European Monetary Union

The apparent determination of most members of the European Community to create a monetary union by the end of the 1990s has sparked off a heated debate among politicians, bankers, economists and interested laymen. Much of this stems from the fear of influential political groups — particularly strong in the United Kingdom — that the union represents, effectively, the penultimate step in the process of creating a United States of Europe. After all, a monetary and economic union of the kind proposed by the Delors Committee in 1989 and approved by Heads of EC Governments at their meeting in Maastricht two years later requires a common political authority to decide its economic and social priorities.

There was much less uniformity in monetary and financial arrangements before the First World War than is generally realised. This applies even to the international gold standard which, contrary to widespread belief, never really became a truly global system in the sense that all countries adopted it.

Research over the last thirty years has done a good deal to destroy many of the myths surrounding the classical gold standard. For instance, it is clear from the historical evidence included in the previous chapter that the standard was by no means a truly global monetary system. A number of large, or fairly large, countries never tied their currencies to gold; and some of those that adopted the practice did not hesitate to abandon it when the cost of observing ‘the rules’ became too great. This tended to confine membership of ‘The Club’ to the most advanced economies of the time. Moreover, although a number of countries made great strides in industrialising their economies, the rates of growth achieved between 1880 and 1914 were neither as high nor as stable as after the Second World War (Maddison 1982, Boltho 1989).

The analysis in the previous chapter was deliberately confined to the current account and short-term capital flows in accordance with traditional, static models of the adjustment and financing processes under fixed exchange rate systems in general and the classical gold standard in particular. It showed conclusively that the standard never operated in the way described by the classical/neoclassical models. The synchronisation of short-term movements in national prices and interest rates was such that the ‘mechanisms’ analysed in the last chapter could not have produced either lasting adjustments or long-term financing of the kind attributed to them by the conventional wisdom. It is necessary, therefore, to look for other explanations why this, the most exacting of all quasi international monetary unions, managed to survive for so long.

It is clear from the preceding chapters that, although it was never defined in those terms, the classical gold standard combined all the basic characteristics of a quasi monetary union. Capital, in both the short and the long term, moved freely between countries. The same was also true of labour. The exchange rates of countries which adopted the standard were ‘irrevocably’ fixed to each other within very narrow margins where they were expected to remain indefinitely. There were no provisions for exchange rates to be changed under any circumstances, no matter how ‘exceptional’. This meant that, in principle, external balances had to take precedence over internal ones irrespective of losses in output, employment and income that such a commitment involved. A country with serious adjustment problems and unwilling to tolerate such losses for long had either to find a way of reconciling the two balances without sacrificing economic welfare or abandon the standard. There was no other alternative.

As pointed out in the Introduction, there are a number of important similarities between the monetary union that the European Community intends to create in the late 1990s and the quasi monetary union operated by countries which adopted the classical gold standard. At the same time, there are also important differences. Many of the steps either taken or planned by the European Community go well beyond anything attempted under the gold standard.