European Monetary Integration

With the Maastricht Treaty signed on February 7, 1992, the EC member countries seemed to be heading not only for the single market as of January 1, 1993, but also towards monetary union by the end of the 1990s. However, within months the EC was facing (i) a confidence crisis on the side of market participants, (ii) an economic policy crisis in the sense of diverging views on the desired policy course in major EC countries and (iii) a growing concern that too rigid fiscal policy convergence criteria of the Maastricht Treaty would restrict the room to maneuver at the start of single market. The start of the single market was surprisingly characterized by slow growth and strong pressures for structural adjustment in all EC countries.

National borders are becoming increasingly faint on the economic map of Europe. The 1989 Delors Commission report calls for both liberalization of goods and factor markets as well as increased coordination of macroeconomic policies among members of the European Community. The process of economic integration of goods and factor markets is to culminate with the removal of obstacles to trade, labor movements and capital movements within Europe by 1992. The logical extension of the process of macroeconomic coordination, begun by the institution of the European Monetary System (EMS) in 1979, is the proposed European Central Bank. These movements, while continuing the trans-national European policies that began with the Treaty of Rome in 1957, represent significant new steps down the path towards European integration.

The European Council took a decision in Strasbourg last December which will have far-reaching implications. Before the end of this year an intergovernmental conference is to be convened which is to discuss, and to decide on, the future road to European economic and monetary union and its institutional structure. It is to provide the legal basis for the necessary responsibilities which now rest with the national authorities to be transferred to Community bodies. Monetary policy will be affected most. The ruling EC treaty does not provide for any Community responsibility for monetary policy, which sufficiently explains why institutional steps towards monetary integration require an amendment to the treaty. Article 102 A, which was added to the ruling EC treaty by the Single European Act in 1986, expressly reaffirmed this requirement by stating: “In so far as further development in the field of economic and monetary policy necessitates institutional changes, the provisions of Article 236 shall be applicable.” Pursuant to that article, such amendments shall be “ratified by all the member states in accordance with their respective constitutional requirements.”

Politicians and economists in the Federal Republic of Germany are confronted with two types of monetary integration: the German Monetary Unification (GMU) and the European Monetary Union (EMU). The GMU is a new challenge resulting from the November 9, 1989 revolution in East Germany. The first ideas for monetary integration in Europe date back to the year 1970 when the former Prime Minister of Luxembourg Werner presented his plan for an EMU. In 1989 the Delors-Committee launched new efforts in this direction and outlined a plan for the realization of the EMU in three stages.

In 1986 the twelve member countries of the European Community (EC) signed the “Single European Act” according to which the internal market should be established by the end of 1992. The plan is to have a market without internal frontiers allowing the free movement of goods, services, labor, and capital. As an essential component, the completion of the 1992 single market program involves the realization of a genuine EC-wide common financial market. This paper is concerned with major achievements and shortcomings in the realization of the program to complete the so-called “financial dimension” of the internal market. It emphasizes the efforts towards the liberalization of capital movements and towards the creation of a new regulatory order for the community-wide supply of financial services as the two basic forces driving the process of financial market integration in the EC.

With the Strasbourg Summit of December 8/9, 1989, the process of monetary and economic integration in Europe, which had been already quite impressive, has gained additional momentum. Before the end of 1990, the President of the European Council will convene an intergovernmental conference which will be charged with the task of preparing an amendment of the treaty with a view to the final stages of EMU.

Founded at the end of the turbulent 1970s, the European Monetary System (EMS) goes into the 1990s with surprising (sometimes artificial) viability. Having successfully passed infancy in the 1980s the EMS now faces several challenges of adolescence, some of which are related to EC internal developments—above all “Project 1992”, the elimination of capital controls and the shift to an Economic and Monetary Union (EMU)—and others which concern a rapidly changing global environment. In June 1988, the European Council entrusted the later so-called Delors Commission to prepare a report on economic and monetary union in the EC; the Delors report received support at the Madrid EC summit in June 1989 which adopted stage I of the report: the removal of capital controls and the strengthening of intra-EC policy coordination. The deliberations within the EC do not point to a basic consensus with respect to an institutional framework for an EC central bank—a dual speed monetary integration scheme in which major continental EC countries would adopt a stability-oriented common monetary policy under the leadership of the German Bundesbank (central bank) seems to be possible.

European Monetary Union (EMU) has long been considered an important part of the European integration process, albeit a highly ambitious one. Provisions for the coordination of monetary policies in the European Community (EC) were already included in the Common Market Treaty of 1958, which obliged all member states to regard their exchange rate policies as a matter of common concern (Art. 107) and created an advisory currency commission (Art. 105). But it was not before the Bretton Woods System ceased to furnish monetary and exchange rate stability externally to the EC in the late 1960s, that the process towards EMU gained strength. EMU was first adopted as an official goal by the EC at its Hague Summit in 1969, which lead to a number of significant steps. The Werner Report (1970) presented a first proposal of how to achieve EMU. It lead to the unsuccessful Snake arrangement of 1972, the European Monetary Cooperation Fund of 1973 and a number of directives to institutionalize monetary policy coordination in the EC (Christie and Fratianni 1978). The Marjolin Report (1975) discussed the relationship between trade and goods markets integration and monetary integration in the EC. It argued that monetary union should be postponed until the achievement of a high degree of economic integration in the Community. Reducing barriers to trade and factor mobility would create a unified internal market which would be a sound basis for subsequent monetary unification.

The Maastricht Treaty on the move towards Economic and Monetary Union (EMU) raises the prospect of the establishment of a common currency area among EC countries without there being a common fiscal policy. Some have argued (notably, Sala-i-Martin and Sachs, 1992) that a community-wide tax and transfer system would be desirable in order to cushion regional shocks, since member countries in a monetary union are not be able to use the exchange rate instrument for that purpose. Indeed, according to those authors, such a federal system may be essential for the survival of EMU. In contrast, the EC currently has no fiscal mechanisms at the Community level for offsetting short-run, or cyclical, fluctuations-such as unemployment insurance or an EC-wide income tax.

The intensity of debate associated with economic and monetary union (EMU) in the European Community (EC) highlights the core question of how valuable irrevocably fixed exchange rates, or a common currency, would be for its members. This is at heart an economic concern, one to which political objectives and motivations must be compared.¹