German policy towards economic and monetary union: €?

TABLE OF CONTENTS

Abstract

1. The EMU project from a European perspective

2. Germany and Economic and Monetary Union
2.1. Political interest in EMU: Why Germany is different
2.1.1. Post-Cold War Europe and German Unification
2.1.2. Germany in Europe and the Importance of History
2.2. Economic opportunities for Germany
2.3. German difficulties with EMU
2.3.1. (Perceived) Economic and monetary risks
2.3.2. ...and half-hearted political opposition: “We’re neither in favour of EMU nor against it, on the contrary!”
2.4. German Policy Approaches to EMU

3. Public Opinion in Germany
3.1. EMU scepticism combined with a commitment to Europe
3.2. Germany and the Single Currency: a survey of current public opinion

4. Conclusions

Appendices
Appendix 1: Explanation of terms and abbreviations
Appendix 2: Index of politicians and other public persons
Appendix 3: EMU survey of 100 Germans: the questionnaire
Appendix 4: EMU survey of 100 Germans: Explanatory notes
Appendix 5: Secret Memo to the FCO on German unity (1955)

Bibliography

Gunnar Matthiesen

German Policy towards Economic and Monetary Union: An Assessment of Germany’s National Interest in EMU.

Dissertation for the

MA in European Studies & International Relations University of Kent at Canterbury

August 1999

12000 words

(excluding footnotes, appendices, tables, long quotations and abstract)

N.B.: Names marked with an asterisk are explained in the appendix

ABSTRACT

The purpose of this paper is to explore the German national interest in European Economic and Monetary Union which led to the country’s full support of the project in spite of the perceived risks. Although not ignoring economic arguments, the analysis focuses on the arguably even more important political benefits and interests. (Specific programmes preparing the German economy for EMU are not, as an internal economic matter, a subject of this assessment of Germany’s political approach towards EMU.)

In order to explain the backgrounds of German support for EMU, the first chapter will introduce EMU from a European perspective, as the next logical step to complete the Single Market and as a source of enormous economic advantages for EU member states. However, it is also an important vehicle for the aim of political union. Hence, in view of Germany’s traditional position in Europe as one of the central and most supportive states of the European integration process, the progress EMU represents in terms of achieving European unity is a significant factor that led to the unequivocal attitude the Kohl government has taken in favour of EMU.

The absolute necessity for Germany to support and actively advance the integration process was emphasised by German unification and the resulting virtual political impossibility to refuse EMU as international support for a unified Germany was tied to stronger European integration.

In addition, the common currency has huge benefits for Germany’s foreign trade reliant economy which seem to outweigh the economic doubts brought forward by those who fear looser monetary policies and increased inflation and instability risks. Nevertheless, these concerns did play a role in defining political approaches and have significantly influenced both the opposition’s stance and government policy towards EMU.

While fully in favour of EMU in principle, the latter was predominantly concerned with ensuring the Euro’s long term stability. The most obvious expression of this is Germany’s insistence on strict adherence to the Maastricht convergence criteria and the negotiation of the stability pact. The uncompromising approach in this area, which is one of the first occasions for Germany to fiercely represent and defend its own national interest in terms of the EU’s internal structures against a majority of member states, was necessary to secure political and public consent within Germany, but was met with dismay in other countries.

While there was little open political opposition against EMU, German public opinion was not fully supportive of EMU. However, scepticism of the common currency largely relies on economic uncertainties rather than on opposition against the European integration process and has never been strong enough so as to mobilise a public movement against EMU. Consequently it can be assumed that once the Euro’s long term benefits make themselves felt more strongly than the undisputable short term economic cost, public opinion will support the Euro.

From these considerations, it is deduced that EMU is in Germany’s the long term interest on every level provided certain conditions are met. The government’s policy to create a favourable environment for a single currency in spite of short term economic cost is motivated by a combination of the above factors and a recognition of the long term political and economic benefits, and by and large represents a continuation of Germany’s traditional commitment to the European integration process.

1. THE EMU PROJECT FROM A EUROPEAN PERSPECTIVE ( BY WAYS OF INTRODUCTION )

In order to understand the German approach to EMU, it is useful to begin with a brief introduction to the motivations for from a European perspective, which will be followed by an assessment of the specific German situation in the subsequent chapters.

By signing the Treaty on European Union in 1991, the European Council decided to continue the process begun with the commissioning of the Delors Committee on Monetary Union by the Hannover Council in 1988 and create Economic and Monetary Union by 1999 in three stages.

While the first stage, aimed at approaching currencies within the Exchange Rate Mechanism, did not involve any new mechanisms, the next two stages required new institutions and, consequently, a new treaty basis. This was provided by the Maastricht Treaty, which lay down a strict timetable for the completion of monetary union. According to articles 116 and 117 of the EC Treaty, the second phase of EMU began on 1 January 1994 with the creation of the European Monetary Institute, charged with coordinating and approaching the monetary policies of member states, which were moved under the control of the European Central Bank (ECB) on 1 January 1999, thus marking the beginning of the third and final stage in accordance with Article 121 TEC.

EMU is based on a series of convincing economic principles and the recognition that with the 1992 programme, a time had come when the merits of negative integration had largely been exhausted and positive integration was required “to enhance Europe’s quality”¹ .

Encouraged by the positive reaction to the 1992 programme, the common currency was a logical consequence of the degree of monetary integration attained by the late 80s.

The Maastricht Treaty was negotiated before the background of the European Monetary System’s obvious success, which caused substantial progress in economic and monetary convergence since its creation in 1979. (Compared to 1975-79, exchange rate volatility was halved during the EMS’s first five years, and again reduced by 50% from 1986-89.)

Long term surveys also show that interest and inflation rates generally tend to develop similarly in most EU countries, especially in the two core countries of EMU, France and Germany. The Netherlands, too, have hardly experienced any currency volatility with respect to the DM, and the Guilder is closely linked to the Belgian Franc, already in monetary union with the Luxembourg Franc. This shows that monetary convergence has developed steadily over a long period of time, so that the introduction of a common European currency is indeed ‘only’ the expression of the level of integration and convergence already achieved. If one accepts that “since the signing of the Treaty of Rome and the early days of the European Community the goal has always been for the common market to culminate in economic and monetary union”² , completing the Single Market by means of EMU was therefore the next step in Europe’s integrative logic.

In this context, it is also significant that the 1989 Madrid Council set the starting date for EMU’s first stage to coincide with the entry into force of measures liberalising capital movements within the SEM, thereby ending a situation where the latter were subject to fluctuation risks because of the lack of a centrally devised monetary policy. According to Tomasso Padoa-Schioppa, “the only solution to the inconsistency is to complement the internal market with a monetary union”³ .

Helmut Schmidt goes even further, arguing that without a common currency, there would have been a danger of increased currency speculation, followed by protectionism within the SEM possibly leading to its progressive disbandment. Although this is clearly a worst-case scenario, there is little doubt that from an internal point of view, EMU simply makes economic sense.

Furthermore, European economic and monetary policies have become highly interlinked and interdependent, so that with the additional effect of cross-border trade and capital movements, true national monetary sovereignty has long been abolished in the SEM's economic reality. However, with no governing body responsible for a common economic and monetary policy, disproportionate influence is normally exercised by the strongest economy. In the case of Europe, this meant a domination of European economies by the Bundesbank. Any policy responding to the situation on the markets would therefore be tailored to German needs, ignoring the requirements of other European regions. The only conceivable long term solution for this situation contravening Single Market principles is the creation of a central body responsible for devising a common European economic and monetary policy.

In addition to its economic benefits, EMU is “not an end in itself, but a means to [the] end”⁴ of political union. In the words of Jacques Chirac, the aim of European integration policy is to enable Europe to survive in a globalised world by contributing to “the creation of a multi-polar world order with the EU as one of the main global players.”⁵ .

There is no doubt that this aim requires the dual approach of a common currency on the one hand, and political unification on the other in order to make the EU coherent enough to be able to behave as a single political and economic actor on the international scene.

However, given the broad, but not unanimous agreement on the need for political union and the reluctance of some member state to give up national sovereignty on a large scale, economic means could once again provide the impetus and spill-over effects for political integration. In Jacques Rueff’s terms, the approach seems to have been based on the ‘Jean Monnet factor’ that “l’ Europe se fera par la monnaie ou ne se fera pas.”⁶

It can indeed be argued that any entity with monetary sovereignty also needs extensive economic and political competences in order to function efficiently and devise a coherent policy incorporating all relevant political, economic and monetary aspects. In the EU’s case, “the transfer of an elementary sovereign right such as monetary policy to a European Central Bank is likely to mark th[e] point”⁷ where further political progress becomes inevitable. The Bundesbank’s governing council stated in its monthly report in February 1992 that political union will be of crucial importance for the long term success of EMU, and its outgoing president Tietmeyer stressed that EMU is “a community of solidarity that cannot be cancelled anymore and that will need, as experience shows, an overarching political union for its stability”⁸ as well as a social consensus, coordinated economic, labour market, fiscal and monetary policies and common decision making procedures. The parallel conclusion of the IGC’s on EMU and political union as well as the earlier signature of the Social Charter at a time when EMU was equally high up on the European policy agenda are both powerful examples of the validity of this view.

In addition, as Jacques Santer notes, “the Euro is a vehicle for Europe’s role in world politics”⁹ , especially as the likely long-term spill-over effects of EMU include the development of a more coordinated European foreign policy approach. Although there is significant political resistance against such a move, it is hardly conceivable for EMU member states to run a truly independent and credible foreign policy without being in firm control of their own currency.

Henceforth, Buiter rightly suggests that EMU is “major step”¹⁰ towards an “ever closer union among the peoples of Europe”¹¹ and a logical necessity arising from the dynamics of the previous development, in view of which it seems impossible to pursue the progressive decline of the nation-state in Europe without creating some sort of higher level replacement.

This essentially supports the neo-functionalist argument that the single currency is based on spill-over effects from the SEM, whose efficient functioning was increasingly dependent on a single currency preventing competitive devaluations and facilitating free trade within the common market, and that the political motivation of EMU lies largely in its potential to lead the way for political union.

However, although neo-functionalist theory can point to the fact that EMU was initiated in 1988 and could therefore not have been a reaction to the fall of the Berlin Wall, it must be seen that the IGC’s themselves were heavily influenced by the 1989 events, which have played a significant role in shaping the EMU negotiation and in maintaining the pressure on governments not to let the project derail as the Werner plan did in the 1970s. German unification and political turmoil in Eastern Europe may not have initiated EMU, but they have made the single currency and more European unity inevitable by the time of the 1991 Maastricht Council.

At the same time, there is some truth in the realist view that the driving force behind EMU was governmental recognition that the single currency was the only viable answer to increasing international challenges, in particular the globalisation of the financial markets. Henceforth it can be argued that “both external and internal forces ha[ve] contributed towards EMU, and a satisfactory theoretical account need[s] to combine elements of [different theories].”¹²

Given the FRG’s strong commitment to European integration these background considerations form an important basis for German support of EMU and should be kept in mind when assessing German national interest in EMU. However, a number of specific factors have influenced Germany’s position and distinguished it from other member states.

2. GERMANY AND ECONOMIC AND MONETARY UNION

2.1. POLITICAL INTEREST IN EMU: WHY GERMANY IS DIFFERENT

In many ways, the FRG is the one state that has most to gain from EMU as its political benefits enabling Germany pursue its two most important political interests in the 90s - German unification and European integration with a peaceful Germany at its heart - combine with enormous gains for Germany’s foreign trade reliant economy.

Before the background of the Federal Republic’s historically unique position in Europe, German interest in integration is traditionally different from the often pragmatic economic motives of some other member states. While Germany does of course have immense economic gains from EU membership, it also has to rely more than anybody else on membership in Western structures to play a constructive role in Europe and the world. Once German unification gave new rise to old fears of Germany which could only be allayed by an unequivocal commitment to European integration, and, by implication, to EMU, it became apparent that opposing the single currency was not a viable option.

However, critical domestic voices argue that political considerations have prevailed over economic reason in defining German attitudes towards EMU¹³ and insist that economic and monetary risks also make Germany the country that has most to loose from EMU. Such concerns, frequently built on a diffuse fear of loosing the D-Mark both as an extremely stable currency and as symbol for Germany’s post-war identity, have encouraged doubts about the wisdom of the EMU arrangements, but with the exception of an isolated attempt in 96, EMU did not face any serious political challenges.

2.1.1. Post-Cold War Europe and German Unification

One of the single most important factors determining Germany’s specific political situation at the end of the 1980s was German unification, which had a profound impact on the EMU negotiations and on Germany’s readiness to give up the Deutschmark in favour of a common European currency. Given that EMU was initiated in 1988, well before the fall of the Berlin Wall could possibly have been foreseen, this was not the only reason for EMU, nor would it be accurate to say that there would not have been any moves towards EMU without German unification. Nonetheless, the events of 1989 and German unification in particular have accelerated the development of monetary union and the implementation of the Delors report.

The prospect of unified Germany consolidating its position as biggest country in the EU in terms of population and economic power led to a re-surfacing of those fears the Federal Republic had - reasonably successfully - tried to eliminate for the previous forty years. This coincided with the somewhat uncomfortable fact that once unification was on the political agenda, there was some internal pressure for a stronger expression of the German nation- state and a tendency in regional elections towards worrying levels of support for far-right parties, thus fuelling these fears throughout Europe.

Before this background, “it [did] not stretch imagination too far for the new Germany to pass from Willy Brandt’s famous description of it as ‘an economic giant, but a political dwarf’ to giant status on both accounts”¹⁴ . Consequently, neighbouring states, who in view of Germany’s less-than-glorious history can be forgiven for allowing anxieties to re- emerge, needed reassurances that a relapse into assertive politics was not on the agenda.

Regardless of how unreasonable such fears may have been (the Federal Republic has always striven to depoliticise and demilitarise patriotism: while the only power it has ever sought was the international strength of the DM¹⁵ , the German military has never had an independent strategic command, but left this to NATO and can therefore hardly be expected to embark on unilateral military adventures¹⁶ ), chancellor Kohl accepted the insistence of other European countries that Germany would have to let itself be fully integrated into European structures, including EMU, in order to secure vital EC support for its most important domestic policy aim in the late 1980s: German unification.

Knowing that President Mitterrand would try to stop or at least delay German unification outside the wider framework of European integration, Kohl tied the two issues together and depicted “German unification and European unity [as] two sides of the same coin”¹⁷ in order to make it clear that Germany was both unable and unwilling to act unilaterally on this issue. This had become particularly necessary after Kohl’s infamous 10 point plan for German unity caused a political storm over what was perceived to indicate a possible German Alleingang and made it abundantly clear that unification could not happen outside the European framework without severely damaging Germany’s economic and political interests and political cooperation and stability in Europe.

As the Federal Republic is highly dependent on functioning European structures and on working political and economic relations within the EU, unification made it vitally important for Germany to quell undue worries in neighbouring states by emphasising its “European credentials”¹⁸ in order to maintain international confidence in lieu of causing new fears and scepticism.

Given that nothing less than an irrevocable commitment to European integration could win EC support for unification and secure Germany’s future position as a partner in Europe, not a perceived threat, “agreement to [...] the IGC on EMU was the price Chancellor Kohl had to pay to the French President in order to quell his publicly expressed doubts about the rapid unification of Germany”¹⁹ . It was also the proof he was to give that a united Germany saw European integration as its historical duty and its sincere desire in order to “stop once and for all German policy vacillating between the East and the West”²⁰ .

Consequently, it “appeared necessary to bind [the unified] Germany in tight political and economic European structures to prevent new military adventures” so that “EMU [...] was similar to the early years of European integration”²¹ : with the single currency , it would be clear that once and for all, Germany could no longer embark on unilateral hostilities.

In that respect, Germany, for the sake of its continued standing as a partner in Europe, rather than a threat, had little choice whether to accept EMU or not. As Helmut Schmidt argues, if the Germans “destroyed the EMU project, [they] would face self-isolation and therefore act against [their own] vital interest”. Resisting EMU would have been a demonstration of “lacking strategic insight”²² risking a severe disruption of European integration upon which Germany depends heavily. This would, in turn, cause “ice-cold conditions”²³ for the Federal Republic because of the resulting economic difficulties, re- emerging international suspicion of German power and the worrying perception of German unilateralism against the wider European interest.

Furthermore, once unified, its geographical position created a vested interest for Germany to be part of a strengthened EU able to face the instabilities and challenges resulting from the break-up of the former Eastern Block. On the one hand, “Germany had more to gain from stability in the region [Eastern Europe] than its allies - and more to loose from instability”. On the other, challenges were so extensive that “no matter how big Germany was, the challenges were even bigger”²⁴ (the influx of refugees from Eastern Europe into Germany is only one example), thus highlighting the merits of European integration, including EMU, as a stabilising factor.

Before this background, it is little surprising that all major political forces in Germany saw the need to build a “European roof over Germany”²⁵ to create more cohesion in the West and thereby construct an anchor of stability for the East. This, however, could only be done by deepening the EC in all aspects, given that France, much more keen on EMU than on political union because of its uneasiness about the Bundesbank’s domination of French financial markets, had only accepted to discuss the latter as part of a package deal with the former and had joined Jacques Delors in using German unification as a tool to stress EMU’s political inevitability.

However, as its commitment to EMU and political union is consistent with Germany’s long term policy towards Europe, it can be concluded that unification has merely reinforced the FRG’s traditional European orientation rather than forcing Germany into a disadvantageous, but politically inevitable deal.

2.1.2. Germany in Europe and the Importance of History

Nevertheless, in view of the fact that EMU was launched before the events of 1989, unification cannot have been the only driving force behind Germany’s support of EMU. Henceforth, Germany’s agreement to EMU must be seen in the wider context of its commitment to European integration as it is enshrined in its constitution. Assuring that Germany is “animated by the resolve to serve world peace as an equal part of a united Europe”²⁶ , the Basic Law demands that the Federal Republic “shall participate in the development of the European Union” in order to “establish[...] a united Europe”²⁶ . To this end, the federal government can “transfer sovereign powers” and Bundesbank responsibilities to the European institutions and the ECB²⁷ .

Nonetheless, as political reality proves, Germany’s commitment to the EU is not merely based on general declarations of intent, but heavily influences all mainstream attitudes policies. Parliamentary votes on key decisions on Europe demonstrate this: the Bundestag voted to proceed into the final stage of EMU with 575 ‘Yes’ votes out of a total of 615²⁸ , and the ratification of the Maastricht Treaty in 1992 produced a similarly convincing result.)

Apart from the economic interests in EMU, Germany has “an obvious interest in Western integration”²⁹ because of its unique place in Europe based on the two diametrically opposed pillars of its dark history during the first half of this century and its unequivocal commitment to democracy and European integration after Word War II.

Germany’s positive attitude towards Western integration at the time of the ECSC and the Treaty of Rome is founded on the country’s desire to play an active, but peaceful role in Europe. Not only in European countries, but even in Germany itself, there was a feeling that the Germans had to be protected from themselves by integrating them into structures where warfare would become impossible, and that the only way for Germany to pursue its political interests was to make them compatible with those of its neighbours in order to keep the balance between not appearing assertive without loosing international influence. Combined with Germany’s economic interest, this gave European integration the highest political priority.

A remarkable indication of this can be found in a memo to the Foreign Office, advising Foreign Secretary Macmillan in December 1955 that chancellor Adenauer “depreciate[d] reaching this position [of German unification]. The bald reason was that Dr Adenauer had no confidence in the German people. He was terrified that [...] a future German government might do a deal with the Russians at the German expense. Consequently, he felt that the integration of Western Germany with the West was more important than the unification of Germany.”³⁰

[...]

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¹ Lothar Späth*, 1992 - Der Traum von Europa, p. 257

² Wolfgang Schäuble*, Germany in the Run-up to EMU, p. 4

³ Tomasso Padoa-Schioppa* in Watson, Aspects of European monetary integration, p. 51

⁴ Jacques Santer*, Ties are expected to grow as the 'snowball' rolls on, Financial Times, 5 January 1998

⁵ Jacques Chirac*, speech to ambassadors in Paris on 29 August 1996, cf Hennes, p. 14

⁶ Jacques Rueff, L’ Age de l’ Inflation, cf Schäuble, Germany in the Run-up to EMU

⁷ Hans Tietmeyer*, speech to the Italian Senate on 11 April 95, cf Issing, p. 16

⁸ Hans Tietmeyer*, Die EWWU - Eine Deutsche Sicht, speech to the LSE, 18 February 1992, cf Währungsstabilität für Europa, p. 53 and p. 65 respectively

⁹ Jacques Santer*, Interview with the Financial Times, 2 February 1996

¹⁰ Willem Buiter, Alice in Euroland, p. 183

¹¹ Preambles to the TEC and the TEU

¹²Richard Young, The politics of the Single Currency, p. 300

¹³Cf Schöllgen, The Berlin Republic as a player on the international stage

¹⁴David Spence, The European Community and German Unification, p. 136

¹⁵ Cf Peter Pulzer, Unified Germany - A Normal State?, p. 8

¹⁶ Cf Bruce N Goldberger, Why Europe should not fear the Germans, p. 290

¹⁷ Helmut Kohl*, speech to the Bundestag, 13/12/91, cf Das Parlament, 20-27/12/91, p. 3

¹⁸ Alison Watson, Aspects of European Monetary Integration, p. 56

¹⁹ David Spence, The European Community and German Unification, p. 141

²⁰ Helmut Kohl*, speech at Edinburgh University, 23 May 1991, cf Spence, p. 137

²¹ Jörg Huffschmidt, Hoist with its own Petard, p. 88

²² Cf Helmut Schmidt*, Die Zweite Chance: warum Währungsunion?, p. 37 and Die Bundesbank - kein Staat im Staate, Die Zeit, No. 46, 1996

²³ Hans-Dietrich Genscher*, cf Schmidt, Aufgeschoben ist aufgehoben, Die Zeit No. 25, 1997

²⁴ Timothy Garton Ash, In naam van Europa, p. 480

²⁵ Helmut Kohl*, cf Ash, p. 480

²⁶ German Basic Law, Preamble

²⁷ Cf German Basic Law, Articles 23.1 and 88 respectively

²⁸ on 23 April 1998

²⁹ Christian Hacke, The National Interest of the FRG on the Threshold of the 21st Century, p. 5

³⁰ Secret memo by the German ambassador on behalf of Chancellor Adenauer to the British government, 16/12/1955,FCO archives document No. WG107/G/374 (cf appendix 5)