’ mutual recognition of equivalence of each others’ laws, regulations and administrative practices that were not harmonised at the level of the EU. A corollary to mutual recognition was home-country control, whereby the regulations, laws and practices of the home-country was to be accepted as applying both to operations of corporate branches and to cross-border provision of services.
The term mutual recognition had already been deployed in Article 57.1. of the Rome Treaty, with reference to professional qualifications. But the landmark case, which enabled the Commission to elaborate the concept on the basis of a European Court of Justice decision was Cassis de Dijon. Cassis de Dijon, the French liqueur manufacturer, had been excluded from sales in Germany on the grounds that its alcoholic content was too low to classify as liqueur under German law. The Court ruled that a member state may not apply national law to imported products which were lawfully produced and sold in other member states. The Court’s judgement was, in fact, cautious and subject to much legal debate. A further judgement in June 1980 prompted the Commission to issue a statement to the member states in October whereby a product may be freely exported to another member state when it has been produced and commercialised in accordance with the principles and regulations of the exporting country. The principle found its way into the Single European Act (SEA), which stipulates that the Council “may decide that the provisions in force in a member state must be recognised as being equivalent to those applied by another member state.”
The principle of mutual recognition implied a move to open markets across the EU. But in December 1986, the Court defended a states rights position in four insurance cases.  As the Court stated, there existed in the field of insurance “imperative reasons relating to the public interest” that may justify restrictions on the provisions of services. Indeed, the insurance judgements targeted the public interest as the key criterion for determining the legality of barriers to cross-border trade. They therefore touched on another principle which underpinned the Rome Treaty, namely that of non-discrimination on the basis of nationality. What this principle suggested is that firms from another member state would have the same opportunities as domestic counterparts with respect to host-country laws and regulations. Non-discrimination implied that member states extend national treatment to firms such that they would face “laws, regulations and administrative practices…no less favourable than that accorded in the situation to domestic enterprises.” Such a definition of non-discrimination would have left twelve separate national markets with different rules and regulations, moderated in practice by the application of the principal of mutual recognition, whereby member states recognise each others’ laws and practices as equivalent to their own and thereby preclude the claim that doing things differently provides a legitimate reason for protection.
The principle of mutual recognition helped to bridge the gap, but not to eliminate the tensions, between the two competing principles of national treatment and public interest. Up to 1981, the cross-border provision of services had been viewed as falling within the category of liberalising capital movements. But a Court judgement of that year held that Article 67 for complete liberalisation of capital movements was not inherent to the Treaty (i.e., directly applicable), and therefore had to be implemented by directive. This opened the door to the preferences of member states’ being woven into the legislation, implying that liberalisation of capital movements, and negotiations on the resulting Eu financial “space”—one of the keys to the internal market programme– would be a negotiated compromise between different and competing national policy communities and their preferences. Between 1988 and 1993, the member states negotiated their way through to a set of agreements which ensured that the EU would remain wide open to global markets, while many de facto powers remained in the hands of member states, notably protection of national ownership structures. The launch of the internal market programme was a necessary, not sufficient cause for monetary union.
The politics of intra-European exchange rates.
The story of convergence incorporates lessons about the asymmetrical relationship betweenGermanyandFranceprior to the Euro. From 1973 on, the DM emerged asEurope’s key reserve and transactions currency. As the key currency country,Germanylooked to its domestic monetary policy in the first instance, while all other countries derived their domestic monetary policies from the fixed character of their exchange rate relative to the key currency. If other countries, notablyFrance, failed to follow Bundesbank priorities, the Bundesbank faced a dilemma: if it floated the dollar freely on international markets, the DM became directly exposed to the fluctuations of the dollar. The growing lobby of German DM-bond holders were happy not to import inflation from European neighbours, devaluing their investments, butGermany’s equally powerful export lobby became concerned at the loss of price- competitiveness of their goods on world markets. They preferred the DM to be sheltered from dollar movements in a stable exchange rate regime within the EU.
The manner in whichGermanymanaged to balance priority to price stability and the DM complicated relations with inflation-prone neighbours. First,Germany’s combination of tight monetary policies and trade surpluses led to a steady revaluation of the DM. This provided an additional incentive for German manufacturers to move up-market into higher value-added products, less price-sensitive on international markets. German wage levels rose relative to others, thereby accentuating the importance of achieving high levels of productivity. Import prices exerted a stabilising effect on the general level of prices. This was the reverse of theUSworld regime of 1945-71, where theUSran trade deficits and irrigated the world with dollars, thereby stimulating growth. Secondly, the DM became a reserve currency. The Bundesbank thus had it all ways: it became Europe’s lead central bank; its large trade surpluses were neutralised as reserves accumulated; the Bundesbank only accepted dollars in reserves and reinvested them on US Treasury bond markets; the German government issued DM-bond debt to finance structural government deficits; and German diplomacy had funds spare to grease the wheels of EU integration, while subsidising the last years of the GDR (German Democratic Republic – former East Germany) and buying off the Soviet Union in 1989-90.
The squeeze on France proved particularly severe. There were two aspects of this. First, French economic policy since the 1940s was predicated on a combination of growth-inflation-devaluation, a formula which it took until 1983 to shake off. Second, alignment of French policy on German preferences for a hard currency meant readiness to reform labour market institutions according to liberal market prescriptions. For this, there was no national support. Rather, there has been consistent French support for the EU to develop “economic government”—shorthand for a sizeable EU counter-cyclical capability, financed either through taxation or through the bond markets. With sticky labour market institutions, France, as well as the EU, is a prime candidate for a Keynesian capital-spending programme. For German bond-holders, French, and even more Italian conversion to Bundesbank policy priorities remained suspect: once the Bundesbank was no more, Germany’s inflation-prone partners would resume their old habits, and go for a combination of growth-cum-inflation and devaluation no longer on a national, but henceforth on a continental scale.
It is important to set Franco-German relations after 1973 in the context both of DM-dollar relations, and of East-West relations. In the early 1970s, the German government, with reluctant US and French support, launched a policy of détente with the communist party-states, designed to reduce tensions between the two Germanies. But in 1977, the US administration announced the possible installation of Cruise missiles in western Europe, while the broader European left picked up the cause of hostility to the nuclear diplomacy of both theUS and theUSSR. East-West tensions were accentuated in December 1979, when the NATO allies decided to counter the Soviet build-up in long- and medium range nuclear weapons, and to install nuclear weapons in theFederal Republic, and elsewhere in western Europe as a signal to populations of the indivisibility in security commitments among Atlantic alliance member states. A few days later, the Soviet Union invadedAfghanistan. These events prompted formation of a European “peace” movement in western Europe, at the same time as the party-states in eastern Europe cracked down on human rights initiatives there. The western, particularly the German peace movement, demanded an end to the nuclear stand-off in central Europe, which had helped to freeze East-West divisions since the late 1940s, while the human rights activists in eastern Europe, particularly inPoland, in effect militated for regime change.Germanylay at the seismic centre of these two trends.
Chancellor Kohl responded to the challenge by welcoming the installation of medium-range missiles on German soil. President Mitterrand, elected in 1981, backed Kohl, to the dismay of the German social democrats and militants in the peace movement, who wanted theFederalRepublicto move to neutrality between East and West. Keeping theFederalRepublicfirmly embedded in the Atlantic alliance, and in the EU, had been a constant of French foreign policy since the late 1940s. The counterpart to this policy of bindingGermanywestwards was to bind France to theFederalRepublicthrough the institutions of the EU. That meant Mitterrand distancing himself from his initial policies of nationalisation, reflation and devaluations, undertaken in the years 1981-83.
A crucial convergence of French and German interests on exchange rates had occurred in the fall and winter of 1977-78, when a run on the dollar prompted a surge in the value of the DM, penalising German exports.France, too, wanted more stable exchange rate conditions, while moving to align monetary policy on German conditions. TheEMS(European Monetary System), conceived as a Franco-German initiative in April 1978, was launched in March 1979. For President Giscard d’Estaing, the EMS served two key imperatives: one was to start aligning French economic policies more on those of theFederalRepublic; the second was to confront any possible future left government inFrancewith the pre-existing constraint of the EMS. The EMS effectively recreated a regional Bretton Woods system. Currency fluctuations were limited to 2.25% in relation to a bilateral parity grid. The ECU (European Currency Unit) as a weighted basket of member‑country currencies was retained as an indicator of a currency’s margin from parity. Participating governments were to contribute 20% of their gold and US dollar holdings to a European Monetary Cooperation Fund (FECOM). In exchange, they received ECU balances to supportEMSparities. To this was added a fiscal transfer mechanism, designed to improve intra-EU payments imbalances and to facilitate payments adjustment.
Unfortunately for Giscard d’Estaing’s second imperative, the German government, at the European Council meeting of Brussels in December 1980, took the opportunity of deteriorating economic conditions to have FECOM indefinitely delayed for a “more opportune moment”. In February 1981, the Bundesbank drove up interest rates to record heights while world savings flowed to the US to feed President Reagan’s military-spending-induced boom. In March, Giscard d’Estaing lost the Presidential elections to his rival, Mitterrand, who immediately engaged his government on a policy of reflation and nationalisation. Three franc devaluations followed, consolidating the Bundesbank as Europe’s de facto, but not de jure central bank. In March 1983, President Mitterrand opted for the franc’s stabilisation within theEMS, rejecting counsel to move to national protectionism—the echo on the French left to the German left’s growing preference for national neutrality. Abandoning France’s go-it-alone policies meant aligning French economic policy preferences on those of the lead state, Germany, and in particular, on the interest rate and exchange rate policies of the Bundesbank.
This decision of March 1983 marks the key turning point in the history of monetary union. Thereafter successive French governments single-mindedly pursued their objective in the EU to create a currency and monetary regime to counter the dollar’s hegemony and to loosen or terminate the very special relationship in currency management between the Bundesbank and the Federal Reserve. The single currency, the ECB and the single capital market establish the EU as a counterweight to the US and—in the French government’s perspective—consolidate the European Council as the legitimate authority to shape macro-economic policy for the EU as a whole. France gains in that it makes economic and monetary policy on a footing of equality with Germany; Germany gains in that monetary union no longer exposes it to French resentment at its acquired position as de facto, but not de jure central bank for Europe. Monetary union is the EU’s answer to the re-emergence of an imbalance of power inEurope before and, even more so, after German unification.
From freeing of capital movements to monetary union.
Other considerations contributed to the “relaunch”Europein 1985. These included widespread concern at the EU’s poor economic performance, chronic unemployment, the surge in social security expenditures and labour legislation that raised the cost to employers of hiring labour, the decline in savings rates and a fall-off in investment rates. The tide of ideas away from government interventionism and towards freer markets was accompanied by changes in leadership among the member states, and the elaboration of new policy concepts within EU institutions. The British government saw an opportunity to promote free-market ideals as a positive contribution to the common enterprise. The Netherlands stayed loyal to its traditional attachment to the ideal of European union. Belgium, Luxembourg and Italy looked for a more determined lead from Brussels as a means to promote reforms at home, while welcoming the culmination of Spain’s lengthy entry negotiations to the EU as providing a new impetus to Community affairs.
But the major stimulus to Europe’s re-launch came fromGermanyandFrance. During its Presidency of the EU in early 1983, Chancellor Kohl’s new government in Bonn established its EU credentials at the Stuttgart European Council, where the heads of government subscribed to a Solemn Declaration on European Union, indicating an intention to extend EU deliberations into “the economic and political aspects of security,” as well as into the cultural or foreign policy areas. Bonn made the successful completion of the Spanish entry negotiations a precondition for the release of additional funds for the EU budget. The move underscored Germany’s status asEurope’s prime economic and political power. It obliged member states to speed agreement on control of farm surpluses, to conclude Spain’s EU entry negotiations in March 1985, and to win member-state support for the Commission’s internal market programme from which—it was supposed– Germany had most to gain. The internal market programme informed the Single European Act (SEA), amending the Rome Treaty, and agreed-upon at the Luxemburg European Council of February 1986. France’s Finance Minister, Jacques Delors, who had launched the French financial system on far-reaching reforms, took over the Presidency of the Commission in January 1985. The SEA was the common denominator linking four interlinked sets of negotiations.
The first set of negotiations was a commitment of the states to achieve “a progressive establishment of the internal market by December 31, 1992.” This meant the introduction of qualified majority voting in the Council of Ministers for legislation concerning the internal market, including financial services and capital markets. The extension of majority voting was balanced by retention of the veto in highly sensitive areas, such as the protection of savings by home country authorities. Meanwhile, the Dutch and the British co-operated closely with the Commission in promoting another round of trade negotiations in the GATT, finally agreed-upon atPunta del Este,Uruguay, in September 1986. The EU-wide policy consensus on internal negotiations, as in the past, was intimately associated with global market opening initiatives.
The second set of negotiations was about labour market reform. The British, with Irish and Italian backing, proposed an Action Programme for Employment and Growth, which championed the freeing of labour markets and stood in stark contrast to the Commission’s preferences for social protection. It was promptly scotched by an alliance between Commission President Delors, with the Belgians, French and Germans in support. The long term implications of this attempt to preserve existing social welfare policies, while stimulating more open product and service markets, has been to ensure very high rates of under- and unemployment, notably in the core EU states of France, Germany and Italy.
The third set of negotiations was about movement to monetary union. President Mitterrand agreed to liberalise capital movements in exchange for Chancellor Kohl’s recognition of monetary union as a goal. This is where Prime Minister Thatcher parted company with her French and German counterparts. Kohl was ready to discuss monetary union. Thatcher was adamantly against it. The SEA noted that theParissummit of October 1972 had approved “the objective of the progressive realisation of economic and monetary union,” and it alluded to the Rome Treaty’s Article 102a, referring to “further development in the field of economic and monetary policy.”
The fourth, and crucial, set of negotiations was over liberalisation of capital movements. It was crucial because without accord being reached on the liberalisation of capital movements, the linkages between the other sets of negotiations would not have occurred as they did. For Jacques Delors, liberalisation of capital movements was a first step to legislating the rules for an internal EU market, distinct from ongoing global market integration. His prime concern after the signing of the SEA in early 1986 was to implement the Rome Treaty with regard to liberalisation of capital movements. Without an end to capital controls, Bonnand London had made clear, there would be no internal market and little prospect for further cooperation in the monetary field. The Commission duly presented its two stage programme for a gradual end to capital controls on May 23,1986.In the first stage,France,Ireland andItaly were to conform by 1987 to existing rules. Long-term commercial credits, securities transactions and collective investments were to be completely liberalised. In addition, the first stage entailed modification of the directives of 1960 and 1962 on the liberalisation of capital movements, measures that were adopted by the Council in November 1986. Trade in securities was thereby eased, along with access to stock markets. The second stage, presented by Delors in October 1987, involved the implementation of Article 67 of the Rome Treaty on ending capital controls.
Putting an end to capital controls clearly made currencies more susceptible to the collective judgements of financial markets. Not surprisingly, negotiations in early 1988 on ending capital controls betrayed EU member states’ reservations. Safeguards became the main bone of contention. A number of governments were struggling with large public deficits and feared the political consequences of having to cut back on budgetary outlays. This was particularly true in the case of Italy, Spain, Ireland, Greeceand Portugal, which demanded transition periods. Bonn and London preferred no safeguards as a signal to the financial markets of the member states’ seriousness of purpose. But the Commission, with the support of the reticent members, secured the insertion of Article 3.1 in the directive, which allowed for the reintroduction of safeguards for a period of six months, under the supervision of the Central Bank Governors’ and the Monetary Committees. This in turn prompted a certain degree of scepticism about member states’ commitments.
The negotiations on freedom of capital flows immediately revived old feuds in the EU between free traders and protagonists of a single internal market distinguishable from world markets. A prevalent concern held that without convergence on rigorous standards of supervision in financial markets, initial disparities would generate competition between financial market systems and evasive behaviour by market participants. As the May 1986 Commission paper on capital movements indicated, the objective beyond the establishment of a financial-free trade zone was to establish an EU-wide integrated financial space. This was to be achieved through minimum common rules to protect users of financial services. This entailed the elimination of remaining restrictions on capital flows, alongside agreement on the new rules in the EU game along the lines of the White Book and the SEA.
An end to capital controls also exposed major differences among national tax regimes. This was a particularly awkward area for the Commission to address, since taxation lay within the domain of the member states’ veto rights. Not only did tax levels and structures differ, but collection techniques also diverged widely between member states. French tax authorities, for instance, relied on banks for tax information. Liberalisation therefore entailed, from the French perspective, an alignment of national fiscal regimes and a transmission of information among EU financial institutions to prevent evasion. But there was little backing for the idea among other central banks and finance ministries. Luxemburg refused to tamper with its bank secrecy laws, another major cause of tax evasion in other member states. But France persisted, and won a commitment for the Commission to propose by June 1989 measures to align withholding and corporate taxation.
Another concern was that the opening of financial markets could unleash currency turbulence by sending volatile funds flows across frontiers. A constant refrain of the Commission, referred to in the May 1986 proposal, was for a consolidation of the EMS. But this could only be achieved by further convergence in economic policies, and a package deal between the three major member states, France, the U.K.and Germany. Repeatedly, Commission officials appealed to the British government to bring the pound sterling into the exchange rate mechanism. But Prime Minister Thatcher remained adamantly opposed. Frequent references were also made to developing the ECU as a medium of exchange in the EC. But the Bundesbank, charged with management of Europe’s key currency, had outlawed the ECU’s use in Germanyand used only dollars to intervene on foreign exchange markets. France agreed to end all capital controls, and linked the move in June 1988 to “the prospect,” in Delors words, “of a common money and a common central bank.”
Liberalisation of capital movements entailed a compromise between the German and British positions of markets open to the world, and the French aspiration to create a more exclusive internal financial space, subject to EC law and policy clearly and distinct from world markets. Whereas the French position referenced the “specificity” of the EU financial space, German and British support for the internal market was only to be won by full acceptance of the principle of capital liberalisation erga omnes. The text was less assertive. The June 1988 directive, submitted by the Commission to the Council , stipulated that the condition of erga omnes did not prejudice “the application, towards third countries, of national rules and Community law with respect to conditions of reciprocity,” regarding access to financial markets. Equally, member states were only beholden to consult on measures taken to deal with disruptive capital flows. Repeal of the 1972 directive, introduced at Germany’s behest to take unilateral defensive measures against financial inflows did not abrogate de facto national powers of self-defense in the event of financial crisis.
The June 1988 directive also confirmed two principles: one of complete, unconditional and free movement of capital, and the other of non-discrimination based on nationality. But here too, due allowance was made for national susceptibilities. For reasons of monetary policy, the German government was determined to preserve a firewall between the domestic monetary base and short-term capital flows. “In certain cases,” the Central Bank Governors opined, “limitations on access to the national market should be allowed to be maintained for legitimate motivations of monetary regulation.” In other words, where legitimate national interests were at stake, they took precedence over EU cooperation. Similarly, the directive stipulated that all legislation designed to encourage national savings that afforded privileges to domestic over foreign securities had to be ended. This did not however prevent governments from encouraging domestic investors to buy national securities.
The “second stage”–ending all restrictions on short-term capital movements was voted by the Council on June 24, 1988, enabling EU nationals to open a bank account in another member state, and to trade in stocks and shares. The measure was to come into effect on June 1, 1990, with escape clauses, and delays for Ireland and Spain until 1993, andPortugal and Greeceuntil 1995. Freedom of capital movements was seen as one of the main conditions for the creation of the internal market, in that its achievement would assure “an optimal allocation of European savings.” The directive was the central measure which Delors used to link the internal market to all aspects of the broader EU programme, especially the achievement of monetary union.
German unity and monetary union.
As France unfurled its policy to tie the Federal Republic into a strengthened EU, Gorbachev’s election as Secretary General of the Communist Party of the Soviet Union (CPSU) in March 1985 was transforming Germany’s position in central Europe. The 1980s heralded a sharply modified world order. The rapid emergence of the dynamic economies in the Asia Pacific, led by Japan, prompted a “new thinking” in Washington and Moscow on the need to restructure world politics, and to release resources from supply of military hardware in the production of civilian goods and services.Paris,London and Bonn had reinforced defense ties in 1986-87, as the two world powers edged towards agreement on partial nuclear disarmament. Gorbachev’s proposals in February 1987 to dismantle intermediate-range missiles in Europe as separate and distinct from discussions on theU.S. and Soviet strategic arsenals were listened to attentively inWashington. Pressure to agree was brought to bear on the NATO allies, particularlyGermany. Kohl reluctantly conceded.Washington then asked Bonn to renounce partial control of short-range nuclear weapons based inGermany, and the way was cleared for the Washington Treaty of December 8, 1987 between Gorbachev and President Reagan. The Treaty meant the removal of intermediate-range nuclear weapons that theSoviet Union feared, while leaving in-place “battlefield” nuclear weapons for eventual use on German soil.
The Washington Treaty of December 1987 opened the way for a removal of intermediate nuclear weapons installed in Europein the mid-1980s. The Treaty, and the accelerating decompression of communist party-state rule in central-eastern Europe, transformed Germany’s international context. As the Bavarian leader, Franz-Josef Strauss wrote, Kohl’s August 1987 decision to abandon the Pershing IA missiles deprived Germanyin effect of nuclear cover, and reduced the Bundeswehr to the status of a colonial army. Whether or not the judgement was deserved, it reflected a weakening ofGermany’s commitment to the formulas for western security devised in the Atlantic alliance during the 1960s. The Chirac government revived the dormant WEU in October 1987, when its member states reiterated the principles of NATO strategy predicated on nuclear deterrence. These were promptly undermined by the Washington Treaty.Paris then revived the military provisions in the 1963 Franco-German Treaty, and won the Kohl government’s accord to create a 4,200 man Franco-German brigade. An untried brigade was no substitute forUS nuclear coverage of Germany.
Equally, Pariswas concerned that the Federal Republic talked European integration, but practised economic nationalism, and that the heart of national economic policy was the Bundesbank. To counter Germany’s primacy in shaping broader European economic policy through the Bundesbank’s stranglehold over intra-European exhcnage rates and monetary policy, Paris, Romeand Londonturned to the United Statesto prod Germanyinto a more accommodating macroeconomic policy. At a meeting of the G-5 Finance Ministers in the New York Plaza Hotelin September 1985, the second Reagan administration sought the cooperation of the other industrial countries in order to jointly manage the dollar downwards. There ensued a general lowering of interest rates, a surge in the yen and a decline of the dollar against the DM. At a meeting in the Louvre in February 1987, the leading financial powers struck a deal. West Germany and Japan pledged to boost growth, while the United States promised to cut its budget deficit, d U.S. Secretary of Treasury Baker promised to stop “talking the dollar down.”
Within the EU, in the Basel‑Nyborg Agreements of September 1987 a partial accord was reached whereby the EU central banks were to lend to each other in order to defend agreed-upon currency values before reaching the 2 1/4% mandatory intervention limit under the ERM. The Bundesbank initially denied any obligation. But the world equity market crash of October 19, 1987 accompanied by angry exchanges between Bonn and Washington exposed theFederalRepublic’s isolation, counselling closer cooperation with ERM partners.France, too, was effected by the crash. The government suspended trading in equities, and its privatisation programme ground to a halt. Fiscal restrictions in France were slightly eased, and Germany’s monetary targets were exceeded.Bonn and Paris cooperated through the financial disorders of November 1987. At the Franco-German summit that month, it was agreed to introduce an Economic and Financial Policy Council, within the bounds of the 1963 Franco-German Treaty. The Council was launched in January 1988. The Bundesbank immediately expressed reservations about an initiative that threatened to put the Bundesbank in a minority and subject it to the authority of Finance Ministries.
When public discussion on EMU was renewed in 1987, three key ideas were in circulation. Mooted in a memorandum by French Finance Minister Balladur, the first notion focussed on the inequity of Germanysetting monetary policy for others. The French Finance Ministry’s proposal of early 1988 for a common currency in essence aimed to have the Bundesbank hold ECUs rather than US dollars as counterpart to German external surpluses and use them to subscribe to French Treasury bonds. It provided the thrust for the creation in January 1988 of the Franco-German Economic and Financial Council in parallel to the Defense and Security Council modifying the Elysée Treaty of 1963. The Council was to meet three times a year and be attended by the respective Economics and Finance Ministers, as well as the two central bank governors. The second proposal, advanced in Rome, was for all EU currencies to join the ERM, and for a European Central Bank (ECB) to be set up as the central coordinator for a European currency policy. In this way, the German economy would not continue to make “structural gains” through the DM’s undervaluation, while Britain would not be able to gain from capital-market liberalisation, “without being subject to the restrictions (membership in the ERM) placed on domestic economic policies.” The third proposal came from the German Cabinet for a single currency, entailing free capital movement, priority for price stability, political independence of the ECB, no inflationary financing of government deficits, and a federal political system. The European Council at Hanover in June created a special committee, chaired by Delors and including all EU central bank governors, to investigate ways of achieving economic and monetary union. 
The Committee’s report in spring 1989 reflected its composition. It proposed a programme for the creation of EMU (European Monetary Union) through irrevocably fixed exchange rates, a single European currency, a common monetary policy under the direction of a European central bank and rules to constrain national governments with regard to budgets. The Bundesbank’s reticence on EMU was recorded in the reference to its having “potential”. The report sketched three stages to monetary union. Capital movements were to be freed on 1 July 1990. The second stage would start at an unspecified date, once a new Treaty had established a European Central Bank (ECB) and precise, but not binding, rules on the size of government deficits. The third stage would start once the mechanisms for the internal market were in place.
Differences between Paris and Bonn were patched-up by a successful Franco-German summit that set the agenda for the EC Strasburg summit of December 8-9, 1989. At the summit, the EU heads of state and government reiterated support for the German people to “refind unity through free self-determination,” and Bonnconcurred in Paris’ request that a new intergovernmental conference be held prior to the German elections in 1990, with a view to incorporating monetary union into the Treaties. Germany’s western orientation seemed confirmed with Kohl’s statement in Paris in January that “our common aim must be to build up the EU as the kernel of a future European peace order.” German unity was completed on 3 October 1990 ahead of the December general election. Kohl supported the Bundesbank’s terms, presented to other governments as “non-negotiable” demands: political union, price stability, completion of the internal market, political independence of the ECB and member banks and an ECB monopoly on all necessary monetary policy instruments. Prior to union, price levels had to converge on a stable and low norm. There was to be no inflationary financing of government deficits, and there were to be binding rules on government spending.
Until 1990,Germany’s major security partner in the context of the Cold War was clearly theUS. In essence,Germanyacquiesced in the dollar’s privileges as a reserve and transactions currency because theUSwas its prime protector in the Cold War. The US played the central role as Germany’s partner in the 1990 rush to German reunification. AtMaastricht, the EU failed to develop a coherent and effective foreign and security policy. The task of ensuring Europe’s security devolved by default to NATO and thus to the US. Yet the EU’s move to monetary union created the Euro as a potential rival to the dollar and the Euro-capital market as an alternative to theUScapital market for investors around the world. Since German unity, and until the 2003 Iraq war, a realist might have noted the tension inherent to the EU’s situation, whereby the EU continues to depend for its security on the US, but – with the Euro – poses a monetary challenge to the dollar.
The Maastricht Treaty, signed on 7 February 1992, incorporated a German programme for a single currency.France accepted these terms, and the German government signed away the DM. During the transition, member states were to strive to achieve the convergence criteria, defined in a treaty protocol. These were essentially financial: low inflation, stable interest rates, stable currencies in the ERM and moderate government deficits and public debt. A “European Monetary Institute” (EMI) was to be created in 1994 with responsibility “to coordinate monetary policies.” Stage Three would start in January 1999. If enough states were not ready by 1996, the EU would decide in 1998 and by majority vote which countries were prepared. Exchange rates were to be fixed and the new currency was first to be introduced in 1999 on the wholesale markets and by 2002 on retail markets.
Public opinions and the Bundesbank were less than enthusiastic about the treaty. World financial markets doubted the credibility of existing exchange rates and challenged them repeatedly in the course of 1992-93.Germanywon support to locate the ECB inFrankfurt, to call the common currency the “Euro” over the French choice of “Ecu”, and to introduce a “stability pact”, whereby governments running excessive deficits would be fined. The Bundesbank insisted that the ECB would have no obligation to intervene on behalf of weak currencies: the burden would be on them. But France continued to champion the ECB’s political accountability to the European Council; backed Italian and Spanish membership in monetary union to ensure a pro-growth lobby among finance ministries; and agreed to tighten joint supervision of exchange rate policies—an “ERM 2”, whereby “out” currencies would move within the prevailing 15% bands in a grid hinged on the Euro. The UK parliament ratified the Maastricht Treaty, but won an “opt out” of monetary union, and in 1997, the new UK Labour government signed up to the EU’s social policy. The British Chancellor of the Exchequer was reminded that two and one half years had to be spent in the ERM-2 before entry to the Euro, while candidate countries from Central and Eastern Europe had to expect pressures to join a tight-exchange rate regime, before they had completed their transformation into market economies. Similarly, the core countries interest in roping currencies into the new regime was not unrelated to whether an additional member state’s reputation on world currency markets would hold their harder currencies down against the dollar. The incorporation of Greece—a chronic weak currency country– to monetary union in 2001 may be explained in that light.
For all the hesitations and after-thoughts in the run-up to the Euro’s introduction, there was no going back. After the ratification of the Maastricht Treaty in 1992, despite the monetary crises that hit Europe in 1992 and 1993, the timetable for the introduction of the Euro – from the agreement in 1998 over the first 11 member states to the introduction of the currency in wholesale markets in 1999 and the changeover from national currencies on 1 January 2002 – was kept. Commitment to monetary union, in the terminology of the Maastricht Treaty, was “irrevocable”. Monetary union ranks as one of the great victories of French diplomacy.
Into the first decade of the millennium.
Now that the single currency had been born, contrary to many expectations, it would have been tempting to argue that the pre-history of the Euro was irrelevant or ‘bunk’, as Henry Ford I famously stated about history. But this would be an error. There were many carry-overs into the new currency. Not the least among these was the German ambition to use the Euro as a step to a federalEurope, modeled on domestic German legal and political traditions. In presenting his government’s strategy for Germany’s six months’ tenure of the presidency of the EU in January 1999, Foreign Minister Joschka Fischer celebrated the Euro’s launch, but added that “the introduction of a common currency is not primarily an economic, but rather a sovereign, and thus eminently political act”.
Despite the efforts of the German government, with its allies around the EU member states, to press ahead for a federal design for the EU, the member states showed little sign of abandoning their state powers. The German government’s intent was to flank monetary with political union. But having secured representation on the ECB, and in the key committees supporting the work of the Finance Council, the states retained their veto on foreign and security policy, on taxation, and on much else affecting the workings of the internal market, such as procurement, transport or culture and education. An EU of states was further strengthened by successive rounds of enlargement, first with the expansion of membership toAustria,FinlandandSwedento an EU of 15 in 1995, and then to an EU of 25 in 2004.
The euro was launched as an electronic currency on 1 January 1999 with 11 member states signing up to join, and became legal tender on 1 January 2002. The Frankfurt-based ECB is the institutional heart of economic and monetary union. Unlike the US Federal Reserve and the Bundesbank, its sole mandate is to maintain price stability. There is no mention in the Treaty of it having to co-operate with the government on economic policy. It has 500 staff, and its Directorate was headed initially by the former Dutch central bank president, Wim Duisenberg. The choice of Duisenberg was, however, vitiated by the deep-rooted European politics of prestige: French President Chirac insisted that Duisenberg sit out only half his term, and make way for the then governor of the French central bank, Trichet. The ECB is charged with making EU-wide policy, and in developing relations with the rest of the world. It must decide on the mechanics of monetary policy, and has adopted a pragmatic approach in the on-going debate about whether to adopt monetary targeting (the Bundesbank’s preferred method since 1975 to serve as a guide to employers and trade unions during wage negotiations), or inflation targeting (the preferred method of the Bank of England). The ECB has expressed hostility to target foreign exchange rates between the Euro, the $, or the yen. A large, open economy such as the EU—it was argued– need not focus on the exchange rate to the same extent as smaller economies, such as theUK.
Power in the EU’s new monetary regime lies in the European System of Central Banks (ESCB), made up of not only the ECB but also 12 national banks—Greecejoined in 2001. The national central banks play a central role in the ECB’s governing council in Frankfurt and the monetary operations through which the bank carries out its policy. Together they employ some 60,000 staff. They are not subsidiaries of the ECB, as is the case of the Federal Reserve System in theUS. They are its shareholders. The six members of the ECB’s executive board who serve on the ECB governing council are outnumbered by the 12 national governors on the council. If the number of participants increases, the national bank governors will form a still larger majority. In addition, the national central banks are in charge of operational aspects, including regular money market operations through which central banks inject liquidity into the financial system. Frankfurt wrested back the DM-bond market from London, to back the growth a large and liquid Euro-bond market, but the beneficiary of the Euro in the battle for dominance among financial centers turned out to be London, and the losers the smaller financial centres, including Paris and Frankfurt.
The Meaning of Monetary Union
As indicated above, monetary union is regarded by many as an integral part of the EU’s political development and a logical extension of the process of economic integration. At its most fundamental level, of course, it is intended to eliminate national currencies and exchange rates among the participating countries. As a consequence, monetary union eliminates associated transaction costs, where payments are made between buyers and sellers in two or more currencies. This reinforces a single market for goods and services, promotes a more market-based allocation of resources, and contributes greatly to synchronise trade cycles. Consumers benefit as prices across the EU become more comparable in one currency. Smaller companies, which do not have ready access to hedging facilities on futures markets, will find it easier to service an EU-wide market.
These expected benefits were not realised, as much as some had hoped. Without any doubt, the ECB’s policy of holding interest rates low, combined with the unexpected initial downgrading of the Euro relative to the dollar, yen and pound sterling by the foreign exchange markets, helped to stimulate growth after 1999. The Euro also fulfilled the expectations of its two ancestors, the former German Chancellor Helmut Schmidt and ex-French president Valéry Giscard d’Estaing, to form a “zone of monetary stability” in Europe, shielded from the movements of the dollar. Corporate investors within the Euro zone now had a stable and predictable business environment in which to plan for the future – and on a continental scale. The two statesmen had also been concerned at the unipolarity of the global financial system, structured as it was around the dollar. With the Euro, the world’s investors had an alternative to a dollar placement, which was that much more risky in the light of the rapid escalation of US foreign debt. The Euro quickly became a prime issuing currency in the bond markets, with the US dollar and Euro each accounting for 45% of bond issues and the pound sterling for the remaining 10%. This upward pressure on the Euro in 2003-2004 hurt the competitiveness of European-produced products on globalised markets. But the fundamental reservations about the Euro’s future relative to the dollar were rooted in politics: the adoption of the Euro created a structure of incentives to move to an integrated polity and economy, while the mentalities and inheritances of European peoples, regions and states remained extremely diverse. The Euro abolished 12 national currencies, but it did not abolish 12 political systems. It created one capital market, but did not end the existence of 12 different financial systems. This was especially the case of France and Germany.
By contrast, the other major European economy—the UK—showed robust growth, and sharply falling unemployment rates, while EU money market operations concentrated in London, which continued to prosper as the EU’s prime financial centre.Ireland, Finland, Denmark, Sweden, the Netherlands, Belgium, Luxemburg and Spain also turned in robust economic performances. With the UK, Denmark and Sweden not in monetary union, but prospering outside, andIreland, Finland, or the Netherlands in monetary union and growing robustly, the focus of attention turned on the big countries of Euroland: were the governments ofGermany,FranceandItaly capable of implementing the market-friendly reforms needed to benefit by monetary union?
One of the major benefits of monetary union was the creation of a unified market for money and capital, comparable in size to that of theUS. Such a market contributes to the allocation of capital optimally on an EU-wide basis of the underlying risks and returns. It helps raise the rate of savings and investment, and offers borrowers a lower cost of capital and savers a high rate of return. By continually feeding capital to viable industries and denying it to industries that have lost their competitive advantage at global market prices, a single capital market helps accelerate the rate of technological change, and other determinants of economic growth. Investors request greater accountability of managers, encouraging the growth of a market in corporate assets. All of these factors have been at work in the EU, greatly strengthening the power of management over workforces. Workforces, though, have votes and have clearly cast them in ways to remind incumbent governments that promotion of market-friendly policies is not readily converted into electoral success. Not surprisingly, one casualty has been the Stability Pact.
The Stability Pact, negotiated in the course of 1995-96, illustrated the depth of German anxieties at surrendering the DM, for an untried currency in the company of France and Italy with their inflation-rich histories. The Stability Pact sought to impose a legal constraint on member states’ budgetary policies after the Euro’s introduction. The idea was that profligate governments would face two types of punishment: one was expected to come through the market, given that all debt is evaluated in terms of potential default risk, which in turn is reflected in the interest rates. In addition, a profligate government would face treaty-based penalties for exceeding the 3% gdp limit, as well as bond markets demanding prompt corrective action, signalled by interest-rate changes and/or the success or failure of new issues. But the French emphasis on the European Council as the ultimate arbiter of economic policy indicated that such a legal constraint was open to political interpretation. How political was soon revealed when, once the Euro was introduced, the Commission lectured Ireland and Portugal, two small and peripheral member states, on allowing their deficits to exceed the 3% GDP rule.Ireland avoided being placed in the Commission’s dock, but Portugal became the first Euro-zone nation to breach its terms of the Stability Pact after Lisbon produced a public deficit of 4.1 percent of GDP in 2001.Lisbon duly pushed through unpopular measures, including a rise in the sales tax, to cut the deficit to 2.7 percent in 2002. Thereupon,Germanyand France, the two largest euro-area economies, breached the three percent limit for four years in a row. At a meeting of EU finance ministers in November 2003, they effectively suspended the EU’s budget rules by rebuffing a call by the Commission to bring their deficits back under the limit. Indeed, half of the 12 countries using the Euro -Germany,France,Italy, theNetherlands,PortugalandGreece- which together accounted for 80 percent of the euro-area economy, were in breach of these budget rules in 2004. Clearly, rules designed forItaly, and applicable to small countries, could not be applied to France and Germany.
Another major benefit of monetary union was the incentives provided to financial intermediaries to compete in a highly liquid and contestable market, transformed by the conversion of national bond and equity markets to Euros and by EU legislation on financial services. This opened new sources of finance for corporations, many of which were previously limited to their own narrow national capital markets. Nonetheless, national cross-shareholdings, or other protective mechanisms to keep corporate ownership in national hands, remained widespread after the Euro’s introduction. The single capital market has not abolished the European states’ inherited reflexes to protect their national champions, despite the fact that 16% of shares listed on the German Stock Exchange are in the hands of foreign investors and up to 40% in the case of Paris.France’s finance establishment could not stop worrying about the outcome of BNP’s bid for Société Générale and Paribas, or at ING’s bid for the French bank CCF. The Italian investment bank, Mediobanca, showed how the Euro-capital market could be used to protect a national champion like Telecom Italia from Deutsche Telekom’s unwelcome grasp, and kept in the hands of another Italian national champion, Olivetti. The biggest shock came when a blue-chip German corporation, Mannesmann, with 60% of its shares held by shareholders abroad, faced a successful takeover in 2000 by Vodafone, the British mobile communications giant. German business responded by multiplying defence mechanisms against future takeovers, whileBerlindowned the directive on takeovers proposed by the Commission, with the eager support of Paris and Stockholm. The Wallenberg family, for instance, owns only 7% of Ericsson, a telecoms firm, yet controls the company, because one class of shares carries 1,000 times the voting rights of another class.
If national governments continued to ride to the defence of national capital, they also sought to protect national social policies, as if nothing had changed. Monetary union had significant implications for industrial and labour market policies. The most significant related to the greater fluidity of capital, and the increased pressure of industrial adjustment on firms, both of which required much greater occupational and geographical mobility of the labour force. But intra-European labour mobility was marginal, and labour market institutions and attitudes remained national. Indeed, rather than open up labour markets by promoting equivalence of training diplomas, transferability of pensions, flexible housing markets, and easing up on hire and fire regulations, the political trends in the early years of the Euro’s existence were for more national protectionism, not less. The French government introduced a 35-hour week for workers, with the same pay as if they worked 39 weeks—thereby increasing holidays over the year by 6 weeks, as well as hugely raising wage costs—while the German government extended no-firing policies in Germany to firms employing no more than five people. Unemployment in the EU is around 10%, but in the poorer peripheral areas, such as Spanish Andalusia or Italian Sicily, the figures are at least 30%. InFrance,SpainandItaly, about a quarter of under-25-year-olds are unemployed. Legislation notoriously defends workers in work, but is not predicated on the prior principle that all citizens should have ready access to work.
Because labour markets in the major EU countries are sticky, and their reform, albeit necessary, remains very hazardous terrain for ambitious politicians, the EU can promote growth only by a policy combining lower interest rates and low exchange rates. Policies now feature low interest rates and bloated budgets, alongside rigid labour markets inFrance,GermanyandItalyand a high exchange rate. The one truly European country is the United Kingdom, which undoubtedlty has the most liberal or open market among EU member states in the sense that foreign companies, banks, personnel or products have ready access to a market where actual policy is geared to benefiting the consumer. The fundamental reason why British public opinion is sceptical about ‘Euroland’ is the gap that it perceives between the continental EU language of “solidarity” and the reality, especially as evidenced in the dramatic un-or underemployment figures, inItaly, France and Germany.
So where do Europeans go from here? EMU implies that there is no option other than to move as rapidly as possible to a liberal market settlement, which involves the re-structuring of national welfare and worker participation policies. For all the talk of progress, the reality is that there has not been a move to a liberal market settlement in the Euro zone, and national corporatisms of various types continue to flourish. The fundamental deficiency in implementing the Euro is that product, labour and financial markets have not been liberalised to the extent required in a monetary union and for them to operate at optimum efficiency. And they have not been liberalised, because there is no consent for liberalisation in the major member states. The Euro was launched as a top-down project, led in particular by France and designed to prevent the consolidation of German financial primacy; but it can survive only if the ideological battle is won to ensure a bottom-up support for a liberal market society.
 Hans O.Schmitt, “Capital Markets and the Unification of Europe”, World Politics, Volume 20, January 1968, pp. 228-244.
 Two key contributions to this debate are: Wayne Sandholtz, “Choosing union: monetary politics and Maastricht”, International Organization, 47, 1, Winter 1993, pp.1-39; Andrew Moravcsik, “Negotiating the Singe European Act: national interests and conventional statecraft in the European Community”, International Organization 45, 1, Winter 1991.pp. 19-56.
 There is a huge literature on the run-up to monetary union, and the negotiations surrounding the initiative. A key work is Kenneth Dyson and Kevin Featherstone, The Road to Maastricht: Negotiating Economic and Monetary Union,Oxford,OxfordUniversity press, 1999.
 Rewe-Zentral AG v. Bundesmonopolverwaltung für Branntwein (Cassis de Dijon) Case 120/78,1979 European Coujrt t. Reports. 649,1979 Common Market Law Reports. 494.
 Jean Claude Masclet, “Les Articles 30, 36 et 100 du Traité CEE à la Lumière de l’Arret “Cassis de Dijon.” Cour de Justice des CE, 20 Fevrier 1979,” Revue Trimestrielle de Droit Européen, Paris 1980, No. 4, pp. 611-634; “L’Arret “Cassis de Dijon.” Une Nouvelle Approche Pour la Réalisation et le Bon Fonctionnement du Marché Interieur,” Revue du Marché Commun, Paris, No. 241. 1980.
 Re Insurance Services: EC Commission v. Germany, Case 205/84, 1987 Common Market Law Reports, 69; Re Co-insurance Services: EC Commission v. France, Case 220/83, 1987 Common Market Law Reports. 113, Re Co-insurance Services: EC Commission v. Ireland, Case 206/84, 1987 Common Market Law Reports,150; Re Insurance Services: EC Commission v. Denmark, Case 252/83, 1987 Common Market Law Repots.169.
 Definition given in the OECD’s National Treatment Instrument.
 See Jean-Pierre Baché, “La Libération des Mouvements de Capitaux et l’Intégration Financière de la Communauté,” Revue du Marché Commun, No. 304, February 1987.
 COM(86)292 final.23.5.1986.
 Vittorio Grilli, “Financial Markets and 1992,” Brookings Papers on Economic Activity Issue 2. 1989.
 Lamberto Dini, “Towards a European Integrated Financial Market,” Banca Nazionale del Lavoro Quarterly Review 159 (1986).
 Le Monde, June 15, 1988.
 See Vassili Lelakis,”La Libération Compléte des Mouvements de Capitaux au Sein de la Communauté,” Revue du Marché Commun, No. 320, September-October 1988.
 Europolitique, No. 1401, 30.4.1988.
 See for the general argument as applied to the powers, Paul Kennedy, The Rise and Decline of the Great Powers, Random House, New York, 1988. On high technology as a key consideration for perestroika, Marshall Goldman, Economic Reform in the Age of High Technology, New York, Norton, 1987. For U.S.-Japan trade relations, see Clyde Prestowitz, Trading Places,New York, Basic Books, 1989.
 Franz-Josef Strauss characterised Kohl’s August 1987 decision to abandon the Pershing IA missiles as reducing the Bundeswehr to the status of a colonial army. Franz-Josef Strauss: Die Errinerungen, Siedler Verlag, 1990. p.435. See also Joseph Rovan’s introduction to Kohl, L’Europe est notre destin, p. 32.
 Financial Times, February 23, 1987
 Italian financial circles were generally skeptical at the efficacy of supposedly “spontaneous” mechanisms leading to monetary union. Free capital movements would disrupt the EMS, in view of different inflation rates between European currencies. See Marcello de Cecco, Alberto Giovannini, A European Central Bank? (Cambridge: Cambridge University Press, 1989). The book was based on a conference at Castel Gandolfo in June 1988.
 Financial Times, February 25, 1988.
 Peter Hort, “Ein Bilanz der deutschen EC-Präsidentschaft,” Europa-Archiv 15 (1988) pp. 421-428. François Puaux, La politique internationale des années quatre-vingt, Paris, Presses Universitaires de France, 1989, pp. 159-177.
 “Les Douze acceptent que le peuple allemand retrouve son identité”, Le Monde, December 10-11,1989.No date was named for completion of monetary union, reflecting Kohl’s reticences and Thatcher’s opposition.
 Le Monde, January 19, 1990.
 See my “What the Euro has wrought”, Wall Street Journal, February 8, 2000