Realpolitik and the European Union: Chapter 3. The Rise of the DM

The rise of the DM.

As Germany acquired formal, then effective sovereignty in Europe, France moved away from de Gaulle’s attempt to impose French primacy in the EEC, to accommodating Germany as a special partner in the 1970s, then to negotiating with Germany under often fraught conditions in the 1980s, eventually to conceding that there was no alternative other than to back German unification, while promoting the EU as the diplomatic vehicle for absorbing Europe’s now dominant state in a more integrated EU. The phrase that was endlessly repeated at the time of re-unification in 1990 had been coined in 1953 by the novelist Thomas Mann, in a speech to students in Hamburg. They should strive for “not a German Europe but a European Germany”.

A clear sign that France was moving away from de Gaulle’s policies to impose French primacy on the EEC came in 1976, when President Giscard d’Estaing’s announced his support of Jean Monnet’s idea for direct elections to the European Parliament. In its pre-1979 form, its title was European Assembly, and the delegates were national MPs from national parliaments. They were thus in intimate contact with national politics in their respective member states. Monnet’s aspiration of course was that a European consciousness would emerge over time, as the sense of belonging to Europe edged out national loyalties. But participation in European Parliament elections from fell 62% in 1979 to 42.6% in 2014. National loyalties remained firmly entrenched.

The background to the alignment of France on Germany’s EEC preferences may be dated to the end of the Bretton Woods system in the late 1960s. As a stable dollar had provided the underpinning for currency relationships within the EEC, the slow move away from a fixed exchange rate system became a central concern of EEC member states. The starting shot for France’s three decade long campaign for a common or a single currency began in 1968, when the Bild Zeitung headlined, “Nein”, in paraphrase of Finance Minister’s Franz Josef Strauss’ refusal to accede to de Gaulle’s proposal that the DM revalue.

Franco-German relations from 1957 to1987.

The signatories to the Rome Treaty of 1957 consciously made no reference to monetary union, on the grounds that it was too controversial, even though the idea had been an integral part of the federalist cause for a united Europe. Since the late 1960s, monetary politics have lain at the heart of Franco-German relations, as the DM began its ascent on the back of widening trade surpluses to replace sterling as the world’s second reserve currency after the dollar. (see Table) French diplomacy quietly jettisoned its policy, inherited from de Gaulle, in favour of a Europe of the states and adopted a more integrationist stance with regard to the EU. It focused on the Bundesbank as the bastion of Germany’s financial and corporate power nexus, and the prime partner of the US Federal Reserve in managing the central exchange rate between the dollar and the DM. As Bundesbank Council member Wilhelm Nölling has written about monetary politics over the creation of a European currency, the controversy is “about power, influence and the pursuit of national interests”.[1]

Reserve currency composition

1970       1976       1980       1984[2]

US $                        77.2      76.6        67.2        65.8

Deutsche Mark       1.9        8.8        14.8        12.1

£ sterling                10.4       1.9           2.9         2.8

French franc             1.1       1.6          1.7           1.0

The broad aim informing the policies of successive French administrations was to somehow dilute the Bundesbank’s power within a new European monetary regime, run on lines more compatible with the exigencies of the French economy. The first full fledged proposal for monetary union along federal lines came in October 1970, when the Werner Report-named after the Luxemburg Prime Minister, Pierre Werner-was presented to the Council of Ministers.[3] The proposal incorporated the German preference for price stability as well as stating the need for a sizeable EU federal budget. But governments pursued divergent national policies and the experiment was quickly buried.  Germany argued that it would not be possible to align exchange rates more closely in the absence of convergence in economic policies and performance.

On August 15, 1971, President Nixon announced that the United States would no longer convert dollars to gold at a fixed value, thus launching the world onto the dollar standard. This crucial decision consecrated the dollar as the world’s key trading and reserve currency. In March 1973, the  Bundesbank, decided to have the DM’s rate set on world financial markets. Until the introduction of the Euro, the central exchange rate for the wider European economy was between $ and DM.

A second, more confederal monetary design for the EU was launched, when Chancellor Schmidt became convinced in the winter of 1977-78 of the urgency of extending the DM zone to incorporate the French franc, following the depreciation of the dollar, and upward pressure on the DM. [4] Tying the DM to a weaker franc would shield German exporters on world markets. But the European Monetary System(EMS), foundered for similar reasons to the Werner Plan: the Bundesbank was not prepared to risk importing inflation through interventions on the foreign exchange markets to sustain the franc. [5] In  February 1981, it unilaterally raised interest rates to unprecedented levels to stabilise the DM and stem the outflow of capital to the US.  It thereby imposed retrenchment on the European economies, and ensured the DM’s hegemony as Europe’s key currency.

The heyday of a DM zone disguised in ERM clothes came in the years 1981-87. When in 1981 President  Mitterrand decided to promote consumption and nationalize a swathe of companies and banks, external debt exploded, capital fled the country, domestic savings shrank and the franc devalued thrice against the DM.  A crucial episode was President Mitterrand’s decision of March 1983 to keep the franc in the ERM, and stabilize the French economy. In support of this objective, Paris pushed through major bank reforms and created a “unified capital market”, along Anglo-American lines. [6] Subsequently, successive French governments managed to privatize, and to prevent French companies being “dissolved in Europe”- French shorthand at the time for takeover by German companies.[7] Market capitalisation of equities rose from 5.5% gdp in 1982 to 37% by 1993, and 63% by 2002. By 2007, market capitalization in Paris was 107% gdp, compared to Germany’s 63%.

With the outbreak of the German peace movement in the late 1970s,[8] France redoubled efforts to ensure that Germany was embedded westwards. The fear in Paris was of a neutral Germany well disposed to a militarily powerful USSR, and increasingly dependent on it for natural gas. The strategy to collectivize the Bundesbank in a single currency area, where France would have a say rather than being on the receiving end of Bundesbank preferences, was thus not just about currency matters. Rather, the internal market, capital liberalization, currency and then political union became a central feature of France’s Grand Strategy to bind the German Gulliver.  Jacques Delors-Catholic trade unionist, member of the European Parliament, then Mitterrand’s Finance Minister- was the agent of this policy in Brussels. When  he took over the Presidency of the European Commission in 1985, he picked up on the ambition of his 1960s predecessor, Walter Hallstein, to create a federal Europe-a “super-state”, in de Gaulle’s phrase.[9] His approach was to unpack what he called his “Russian dolls”: the first doll was the “Single European Market”; the second was the financial package for free movement of capital; the third opened on monetary and political union, as sketched in the Maastricht Treaty; and the fourth, full political union to cap monetary union. Delors’ ambitions were shared by Chancellor Kohl.

France’s flagship policy: the single currency.

The story of the genesis of the Euro is only marginally rooted in economic theory. It is primarily a product of Franco-German diplomacy, with a supportive role played by the Banca d’Italia. The overriding justification for the Euro was strategic: Kohl did not want Europe’s political structure to return to the configuration of 1914, with a powerful, united Germany in the centre, and lesser powers joining in coalition to contain it. European union was his answer. Mitterrand sought the narrower goal of having France participate in the policy of the European Central Bank (ECB). In this manner, he fondly hoped, France would not have to follow policies set unilaterally by the Bundesbank.

An abundant literature nonetheless makes crystal clear that the conditions for countries successfully to share a single currency are very demanding. These were first outlined in a seminal article by the Canadian economist, Robert Mundell. [10] Mundell proposed four criteria for a successful currency union :

  1. Labour mobility across the region, facilitated by the lack of cultural barriers, and by institutional arrangements such as pension transferability, passports, or worker rights. Thus, if unemployment rises in one country, workers can migrate easily to where jobs are available.
  2. Capital mobility, price and wage flexibility across the region, so that market forces of supply and demand distribute money and goods to where they are needed. In practice this does not work perfectly as there is no true wage flexibility.
  3. A risk sharing system such as an automatic fiscal transfer mechanism to redistribute money to areas/sectors which have been adversely affected when there is a downturn.
  4. Participant countries have similar business cycles. Should countries in a currency union have idiosyncratic business cycles, then optimal monetary policy may diverge and union participants may be made worse off under a joint central bank.

Solidarity, understood as the sharing of a common destiny, is one further condition added in the ensuing discussions in academe. It may be taken as a proxy for the extremely demanding political conditions required for a single currency area to function optimally: these would include for instance a common political culture; the existence of a common business system; [11] a sense that taxpayers in Germany, for instance, should be prepared to fund fiscal transfers to poor regions anywhere in the EU; and not least, a compatible  exposure of each member state to global business conditions. [12]

The French Finance Ministry’s preferred currency solution for the EU was for a common exchange rate arrangement on confederal lines, that allowed for the preservation of national currencies and regulatory authorities in cooperation with EU institutions.[13] By contrast,  successive German governments adopted a maximalist position in favour of a single currency, which implied a bold move to a federal polity for the whole of the EU.[14] The European central bank would have undisputed monopoly powers over a monetary policy dedicated solely to the achievement of price stability.[15]

Delors had to accept German Chancellor Kohl’s insistence on liberalisation of capital movements as a precondition to the proposed EU internal market, for which the Chancellor  was prepared to consider monetary union as a “goal”. But a removal of capital controls by the French government was bound to make the franc more vulnerable to speculation, while Bundesbank reluctance to intervene on foreign exchange markets in support of weaker currencies, indicated that France would have to align economic policy even closer than it already was on German priorities.

On 26 January 1991,  President Mitterrand held a meeting of his main advisers in his grand office at the Elysée Palace. Elizabeth Guigou, his minister for European affairs, kicked off the discussion. “Even the British no longer believe in the “common currency”(a French Ministry of Finance favourite, as mentioned, whereby national currencies would be co-managed in relation to a common currency-the écu). “ If we don’t go ahead now, she continued, we will never make the single currency(the future Euro, as proposed by the German government in a Bundesbank paper of October 1990).

Pierre Bérégovoy, Mitterrand’s Minister of Finance, replied, that “if the écu is not developed immediately, the Deutschemark will end up serving as the common currency”. Mitterrand then intervened: “We should not hide the fact that there is a debate between the “common currency”, Bérégovoy’s favourite, and a “single currency”. But the policy of France is a single currency….I was opposed for a long time to a European Central Bank, said Mitterrand. “But France will have more influence in the European Central Bank than it does today over the Deutschemark”. Mitterrand went on: “the DM is Germany’s only diplomatic weapon (Germany is not a permanent member of the UN Security Council and has no nuclear weapons). Then he turned to Bérégovoy: “No reversal of alliances! Our ally is Germany! The British are aligned on the United States”. [16](my translation)

The German alliance was Mitterrand’s leitmotiv during the negotiations leading to the signature of the Maastricht Treaty. Anything which stood in the way of French relations with Germany was sidelined: France’s traditional relations with Serbia were ditched, and France accepted the Bundesbank blueprint for monetary union, and the location of the future European Central Bank in Frankfurt. But at the time of the French referendum  in September 1992 on the Maastricht Treaty, he clearly stated :`Those who decide economic policy, of which monetary policy is only one instrument, are the politicians elected by universal suffrage, the heads of state and government who make up the European Council”. [17]President Chirac later returned to the theme, indicating that the French concept of “economic governance” of the EU was not to be circumvented.[18]

The transformation of Europe

The end of the cold war confronted Europe with a fundamental question on how to order  its affairs. One model was to revert to the medieval and supra-national  papacy, where all princes were subject to the same law, and a delicate distinction was sustained between the earthly powers of monarchs and the overarching rule of the Church. But in the western Church, ecclesiastical sway had been fractured by the religious wars of the sixteenth and seventeenth centuries, resulting in the proliferation of sovereigns, of greater or lesser size; whose populations adhered, except in the marches, to the religion of their ruler; that shared a common culture of music, theatre and ideas, and conducted their affairs through trade and through diplomacy according to broad principles of legitimacy and the balance of power. An enlightened European republic of monarchs, where political alliances were frequent across religious divides, proved open to incorporating  the Orthodox religionaires of Russia, Greece, Syria and Jerusalem into its fold, but drew the line at Turkey, the leader of the Moslem world. In the nineteenth and twentieth centuries, with the spread of democratic ideas, the new legitimacy, promoted ardently by all progressives, was nationality, of which Germany, united in the Franco-Prussian war of 1870, was the paradigm.

As General Erich von Ludendorff is said to have commented on Germany’s alliance with multinational Austria-Hungary, Germany was “shackled to a (multinational) corpse”. Ludendorff’s diagnosis of Austria-Hungary as a corpse was similar to that of British liberals, supportive of the non-German nationalities of the Austria-Hungarian Empire. As one of the two directors of propaganda in The Times newspaper against Austria-Hungary during the 1914-18 war, R.W. Seton Watson wrote, “gallant little Serbia” was punishing her “unwieldy northern neighbor”. [19] Only nation states, the belief ran, were legitimate. Apparently, for Seton Watson, regicide was a minor issue.

The Versailles Treaty, and successive accords, ended the state of war between Germany and the allied powers, and sought to create a European order, predicated on self determination of nations, and a parliament of nations, the League of Nations, to promote collective security and prosperity. The League failed, war returned, and the post 1945 arrangements of Europe were shaped by the United States, the prime architect of the United Nations, of the Atlantic alliance, and of NATO; the key supporter of an “integrated” European Community; and a member of nearly all   European international organizations and Treaties from the GATT, the OECD, to the Nuclear Non-Proliferation Treaty and the Helsinki accords of 1975.

As Soviet power waned, the post 1945 order, predicated on Germany and Europe’s division, began to dissolve. Competitive wooing and prodding of Germany by its western partners and by the Soviet Union to confirm its western identity, or to declare neutrality, helped to sap the foundations of the international structure created after 1945 on the débris of war. Gorbachev’s common European home competed as a vision for a future including a neutral and non-nuclear Germany, with Reagan’s rhetoric of a world free of nuclear weapons and Washington’s iron will for a Germany bound into NATO. Delors launched the EC’s internal market as one element of a neo-functional strategy, designed to widen EC competences, and to bind Germany into a westward-oriented European alliance. The prolonged German quest for national self-determination and state unity, culminated in the great transformation of European and world affairs. The end of the cold war  confirmed the thrust to western European integration, just as the principle of self-determination prevailed in Germany. Once the compatibility of German state unity and European integration became evident in the course of 1989-90, German public opinion surged in support of European union.

All of the features of Europe’s condition for the coming quarter century were clearly visible in those founding years of 1989-92. All indicators showed Pacific Asia’s economic growth as the fastest in the world; the opening of China and India on the world economy implied a rapid opening of OECD markets to imports from poorer countries, whose comparative advantage to the world’s corporations resided primarily in their low relative labour costs; it was already visible that low skilled jobs in the United States and Europe were in jeopardy; [20] the options for the EU’s neighbours were simple: either export products into the key European markets and keep most of the people home, or run ever wider trade deficits as their markets for products were opened, and export people. The prospect was for a surge in migrants from high unemployment countries in eastern Europe, and from the high birth rate countries of the southern Mediterranean, and from sub-Saharan Africa. As it was, western European publics were for restrictions on immigration from both areas. Growth rates in the future Euroland were low, as member states competed to meet the Maastricht criteria to enter the single currency. Labour market policies and anti-immigrant sentiments promised to introduce a particularly divisive note in the counsels of the new Europe. Add to that the ambition behind the drive to European Union to create a super-state, the old Monnet method of integration through stealth was no longer viable. Many too many interests were too directly affected by EU policies.

The Maastricht Treaty.

The Maastricht Treaty was a complex package deal, where member states injected their preferences into the negotiations, and haggled over the slightest details. The process prompted a competition between differing traditions to fashion the Treaty as much as possible after familiar forms. Whether the ultimate design was perceived as laden with federal intent, or as perpetuating the states’ existence in an open-ended process, the concessions made by all parties to the Treaty meant that none was satisfied with the result, and that all could claim a partial victory. Yet the concessions involved a challenge to domestic institutions while the partial victories provided further incentives to stay in the game, `at the heart of Europe’.

This tension between the federalists’ aspiration to transform European politics, and the insistence of the member states to preserve their autonomy, lies at the heart of the Treaty. The federalists’ vision is of a Union with the attributes of a state, where government is responsible to a dual legislature composed of the states in Council, and the people’s representatives in Parliament. The separation of powers between executive, legislature and judiciary at the centre, is to be complemented by the separation of functions between the central authorities and those of the states. In a federal Europe, all politics become domestic, by abolishing diplomacy between the member states, the traditional and characteristic feature of European affairs. The Union, not the member states, would be the central protagonist of global politics. There was little sign, then or now, that any one of them contemplates bowing out from the world stage.

Maastricht thus stood accused on two accounts: it centralised legislation in the Union’s executive, and deprived the member states’ parliaments of their legislative and other powers; it lacked democratic legitimacy because the European Parliament’s powers, though enhanced, remain restricted to that of assessing Community affairs and of co-negotiating treaties. Maastricht, in short, stood accused of confirming a union of governments and bureaucracies, rather than of peoples.  Maastricht, through to Lisbon Europe, thus invited  being overwhelmed by the disputes which its ambitions attracted, or being torn apart by the opportunities for self-assertion presented to the states in the post-cold war Europe.

The half-way house of the Maastricht Treaty challenged inherited national identities. France’s shift in the 1970s to become a champion of European integration, bound in a `community of fate with Germany’, was informed by a permanent ambition to defend France’s rank, securing France’s future grandeur in a more exclusive European family, hinging on France’s relations with Germany. The intent did not include, as eventually transpired, a subordination of France to German preferences. But it did entail  constitutional revision within France, and challenges to the concept of the `one and indivisible’ Republic.

For Germany, European Union spelt the abandonment of the DM, the outer symbol of the Federal Republic’s success. But the counterpart of abandonment was a Europe, for all the hype to the contrary, of a German Europe, -a conflation in the collective mind of Germany’s leaders of the German and European interest. In Britain, Maastricht challenged the conventions of Westminster as the emerging legislature for the UK was no longer Westminster but the EU’s Council of Ministers, in combination with the Commission and supported by the ambitions of the ECJ to operate de facto as the EU’s supreme court. For Italy, the end of the cold war accelerated trends to restructure domestic alignments and priorities. From 1945 to 1990, Italian politics had revolved around a “bipartitismo imperfetto”, a duplication in domestic alignments of the competition and co-operation between the United States and the USSR, where the Christian Democrats served in every government since the war, while the Italian Communist Party could only aspire to regional or local government. A series of scandals in the early 1990s brought to light the web of mutually reinforcing interests that embraced all political  parties, publicly owned companies, banks, the media, and all tiers of the state administration. Over a quarter of a century later, no reforms of substance have been implemented in Italy.

The end of the cold war, and the French rush to embrace Germany in a supra-national EU, pulled on deep-rooted sensibilities and the sensitive `membranes of convention’ [21] in the member states. Established national cultures, with their pre-modern origins, their saints, heroes and commemorations, were too strong for the protagonists of European union to confront directly. There was no readily available European culture on which the élites who negotiated Maastricht, could draw. The bet was that a sentiment of common destiny could be created on the future, on what has not yet happened. Maastricht was a leap in the dark.

The Treaty thus incorporated the future not only as a location to place problems now unresolvable, but as a binding or implicit commitment to act now in ways compatible with the Union’s longer term aims.  As these were defined in terms of   “ever closer Union”, understood as a federal endpoint, the Treaty set an implicit rule for all to comply with the direction of travel. Two features of Maastricht Europe were therefore discernible:

-first, states whose domestic opinions and interests, or external attachments, ran counter to the Brussels consensus would have to trade their disagreement on the substance of Union policy for the expected cost of isolation from the crowd.

-second, as Maastricht’s aims were to achieve a Union which absorbed the multiple histories of the continent, it was to be expected that public preferences would erupt into the domain of Union. From the very start, Maastricht promoted “populisms”: the most powerful populism proved to be the German.

The loyalties of Europeans remained primarily national, and their concerns mainly economic in nature. The prime worry was unemployment. To secure support for monetary union, France and Germany coalesced to ensure social protection in order to guard against a populist backlash. Monetary union required exactly the opposite. No matter. It was easier to `Thatcherism’ as a common scapegoat, while preserving in tact, indeed in widening and deepening,  national social systems. This meant in effect restricting competition within labour markets, while negotiating in the EU over Europe-wide regulations which preserved the acquis national. Here was another Achilles heal to the project.

German public opinion proved reluctant to abandon the DM. Abandonment would have to come at a price for the others. The future ECB had to be based in Frankfurt; designed along German lines; and complemented by a full move to political union. The French countered with a general commitment, inserted in the Treaty, to the “irreversibility” of the path towards monetary union.

Under these conditions, popular support for the project proved volatile. German citizens support for the EU project  fell from a peak of 61 percent polled at the time of first nation-wide elections in December 1990 since November 1932 to 48 percent by June 1992. The most notable change, though, came in France, the principal protagonist of European union. By June 1992, 48 percent of those polled expressed indifference or relief if the EC were scrapped, placing the French public alongside the Belgian, British and Danish as the least supportive of the EC. The Danish vote of 2 June, rejecting the Maastricht Treaty by a few thousand votes, was followed by the French referendum of 20 September,with a slender majority voting in favour. Meanwhile, the combination of Germany’s high interest rates and budget deficits to finance reconstruction in the new Bundesländer could be expected to exert strong deflationary pressures on business activity across Europe.  Germany’s priorities were national; only after 2010 was the opportunity available to claim that Germany’s and Europe’s interests were one.

The re-emergence of a Europe of the powers.

Germany’s achievement of state unity marked the reemergence of a Europe of the powers. United Germany outweighed all other western European states in demography, and as Europe’s prime agricultural and industrial power. The DM was the continent’s key currency. Germany was the prime provider of aid and investment to the former party-states, and the main target for their post-communist trade. The end of the cold war spelt the winding down of the allied military presence to one third of the Bundeswehr’s manpower, and the withdrawal of Russian troops from German territory by 1994. The prospect beckoned of a MittelEuropa, hinging on Austro-German cooperation in central and south-eastern Europe. Germany championed the EU’s rapid enlargement, while nothing within the EU could be agreed on without Germany’s consent.

However much France tried to bind Germany into a more integrated EU, the fact remained that  united Germany could chose to champion its interests globally, in the EU or as a champion of a Europe of the states. The writing was therefore on the wall that were German public opinion to grow confident in a recently confirmed national identity, France’s strategy to bind Germany into a European Union, as sketched at Maastricht and developed at Lisbon, would entail paying an ever higher price. As German confidence grew, the German leadership’s terms would harden. Conversely, it was also evident that the scale of Europe far exceeded the capabilities of any one of the larger states.

This applied with particular vigour to Germany. The counterpart to Germany’s prior rank among European states was its declining ability, and willingness to play the role of `Europayer’, as in the past. The psychological strains on Germany, too, could be expected to rise, were its many neighbours to suspect that a petulant, and nationalistic Germany was beating its own path to primacy. Indeed, the course of events over the period 1989-92 provided a host of examples to illustrate how much the history of 1870-1945 continued to burden German policy and attitudes.

Indeed, the danger facing Europe at the time of the great transformation was not the emergence of a dominant Germany, but of a new Europe. This is a curious hybrid from the inheritances of pre- and post-1945 Europe. From pre-1945 Europe comes the tendency to a competition between the states through the play of shifting alliances, as well as the distinct but changing structures and purposes of the states. From post-1945 Europe inherited the complex political and market interdependencies within western Europe, with multiple strands and ties into the rest of the world, and the society established in western Europe on the basis of institutions and values, and now extended at least in principle to the rest of Europe. The end of the cold war has prompted a struggle between the two, one pulling backwards to the re-nationalisation of policies and public opinions, and the other calling for patience and perseverance in establishing a grand compromise for the whole of Europe in a new world.

The grand compromise was between two views of a European Union, one as the centre to a European periphery, and the other as a wider Europe of states, with Germany as a geographic centre. Both impinged on existing identities, and demanded differing degrees of openness. The first envisaged a union broad enough, and sufficiently constraining on all, to defuse the pre-eminence of any single member. That entailed  agreement by all participating states to agree to a condition of semi-sovereignty for each, and a sharing of sovereign powers in agreed domains for all. The second envisaged the emergence of Germany as Europe’s leading state, but confronted with other nation-states, firmly rooted in their inherited cultures, and secured through a convivial coexistence with Germany, by ensuring the permanent presence of the United States as a European power. France favoured the former; the UK favoured the latter.

In retrospect, the big leap into Union prompted by the great transformation of world and European affairs, proved very high risk. The Union absorbed tasks, previously dispersed about Europe’s varied diplomatic fora, without having the legitimacy to act on behalf of its many peoples. Its institutions attracted a rising tide of demands as the scope of its competences widened. They were overwhelmed in the process. The gap between the Union’s aspirations and performance brought it into ridicule. Strong on principles, the epitaph could read, but weak on delivery.

[1] Wilhelm Nölling, cited in Bernard Connally, The Rotten Heart of Europe: The Dirty War for Europe’s Money, London, Faber and Faber, 1995.p.98.

[2] Source:Akinari Horli, Evolution of Reserve Currency Composition, BIS Economic papers, No 18 December 1986.

[3] EC Commission(1970)”Economic and Monetary Union in the Community”(Werner Report),Bulletin of the European Communities.Supplement No.7.

[4] Peter Ludlow, The Making of the European Monetary System, London, Butterworths,1 982.

[5] This condition had been laid down in no uncertain terms by Bundesbank Governor Emminger.  In his letter to the German government in November 1978, Bundesbank Governor Emminger, indicated that Bonn and Frankfurt were agreed that a “definitive” regulation for the EMS would require a change in the Rome Treaty, and that a crucial aspect of  Germany’s stability policy was to place “a limit on the intervention responsibilities “of the Bundesbank.(Emminger’s italics).In Otmar Emminger, D-Mark,Dollar Währungs-krisen, Errinerungen eines ehemaligen Bundesbank-präsidenten, Stuttgart, Deutsche Verlag, 1986.pp.361-2.(Authors’ translation).

[6] A prime motive was to ease with weight of the external debt, “Le poids du service de la dette éxtérieure interdit pour longtemps à la France une politique de relance”, Le Monde, November 15, 1983; and also to develop Paris as a major capital market, Dov Zerah, Le système financier français. Dix ans de mutations. Documentation Française. 1993.p.125.

[7] The expression is that of Olivier Pastré, consultant to the Trésor: “Pastré: le reveil des ZINvestisseurs”, La Tribune de l’Expansion, September 7, 1992.

[8] The growth of opposition to the DDR lkeadership opened speculation about reunification, and under what international conditions; “DDR Widesertand: Sehnsucht nach Demokratie”, Der Spiegel, January 2, 1978.

[9] Charles de Gaulle, Mémoires d’Espoir : Le Renouveau, 1958-1962,Librairie Plon, , p.195.

[10] Robert A. Mundell, (1961). “A Theory of Optimum Currency Areas”, American Economic Review,  51 (4): 657–665.

[11] The term ‘national business system’ has been coined by Richard Whitely to describe specific patterns of economic coordination and control in market economies. In this conception, the state is taken as the basic unit for studying the operations of firms. Firms endeavor individually and collectively to compete for state resources and legitimacy. National legal systems codify property rights, trade unions rights etc. Market regulations are pervasive. Labour markets are governed by labour law, court systems, and corporate hierarchies. National culture as a set of values have consequences for the way people identify with the nation, and is reflected in the laws and institutions of the land. See Richard Whitley, Divergent Capitalisms : The Social Structuring and Change of Business Systems, Oxford University Press, 1999.

[12] The crucial linkage between world and intra-European politics has been a constant theme in the writings of Stanley Hoffman, Decline or Renewal? France since the 1930s, New York, Viking Press, 1974; The New European Community: Decision-making and Institutional Change, co-edited with Robert O. Keohane, Boulder, Colorado, Westview Press, 1991; .After the Cold War: International Institutions and State Strategies in Europe, 1989-1991, co-edited with Robert O. Keohane and Joseph S. Nye, Boston, Harvard University Press, 1993); The European Sisyphus: Essays on Europe, 1964-1994, Boulder, Colorado, Westview Press, 1995.

[13] See Finance Minister Balladur’s memorandum, quoted in English translation in the EC Monetary Committee of 29 April 1988 in Daniel Gros and  Neils Thygesen, European Monetary Integration: From the European Monetary System to European Monetary Integration, London, Longman, 1992. p312.

[14] Hans Dietrich Genscher,”Die Rolle der Bundesrepublik Deutschland bei der Vollendung des Europäischen Währungssystem”, Ergebnisse einer Fachtagung, Strategien und Ergebnisse für die Zukunft Europas, Gütersloh: Bertelsmann Stiftung, 1989, pp. 13-20.

[15] The Bundesbank declared its terms to be “non-negotiable » : “EG-Länder werden auf Gedeih und Verderb miteinander verbunden”,Frankfurter Allgemeine Zeitung, September 26, 1990.

[16] This meeting is recorded in Eric Aeschimann, Pascal Roché, La Guerre de Sept Ans: Histoire secrete du franc for 1989-1996. Paris, Calmann-Lévy, 1996. Pp.90-91.

[17] Le Monde, 5 September, 1992.

[18] “L’Europe selon Chirac” Le Monde, March 25,1996. “A la Banque centrale européenne, que nous avons voulu forte et indépendante, il reviendra de garantir la solidité future de la monnaie européenne. Mais c’est au Conseil des Ministres, institution répresentative des états, qu’il appartiendra de définir les orientations de la politique economique de l’Union, à l’unanimité chaque fois que c’est l’essentiel”.

[19]  Robert William Steon Watson, The Spirit of the Serb, London, Nisbet and Co, 1915, p.6.

[20] Robert R. Reich, The Work of Nations: Preparing Ourselves for 21st-Century Capitalism, New York, Alfred Knopf, 1991. Adrian Wood, North-South Trade, Employment and Inequality: Changing Fortunes in a Skill-Driven World, Oxford, Clarendon Press, 1994.

[21] William Pfaff, Le Réveil du Vieux Monde: vers un Nouvel Ordre International. Paris: Calman-Levy. 1989

About Jonathan Story, Professor Emeritus, INSEAD

Jonathan Story is Emeritus Professor of International Political Economy at INSEAD. Prior to joining INSEAD in 1974, he worked in Brussels and Washington, where he obtained his PhD from Johns Hopkins School of Advanced International Studies. He has held the Marusi Chair of Global Business at Rensselaer Polytechnic Institute, and is currently Distinguished Visiting Professor at the Graduate Schoold of Business, Fordham University, New York. He is preparing a monograph on China’s impact on the world political economy, and another on a proposal for a contextual approach to business studies. He has a chapter forthcoming on the Euro crisis. His latest book is China UnCovered: What you need to know to do business in China, (FT/ Pearson’s, 2010) ( His previous books include “China: The Race to Market” (FT/Pearsons, 2003), The Frontiers of Fortune, (Pitman’s, 1999); and The Political Economy of Financial Integration in Europe : The Battle of the Systems,(MIT Press, 1998) on monetary union and financial markets in the EU, and co-authored with Ingo Walter of NYU. His books have been translated into French, Italian, German, Spanish, Chinese, Korean and Arabic. He is also a co-author in the Oxford Handbook on Business and Government(2010), and has contributed numerous chapters in books and articles in professional journals. He is a regular contributor to newspapers, and has been four times winner of the European Case Clearing House “Best Case of the Year” award. His latest cases detail hotel investments in Egypt and Argentina, as well as a women’s garment manufacturer in Sri Lanka and a Chinese auto parts producer. He teaches courses on international business and the global political economy. At the INSEAD campus, in Fontainebleau and Singapore, he has taught European and world politics, markets, and business in the MBA, and PhD programs. He has taught on INSEAD’s flagship Advanced Management Programme for the last three decades, as well as on other Executive Development and Company Specific courses. Jonathan Story works with governments, international organisations and multinational corporations. He is married with four children, and, now, thirteen grandchildren. Besides English, he is fluent in French, German, Spanish, Italian, reads Portuguese and is learning Russian. He has a bass voice, and gives concerts, including Afro-American spirituals, Russian folk, classical opera and oratorio.
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