UEM-incotro – Translated chapters EN

UEM-incotro – Translated chapters EN


The first thing that must be done when embarking on a study of this kind is to identify the features specific to both monetary union models. Once these features have been outlined, we will be able to assess the advantages and disadvantages of each monetary union model.

As for EMU, aspects of its creation, development and likely future changes, as well as its own inherent features, have been described in an earlier section (The search for a new monetary order in Europe based on a convergence model).

As for monetary unions created by means of currency substitution, a few initial remarks must be made. A natural approach would proceed on the basis that each state has its own national currency, which is often regarded as a manifestation of sovereignty. However, there are many situations where inhabitants of one country use currencies other than their national currency to buy goods, make investments or accumulate savings. These foreign currencies (which are considered to be stronger) take on some or all of the features of the national currency, thereby becoming a means of exchange, a unit of account, a reserve currency, a measurement of value, and so on. This phenomenon is known as currency substitution. Monetary experience has shown that the American dollar has been, and continues to be, an important currency substitute, hence the concept of dollarisation Dollarisation was aided by the way in which the Bretton Woods international monetary system was designed; the use of the American dollar as the primary reserve currency, the tying of all exchange rates for the participating currencies to the dollar system and the obligation on the part of the participating states to intervene to prevent fluctuations in the exchange rates between their currencies and the dollar are aspects which artificially inflated the global importance of the dollar and made it the central currency of the system. Over time, we may observe that dollarisation has achieved successes (e.g. in Ecuador, which decided to dollarise its economy due to the contraction of the latter by 7% inflation of 40.7% and an increase of 197% in 1999 in the value of the dollar with respect to the national currency), but there have also been notable failures (e.g. in Argentina).

But dollarisation as a process has since come to mean any situation where inhabitants of one country fully or partially replace the currency issued by their country of residence with any other foreign currency (not just the American dollar, as one might assume from the name of the phenomenon). More recently, the concept of euroisation came into being after the single European currency was created and went into circulation.

The reasons for both unofficial and official currency substitutions are either the unfavourable economic situations of certain states (characterised by currency market instability, high inflation and low levels of development) or portfolio diversification (which is common in developed countries).

The countries where official currency substitution is practised are generally economies with a high degree of openness towards the exterior. The costs of official currency substitution can be divided into two categories:

  1. costs for the country which decides to practise official currency substitution (loss of independence in the management of monetary policy and exchange rate policy; loss of the right to print money; loss of the right to issue a new official currency; a reduction in, or loss of, the central bank’s role as the lender of last resort; cost of linking the national economic cycle to the economic cycle of the country with the anchor currency);
  2. costs for the country whose currency is adopted as an official currency; these countries can incur at least two categories of costs, namely economic costs (sharing its right to print money, difficulties in controlling currency circulating beyond its national borders, increased sensitivity to unfavourable external developments, and the possibility that dollarised countries will abandon the foreign currency adopted as a foreign currency and revert to their former currency, which leads to a risk of inflationary pressures due to the large volume of currency returning from the dollarised economy) and political costs (due to the possibility that dollarised economies may exert political pressure on it);

The advantages of official currency substitution for countries which adopt a foreign currency as their own include: reduction (or even elimination) of currency and inflation risks; reduced pressure from currency reserve growth; a reduction in country risk; and the elimination or reduction of crises linked to the balance of payments. For countries whose currency is adopted as an official currency in another state, the main benefits are control over the economic mechanisms of other states and the greater international importance of their currency.

Despite criticisms and the measures taken to limit this phenomenon, currency substitution is a natural phenomenon dictated by increased public confidence in a foreign currency which creates a special impact by increasing the level of integration of international money and currency markets.

To return to the main subject of this book, we shall now examine monetary unions created through euroisation and continue with the task we have set ourselves (comparative analysis) and the opinions and positions of various entities (the EU on the one hand, and member/non-member states on the other hand).

A. To begin with, we propose that this comparative analysis shall be conducted from the following perspectives: a1) impact of the interest rate on prospects for harmonised economic growth; a2) impact on the level of inflation control; a3) effects of changes to the structure of the banking system; a4) the extent to which a budget deficit can be financed through inflationary currency issue; a5) effects on the freedom of movement of capital.

a>1Impact of the interest rate on prospects for harmonised economic growth

According to experts, the nominal single interest rate set by the European Central Bank is too high for economies where growth is too slow (such as Germany, Portugal and the Netherlands) and too low for economies with faster growth (such as Spain, Ireland and Greece).

When we analyse the real interest rate within the Eurosystem, what we find is that in reality there is no uniform interest rate, which leads to discrimination in terms of prospects for economic growth. Within the context of integration in a common monetary area such as EMU, the visible differences between national interest rates combined with the high level of nominal interest rates cause macroeconomic disturbances between the participating national economies. For the participating countries, a reduction in interest rates and the existing differences is absolutely necessary before integration occurs if such disturbances are to be forestalled. Furthermore, interest rate control is quite complex, as it interferes with a multitude of associated factors. For example, only where a fixed exchange rate, an increase in capital market freedom and favourable expectations are present can it be said that nominal interest rates will reach a lower level in the long term; low interest rate levels and interest rate convergence are essential for the creation of a stable currency area.

To take a different approach, we highlight the fact that before a country joins a single currency, interest rate differences can lead to what experts have dubbed the “vicious circle of monetary policy”. In this situation, high domestic interest rates (with an expanding interest rate differential) lead to inflows of capital which put pressure on the national currency (leading to overappreciation, because demand for the national currency increases due to heightened interest in making deposits from which gains will be made through interest). One consequence of this is the need to intervene in the currency market (to counteract the aforementioned effects, the monetary authority is forced to intervene by buying foreign currency). At the same time, the capital inflows also lead to an expansion of the monetary base (forms of money supply); increases in monetary mass which are not backed by goods and services give rise to inflationary pressures. In addition, to absorb the additional liquidity, the monetary authority has to raise monetary policy interest rates. As a result, the vicious circle of monetary policy attracts speculation which has a serious impact on the entire national economic and monetary system.

If we shift the focus of our analysis from the pre-entry to the post-entry period, according to the basis set out in Mundell’s research, we may observe that the fairly large differences in real interest rates (and the high rate of inflation) within the eurozone leave a question mark hanging over the prospects for optimising the Eurosystem (in Mundell’s view, an optimal currency area needs uniform interest rates). Since the uniform application of an interest rate within the eurozone is not a given, we are tempted to conclude that in reality, this objective is in fact undesirable.

A monetary union created when a country’s own currency is substituted with a foreign currency (known as the “anchor”) makes it possible (or, to be more precise, necessary) to have the same interest rates, which offer equal opportunities for development (the interest rate is set by the currency authority of the “anchor”). Or, to put it another way, the interest rate will immediately stabilise at the level of the interest rate for the anchor currency within its area of circulation (speculative gains are impossible). The groundwork for a reduction in the interest rate is thus laid, thereby facilitating uniform economic growth.

a2Impact on inflation control

Within the Eurosystem, price stability is one of the nominal convergence criteria. Reality has shown that the countries which have entered the race to adopt the single currency have opted either for the direct inflation targeting strategy or the exchange rate stability strategy.

Analysis of monetary integration in Europe from the perspective of economics shows that a large country with low inflation is disadvantaged when a country with high inflation joins the union. In fact, it could even be in the interests of such a country to reduce the number of countries which join the single currency and to prevent countries with high inflation rates from joining the monetary union. In view of the foregoing, it can be concluded that from the point of view of the theory of optimal currency areas, a European monetary union in which all countries within the EU participate is suboptimal in terms of prosperity. It can also be said from the perspective of economics that the Maastricht Treaty reduces the possibility of a large number of countries joining the euro due to the opposition of the large countries with low inflation rates.

We believe that all of these factors induce competition between member countries and countries which wish to become members of such a currency union.

Monetary unions based on currency substitution offer a degree of inflation stability (for the anchor) similar to the convergence criteria during the pre-entry period. The advantage of such a model is that the candidate country chooses the right moment depending on its reserves in the “anchor” currency (and not according to the opinion of a supranational body as to the extent to which the nominal and real convergence criteria have been met).

Proponents of monetary substitution assert that it offers a solution which can close the vicious circle of inflation and poverty. For example, Latin American economies were dollarised in order to reduce inflation and interest rates, thereby helping to boost foreign trade and attract foreign investment. The counterarguments put forward by opponents of this school of thought are based on the fact that countries which opt for dollarisation become overly dependent on American monetary policy, become increasingly vulnerable to political pressure from Washington and lose an essential symbol of their national sovereignty.

a3) Consequences of changes to the structure of the banking system

The Eurosystem is based on an institutional framework comprising three levels: commercial banks, national central banks (banks of issue) and the European Central Bank. Although this pyramid system is recognised, decision-making authority is not distributed in accordance with its (pyramidal) structure, with the result that the scope for a third country to influence the monetary policy of the union is greater.

The other monetary union model leads to a reduction in (or even loss of) the authority of the national central bank in the state which adopts the “anchor” currency. The banking system adapts to this transformation and assumes a two-level structure: the central bank (of issue) and commercial banks. There is also a decrease in institutional costs (by contrast with the Eurosystem, in which these costs are rising). In this case, it ceases to be possible for a third country to influence (through speculation) the monetary union created by currency substitution.

a4Extent to which a budget deficit can be financed through the inflationary issue of money

The different rates of inflation within the Eurosystem, which are relatively high in the south of the area and relatively moderate in the north, are a consequence of the steps taken by the governments of the member states to finance their deficits through inflation. In the light of this (even if the provisions of the Stability and Growth Pact are implemented), equality of opportunity for the member states is questionable.

Unlike the Eurosystem, this model requires much greater government discipline as deficits cannot be financed through the inflationary issue of money. The opportunity for a country anchored by a strong currency to back some of its public spending by putting into circulation a quantity of money which is not backed by goods and services is non-existent, because only the currency authority in the country to which the anchor currency belongs has the right to issue money.

a5Impact on the freedom of movement of capital

Even if the free movement of capital is guaranteed by treaty, exceptions at national level are possible within the Eurosystem. As we have shown in section 3.3. Impact of the weaknesses of the Eurosystem on its functionality, the free movement of capital is in itself a weak point. For instance, inflows of capital (due to capital account liberalisation and a large interest rate differential) incur the risk of a monetary policy vicious circle with repercussions on nominal appreciation. The latter leads to a decrease in external competitiveness, which in turn can give rise to an unsustainable external imbalance. The imbalance thus created, combined with a fiscal imbalance, leads to a deterioration in the perception of investors. The latter are spurred to remove their capital, causing outflows of capital and hence sudden depreciation (which in turn affects price stability). The resulting sudden depreciation causes inflation; in an inflationary situation, the authorities are forced to promote restrictive monetary and fiscal policies which suppress aggregate demand (triggering other imbalances: recession and unemployment). In the new situation thus created, companies will experience a fall in profitability and become more vulnerable; there is a risk that any loans previously taken out will become non-performing loans, and risks will also spread to the banking sector (with a knock-on effect on financial stability).

In theory, by agreeing to the removal of capital controls, a government relinquishes its own monetary policy system; but in fact, despite the Maastricht Treaty, elements of national monetary policy are still present within the Eurosystem in the form of government debt instruments at the national bank and state institutions with unsalable guarantees (unsecured, which are regarded as toxic financial products). Furthermore, reality shows that the free movement of capital is more generous outside the European Union than inside it.

By way of example, we cite the regulation concerning the declaration (at the border between Germany and other EU member states) of cash and other valuables worth more than EUR 10,000. According to the provisions of article 12 (paragraph 2) of the Customs Administration Law (Zollverwaltungsgesetz), travellers who return to Germany (and those who pass through German territory) must declare cash, financial assets (bilete de bancă), securities (shares, bonds, cheques, waybills and bills of lading), precious metals and goods and, at the same time, undergo compliance monitoring (performed by customs officers, the federal police and the police forces of the Länder of Bavaria, Bremen and Hamburg).

Although this regulation is intended to be a means of preventing and combating terrorism (including the financing of such actions through cross-border transfers), we may also be tempted to believe that the regulation also serves as a means of currency control in the old currency area. In addition, although issuing entities assert that this regulation does not place restrictions on the free movement of capital, the reality demonstrates what we have said above (i.e. that the regulation is a means of currency control for inflows of capital into a member state – Germany). At the same time, we find that this regulation works in a similar way to the serial number system for issued euro banknotes, which identifies the country of the issuer.

Since freeing up the movement of capital has made financial systems vulnerable and ultimately contributed to the current financial crisis, we believe it is also expedient to express a few (retrospective and forward-looking) thoughts about the development of the regulations with regard to the way in which this monetary policy decision is perceived.

The mainstays of the free movement of capital are the freedom to provide services and the free movement of factors of production (financial, physical and human), which are regulated by European primary legislation.

The monetary decision to free up the movement of capital was a relatively recent one. When the ink on the Maastricht Treaty was barely dry, it became a limitless principle of European contracts.

According to the regulations of the European Economic Community (1957), general economic policy and monetary policy are regarded as issues of mutual interest which must be coordinated not1 through common legal measures, but by means of recommendations for the member states. But the freeing-up of the movement of capital was deliberately made subject to necessity. This enabled the member states to keep the movement of capital under control. Limitations on the movement of capital took the form of both administrative measures and market-dictated measures to regulate flows of capital into and out of the country (such as restrictions on loans in foreign currency, transactions involving securities, the purchase and sale of foreign currencies, gains from shareholdings and other commercial rights).

Only when the Maastricht Treaty came into being was a strict unanimous decision2 taken that there should be a universal obligation to free up the movement of capital (article 73b stipulates that all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited). This regulation clearly underlines that there must be no prohibitions or restrictions on approval except where they are exceptionally justified (Article 73c stipulates that the ban on restrictions iswithout prejudice to the application of any restrictions which exist on 31 December 1993 under national or Community law adopted in respect of the movement of capital to or from third countries involving direct investment – including investment in real estate – establishment, the provision of financial services or the admission of securities to capital markets). This gives the member states the opportunity to control the movement of capital through fiscal policies, even though they may sometimes be discriminatory. The valenţe of the obligation to free up the movement of capital become explicit and legitimate if interventions are justified by grounds of public order or security or if they are in the general interest, are reasonable and are non-discriminatory3.

As article 37b stipulates, the obligation to eliminate restrictions on the movement of capital also applies to relations between the member states and states which do not belong to the EU. However, article 73f provides that where, in exceptional circumstances, movements of capital to or from third countries cause, or threaten to cause, serious difficulties for the operation of economic and monetary union, the Council, acting by a qualified majority on a proposal from the Commission and after consulting the ECB, may take safeguard measures with regard to third countries for a period not exceeding six months if such measures are strictly necessary. In relation to the Community right to liberalise the movement of capital in countries outside the EU, this regulation constitutes a backward step and poses a real obstacle which limits the free movement of capital.

The virtues of restricting full freedom of movement for capital have also been recognised by liberal economists, and were put to the test in two recent cases: Chile (through the obligation to create deposits in cash without interest for capital imports) and Malaysia (where the national currency was only permitted to be imported and exported to a very small extent, and short-term foreign capital was only allowed to be moved back abroad after a year).

Some researchers take the view that the crisis in the financial market heralds the end of neoliberalism4, because even within the European Union, intentions to restrict the free movement of capital (supported by the Chancellor of Germany, the leader of the parliamentary Christian Democrat and Christian Social grouping and the prime minister of the state of North Rhine-Westphalia) were recently expressed. However, things soon took a different turn, because the simple request to regulate the financial markets was just a acoperire for banks which consisted solely of the granting of bank guarantees or subsidies.

At present, as the financial crisis is becoming more acute, aspects of capital control are not being considered by either the EU or the president of the EU Council, Nicolas Sarkozy, or the German government. This decision is based on the idea of increasing transparency in the global trading of securities. However, the transparency of credit and security transactions can only be viewed as a means of resolving the crisis if we assume that wise investors will shun risky investments in future (which will not happen if investors rely on the state to compensate them for losses).

The excessive expansion of the financial markets, which was the starting point for the beginning and development of the crises, would not have been promoted without the massive bottom-up redistribution of income and assets from the end of the 1970s onwards. This led to continual expansion of financial assets at the top of society, and they could no longer be reintegrated into the real economy because – due to the redistribution – consumer demand for them was lacking5. The worsening of the negotiating positions between employers and trade unions and the suppression of compensatory social policy were both the causes and continual outcome of the dominance of the financial markets (thereby constituting a vicious circle).

The foregoing enables us to conclude that the free movement of capital must be firmly placed under a question mark (since it is possible that investors may withdraw at any time from national regulation or from the EU).

History confirms that the free movement of capital is by no means a necessary condition for economic prosperity; at this juncture, we reiterate that the first few decades after the Second World War were the decades with the most restrictions on the movement of capital in the history of capitalism; they were also years which witnessed unusually rapid economic growth, virtually no unemployment, real growth in incomes and social progress6.

 Unlike the Eurosystem, the currency substitution model necessitates much freer movement of capital. Opportunities to control and limit risks are real. Freer movement of capital is no longer an option (expressed sooner or later in the assumption that a single currency will be adopted), but a necessity. Vulnerabilities of the kind mentioned above are eliminated.

B. A few remarks must be made about the opinions and positions of the various entities (the EU on the one hand, and the member states on the other) with regard to currency substitution based on the single European currency.

Euroisation is a relatively recent phenomenon; this is because the single European currency is itself not very old (having been introduced only in 1999). Although the original idea was attributed to Poland (in 2000), the pioneers in this field are recently-created entities: Montenegro, which declared its independence on 3 June 2006, and Kosovo, which declared independence on 17 February 2008. They opted for unilateral euroisation from 2002 onwards. Monaco, San Marino, the Vatican City and Andorra adopted the euro after entering into currency agreements with the European Community.

Although the ECB’s position on states outside the EU is clearly defined (although it was only in 2004, after the agreement with Andorra was signed, that the ECB asserted that euroisation must occur on the basis of an agreement), the situation as regards the member states of the EU (and possible future member states) is somewhat more complicated. With the emergence of the first studies of the advantages of euroisation in 2004, the issue became even more controversial and drew concrete statements from the institutions of the EU. For instance, it was concluded by the ECOFIN Council in November 2000 that it should be made clear that any unilateral adoption of the single currency by means of “euroisation” would run counter to the underlying economic reasoning of EMU in the Treaty, which foresees the eventual adoption of the euro as the endpoint of a structured convergence process within a multilateral framework. Therefore, unilateral “euroisation” would not be a way to circumvent the stages foreseen by the Treaty for the adoption of the euro. In the same year, the ECB stated that the Eurosystem does not consider euroisation to be an acceptable way for an accession country to adopt the euro. Accession countries are on a predefined path to entry into the EU and ultimately into the euro area, which implies that they must follow the procedures and comply with the requirements laid down in the Treaty. Euroisation by an accession country would conflict with the economic reasoning behind EMU, which foresees the eventual adoption of the euro as the end of a convergence process within a multilateral framework.

Since some of the states which joined the EU in 2004 and 2007 declared that they intended to pursue unilateral euroisation prior to accession (like Bulgaria, for example), the positions of EU officials and authorities were expressed not only in the form of statements, but also as threats (the institutions of the Community asserted that these states even ran the risk of their applications for membership being turned down).


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In light of the foregoing, we shall outline below the possible advantages and disadvantages which a country (such as Romania) could encounter when opting for one of the two monetary union models.

Romania’s situation over the past few years has been characterised by a disproportionately large rise in consumption based on loans, low productivity, a negative balance and fairly recent liberalisation of its capital account. On the basis of these factors, we are tempted to conclude that not only the moment of entry to the Eurosystem, but also the consequences of this decision are of primary importance. Liberalisation of the capital account after the loan-drugged growth mechanism was launched ensured that the leu would “short-circuit”.

These consequences could have been averted by means of a monetary policy appropriate to the circumstances of the Romanian economy; for example, if foreign lenders had been obliged to make deposits of 10-30% with the National Bank of Romania (to make these foreign loans more expensive), this would have prevented the economy from overheating; secondly, if lending had been limited to the country’s official currency, consumption would not have risen by an amount disproportionate to production.

Since the mechanisms for acceding to EMU swing into action quite quickly after a country joins the EU, new member states are deprived of opportunities to finance their deficits through the exchange rate or interest rate. In Romania’s case, the likelihood that the leu would depreciate was easily foreseen; this is because the country’s savings and wages in lei had to be converted to pay off loans taken out in euros. On the other hand, consumption based on loans in foreign currency created favourable conditions for exporters. The only problem that arises out of this dichotomy is the fact that the burden of the effects was placed on consumers.

These interdependencies naturally give rise to two questions:

  • Who are the winners in the Eurosystem?
  • Who within the Eurosystem profits from the relationship between competition and stability?

a) Who are the winners in the Eurosystem? Who would have been the winners if Romania had adopted the euro on the basis of the currency substitution model? The problems begin with the factors that initiate economic growth: with the oversupply of loans in foreign currency (the euro), inflation in Romania becomes higher than it is for the trading partner which is both a supplier of goods and the creditor of consumers. This growth-driven inflation must be absorbed at source and cannot be exported. In a classic system, for example, where trade with Germany would have a positive balance and Romania would have a negative balance, the inflation generated in Romania by the excessive lending for consumption would be “exported” to Germany. The Eurosystem prevents this inflationary “recycling” by forcing the country (once it has entered the Eurosystem) to impose restrictive fiscal measures as the only means of combating inflation. But fiscal instruments reduce the country’s fiscal competitiveness, driving direct foreign investment down and making the labour force more expensive. At the same time, high taxes make it more difficult for companies to accumulate capital and make investment more expensive.

The answer to the first question above is: “the older sisters” (the member states with the power to exert influence). As for the second question, the answer is completely different (inasmuch as Romania would have had more advantages and means of redress), but in view of the stance taken by the EU institutions on the unilateral adoption of the single currency, which was mentioned in the first part of this section, this would have hamstrung its chances of joining the EU.

b) Who within the Eurosystem profits from the relationship between competition and stability? To answer this question, we shall analyse two relationships: 1) the relationship between unemployment and inflation; 2) the relationship between interest rates and inflation. This analysis is necessary because the success of a monetary union depends on how well the labour, capital and goods markets work in both the member states and future member states.

1) Moving from real convergence to nominal convergence, we can admit that unemployment can be controlled through currency exchange; for example, export growth favours a decrease in unemployment. Conversely, moving from nominal convergence to real convergence, we can admit that unemployment can be controlled through the interest rate; for example, a fall in the interest rate (and a rise in the volume of investment) favours a decrease in unemployment. When these instruments cannot be used, the labour market becomes less flexible.

In the absence of the tool of the exchange rate or inflation/interest rates, unemployment can be tackled through labour market mobility. However, this mobility is constrained by two factors:

  • EU restrictions which allow the member states to agree or not to agree to workforce migration;
  • natural” factors such as language, culture, distance, etc.

If there is no labour market with real flexibility, and in the absence of common trade union representation, the labour market will develop in different ways in the member states, and this affects real convergence. For example, if wages rise in France but fall in Germany, due to real convergence, Germany will become more competitive in the market than France, and this will affect free competition in the monetary union market. Another relevant example is the situation where two countries have difference balances of trade (negative and positive). The normal method of redressing the balance would be currency devaluation, but if the exchange rate is fixed, other methods must be sought. If it is no longer possible to operate within the internal area, then – by virtue of workforce mobility – the country may opt to “export” the unemployed. However, for a country which places restrictions on the labour market (as happens in Romania), this alternative is no longer feasible either. In fact, such countries are deprived of the essential means of intervention to rectify the situation (due to the influence of powerful countries on the union’s policies).

2) The nominal interest rate that is set and the different inflation rates within the eurozone lead to different real interest rates. In the context of a nominal exchange rate, the differences in the rate of inflation have a very big impact on competition. For example, for Romania, high interest rates are reflected in an increase in the cost of loan capital and then higher production costs; high production costs will then generate inflation; the cumulative effect of the latter two phenomena is lower competitiveness. Within the Eurosystem, lower competitiveness obliges Romania to reduce inflation to the extent that its influence allows it to (since it cannot be “exported”, making crises more acute over time). When these constraints are combined, the implication is that the member states have to adopt a policy that does not run counter to or harm the interests of the powerful states within the EU.

The impact of the slowdown in development due to real convergence (through increased inflation) is greater than the impact of stimulating investment through the euro interest rate. When viewed in a functional context, the real interest rate is not just the difference between the nominal interest rate and current inflation for consumer products. This is because, when one extrapolates the sphere of influence, investment decisions are aimed at a future horizon, and the real interest rate can no longer be determined solely on the basis of current inflation. For that reason, we believe that an ex-ante interest rate calculation and not an ex-post interest rate calculation should form the basis of future investment decisions.

In conclusion, the resulting situation can be summed up as follows: a) the real exchange rate can hinder economic development; b) fiscal stimuli for development are restricted; c) even in the context of a restrictive fiscal policy, a rise in taxation of profits (in order to combat inflation) reduces business competitiveness even more; at the same time, higher taxation limits the opportunities to create reserves and increases dependency on loans; d) although inflation is inevitable for a developing country, economic growth is held back by the constraints of the excessively high rate of inflation. In the context of this coercive action plan, the consequences of joining would be dependency on foreign lenders, price rises, lower competitiveness, pressure on wages, the absence of technology transfers, and so on.

In light of the foregoing, the answerto the second question (who benefits from the relationship between competition and stability) is self-explanatory, and is similar to the answer to the first question. Although the Eurosystem is intended to be a currency area created according to the principles of optimality (in the sense that individual prosperity should lead to general prosperity where there is impartial distribution of both benefits and risks), reality shows that the big powers/states seek to maximise their benefits and distribute the risks as much as possible.

Through these examples, we have shown how the Eurosystem becomes vulnerable due to the real convergence criteria themselves (the labour market reflects these vulnerabilities best). At the same time, we also deduce that there is a very unequal sharing-out of risks and prosperity between the developed and the less developed countries. Although it is intended to be a united currency area (through compliance with the convergence criteria), the states within the eurozone display a clear lack of solidarity. To put it more vividly, this lack of solidarity can be summed up as follows: “If a ship sinks, the ship itself is to blame, not the sea.” While real convergence problems are of secondary importance at a regulatory level, in the market these problems come to the fore.

We believe that a monetary integration model based on consensual currency substitution (up until the time of joining the eurozone) requires a sincere policy aimed at a fairer Europe and capitalism with sustainable and lasting opportunities for development. And in such a monetary system, it is natural from a political point of view that the name of the single currency should still be “EURO”, though the architecture would not be based on a convergence pact. Starting with a strong anchor currency belonging to one country, the countries around it adopt the currency with the new name and participate in the decision-making process of the currency authority of the country with the anchor currency. Gradually, the strong currency enters the new states according to the degree of integration of economies keen to participate in this system, which want to benefit from a common currency.

Within a monetary union created through monetary substitution, price transparency and lower transaction costs are similar to the Eurosystem model. The economy responds to exogenous shocks through the market for goods or the financial system rather than through monetary instruments. Such a model guarantees the creation of a united currency area and very advanced integration. Why not adopt such a model in Europe? This question is, of course, a very delicate one.

On the basis of the foregoing, we observe that the for and against positions (the Eurosystem and monetary unions created by substitution) are equally fertile, are born from one another and lead to one another.


The lack of a powerful central monetary authority in the Eurosystem is evident when one deals with an issue which has been discussed too little thus far: the different real interest rates within the eurozone. The differences in real interest rates stem from the existence of different rates of inflation in a situation where a single nominal interest rate is regulated.

This is also the main reason why Germany has suffered the most. In the decades prior to EMU, Germany was behind Switzerland, which had the lowest real interest rate in Europe, but now it has the highest real interest rate – with serious consequences for its economic development. Why?

The monetary policy of the Governing Council of the Eurosystem is a common one and applies throughout the eurozone. This means that the same refinancing coefficient is valid for all commercial banks in all EMU member states, and the amounts given by the national central banks are calculated on the basis of a firmly established formula, in proportion to the share of the ECB’s capital contributed by the national central banks.

In this context, our assessment is that a differentiated monetary policy according to the Lindahl model, which takes the different inflation and growth rates into account, is not possible.

According to the Canadian economist Robert Mundell, a monetary union is optimised when real interest rates are equal. In the context of the eurozone, this has not been possible because prices have risen at different rates at the same nominal interest rates (for instance, between 1999 and 2002 prices rose by 6% in Germany, 8% in Austria and France, 10% in Italy, 15% in Spain and the Netherlands, 16% in Portugal and 20% in Ireland).

Due to these discrepancies, during the first few years of EMU, Germany had the lowest growth rates in the eurozone. GDP rose by just 0.2%, whereas in Ireland it rose by 6.9%. Due to the system’s monetary policy (which is common and does not permit differences), the euro has, on the whole, proven to be an inhibitor of development.

A report published in 2005 by PricewaterhouseCoopers economists stated that the economies of the countries within the eurozone were still experiencing very different outcomes in terms of economic growth and inflation. The single interest rate set by the European Central Bank was at too high a level for the economies with excessively slow growth (such as Germany, Portugal and the Netherlands) and at too low a level for the economies with faster growth (such as Spain, Ireland and Greece). The same document states that after 1999, when the process of Economic and Monetary Union began, economic convergence was not achieved to the same extent for all parameters in the countries within the eurozone. In fact, in terms of GDP growth, there was even divergence after 2001, although some data indicate that certain components of GDP, especially net export value, were on the path towards convergence. However, significant divergences between the economies of the eurozone countries were observed with regard to the change in the overall value of consumption and investment expenditure after 1999.

More indications of cyclical convergence can be identified in the bigger eurozone economies than in the smaller economies, but even the large economies displayed significant differences in terms of the overall level of growth after 1999, as happened in the cases of Spain and France on the one hand and Germany and Italy on the other hand.

In addition, there are no data to indicate clear convergence of inflation rates in the eurozone countries after 1999, although certain trends towards convergence were apparent just prior to that year, during the preparation period for the launch of the EMU process. However, if we proceed from the observation that near-total convergence of nominal interest rates for short-term and long-term loans was achieved in the EMU member states but real interest rates remained divergent, we arrive at the conclusion that the single nominal interest rate set by the ECB can have very different real effects from one country to another.

Estimates of the “optimal interest rate” based on the Taylor rule likewise appear to show that the existence of a single interest rate does not correspond to the actual situation in many eurozone nations.

 The situation is still not satisfactory at present, against the background of the current financial crisis. The European Central Bank has cut the monetary policy interest rate in the context of the eurozone recession in order to slow down inflation. During the 10 years of its existence, the Frankfurt-based institution has never cut the headline interest rate by more than 0.5 percentage points. On the other hand, the current period is not a normal one. The eurozone went into recession at the end of 2008, and economists and international organisations kept a close eye on the GDP of the member states. Compared with the same period in 2007, GDP in the European Union rose by 0.8% in Q3, and the economy of the eurozone grew by 0.6%, after increases of 1.7% and 1.4% in Q2 (according to the Statistical Office of the European Commission). In addition, the labour market felt the effects of the slowdown in economic growth. The EU’s main economic partners, the United States and Japan, were also experiencing macroeconomic difficulties. Japan was officially in recession, with contractions of 0.9% and 0.1% in the two quarters analysed, and the USA’s economy grew by 0.7% between April and June before contracting by 0.1% over the following three months.

To shed more light on the issue of the impact of real interest rates on the economies of the eurozone, we shall also touch upon the concerns of experts in the United Kingdom when the possibility of adopting the single currency was examined. In November 1997, Tony Blair’s government identified five economic tests to measure the country’s readiness to adopt the euro. Each test was designed to ascertain whether the British economy would benefit or suffer from a change of currency. The five tests were as follows:

– Are business cycles and economic structures compatible so that we and others could live comfortably with euro interest rates on a permanent basis?

– If problems emerge, is there sufficient flexibility to deal with them?

– Would joining EMU create better conditions for firms making long-term decisions to invest in Britain?

– What impact would entry into EMU have on the competitive position of the UK’s financial services industry?

– Will joining EMU promote higher growth, stability and a lasting increase in jobs?

Without presenting the answers to the five questions in detail, the conclusion that the United Kingdom reached is obvious (i.e. that it should stay out of the eurozone).

In light of the above, we stress that the aforementioned changes (i.e. cuts) in the interest rate within the eurozone refer to the nominal values. As far as the changes in real interest rates are concerned, the situation is highly diversified.

We believe that the main signs of better economic convergence, in terms of both nominal and real indicators, arose during the period when preparations were being made for the launch of the single currency, and that there have been too few signs thus far to clearly indicate that the convergence process has intensified since EMU was established. In fact, it could be that the constraints imposed by the existence of a single interest rate have actually contributed to the perpetuation of certain cyclical divergences in the eurozone countries instead of giving rise to other processes which would have resulted from the implementation of national-level policies geared towards interest rate stabilisation.

At the same time, it is very important to underline that although it appears that short-term costs have been generated by the introduction of EMU, its potential long-term effects in terms of stimulating cross-border trade and investment between the eurozone countries have been slow in coming. We venture to assert that only when these effects appear will we probably be able to observe signs of greater economic convergence and the net economic benefits which the introduction of the single currency should bring for the member states.


As we have already stated, the legal basis of the single currency is the Treaty Establishing the European Community, article 105 of which provides that the primary objective of the ESCB is to maintain price stability. Price stability and the convergence of the eurozone economies were regarded as essential preconditions for the single currency to be capable of supporting general economic policies within the Community in order to achieve the Community’s objectives (as defined by article 2 of the Treaty).

We welcome and regard as expedient the favourable Opinion of the ECB7 at the Request of the Council of the European Union on a proposal for a Directive of the European Parliament and of the Council amending Directives 2006/4848/EC and 2006/49/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements, and crisis management. In this regard, the ECB considers that most of the technical Annexes to Directives 2006/48/EC and 2006/49/EC should be adopted directly as Community regulations (insofar as they are compatible with the necessary flexibility for national implementation).

Reform of European supervisory arrangements in the financial sectorwas prompted by the financial turbulence witnessed from 2008 onwards. In the ECB’s opinion, a radical overhaul of these directives in accordance with the principles described above would greatly contribute to enhancing the transparency and legal certainty of Community banking legislation. The market turmoil has also highlighted the importance of legal instruments that can be amended easily to adapt to changing circumstances (i.e the right to regulate the framework principles should be reserved for the national levels, and implementing measures should be regulated at Community level).

As for inter-bank exposures and the implementation of monetary policy, the ECB broadly welcomes the objective of the proposed directive, which is to improve risk and liquidity management in credit institutions, including with regard to inter-bank exposures. This is because inter-bank exposures pose a significant risk as banks, although regulated, can fail and large inter-bank exposures require very prudent management. The ECB calls for caution when designing measures on limits to inter-bank exposures as the proposed measures should avoid impairing the smooth flow of liquidity within the inter-bank market. From a monetary policy implementation perspective, constraining the smooth flow of liquidity within the inter-bank market, in particular at very short maturities that are overnight or up to one week, would not be desirable, either in normal circumstances or in the current market financial turmoil. Indeed, in normal times the trading activities of Eurosystem counterparties are instrumental in redistributing short-term liquidity in the market and therefore they should not be constrained, as this would be detrimental to the smooth steering of the short-term money market rates towards the minimum bid rate on the Eurosystem’s main refinancing operations.

As for supervisory arrangements and crisis management, the ECB welcomes the proposed strengthening of the legal underpinnings of the colleges of supervisors. This is a step towards achieving supervisory convergence and would ensure consistency across Member States. The ECB considers that the use of supervisory colleges would enhance cooperation in the day-to-day supervision of cross-border banks, financial stability risk assessment and the coordination of the management of crisis situations.

Below, we shall propose a monetary policy approach in the light of the official regulations which have been adopted. The single monetary policy was based on an institutional and operational framework and a specific strategy. Rather than launching into a diatribe, we believe that to identify the aspects that need to be reformed, it is necessary to outline its initial organisation and the arguments that underpinned it.

a) With regard to the institutional and operational framework, the Eurosystem was intended to be a mechanism based on the principles of independence, transparency and operational decentralisation.

a1Independence was designed to favour price stability. Taking the national model as a starting point (whereby price stability – i.e. inflation control – is strongly correlated with the degree of independence of the central bank), the single currency policy correlated its own objective (price stability within EMU) with the independence of the ECB and that of the central banks of the member states. According to the Treaty, this independence translates into the fact that in performing their tasks, neither the European Central Bank nor the national central banks of the Eurosystem request or accept instructions/orders from Community institutions, national governments or any other authority.

We judge that the task of achieving price stability within the monetary union should have been assumed and coordinated at a single level. For as long as the euro is a common currency, the issue of price stability should not be left to be dealt with individually by each member state through special interventions by the central banks of the member states).

With regard to this first functional aspect, we believe that the principle of independence should have been handled in a firmer manner, so that the Eurosystem is a truly functional entity. Although a range of models for the institutional structure of a monetary union have been put forward (Lindahl, Ciampi, Mundell), a different model capable of reconciling both the interests of the union and national interests was preferred. This is because the eurozone is characterised by a wide divergence in the degree of flexibility of the member states, i.e. more or less willingness to give up certain privileges or sources of national pride. The argument on which we base this assertion is that states with greater influence (such as Germany or France) were unwilling to transfer all of their decision-making autonomy with regard to monetary policy to the newly-created body (the ECB). As such, the structure of the new Eurosystem can be likened more to an atom with multiple nuclei.

In light of the above, we believe that the first aspect that could be reformed is the very way in which institutional independence is handled. Specifically, in our new vision, the ECB should be the supreme authority on EMU monetary policy, and the central banks of the member states should target their policies at general objectives to the benefit of the entire monetary union.

a2Transparency and responsibility were regarded as essential to guarantee the Eurosystem’s credibility. The transparency of decisions and responsibility towards the public are mentioned in very general terms in the Treaty. However, through its own activities and decisions, the ECB has supplemented the reference framework that underpins this principle. For example, it has defined price stability, arranged hearings (president of the ECB/European Parliament) and informal meetings (between finance ministers), published reports on developments and its own analyses, and held press conferences to explain monetary policy decisions.

Although great interest has been shown in implementing this principle, we find that it is not being observed fully. This is because the minutes of the meetings of the Governing Council are not published. The reason cited (by the members of the Governing Council themselves) was that breakdowns of votes could be interpreted through the prism of national concerns and interests, and this would threaten the independence of the members of the Governing Council and the credibility of the decision-making process.

We believe that this latter aspect, combined with the principle of institutional independence (which has been analysed above), should feature among the list of proposed reforms, because only where there is full transparency can it be demonstrated that the interests of the union are being put before national interests.

a3Operational decentralisation – based on the use of modern technology and means of communication – underpinned the harmonisation of operations relating to unification of the eurozone’s money market. Although, at first glance, the principle translates into a natural commitment to ensure that a currency union is operational, we highlight the fact that this decentralisation should not occur in an absolute manner. Specifically, we refer to four aspects:

– the way in which the role of refinancing within the structure of the Eurosystem was considered;

– the way in which the issue of the single currency (the euro) was considered;

– the way in which interest rate policy at Union level was considered;

– the way in which cooperation between the currency authorities and fiscal centres was considered.

As for the first of these aspects, we believe that the issue of refinancing should not be left solely to the national central banks. An active refinancing role for the ECB could have averted external interventions to resolve the union’s monetary problems (specifically, the IMF’s intervention to prop up Greece). Taking on this role would not have compromised the central role of the ESBC; on the contrary, it would have been a precondition for price stability at union level.

As for the second aspect, we observe that by virtue of the absolutist way in which the principle of operational decentralisation was considered, the task of issuing the single currency was transferred exclusively to the national banks of issue. The solution hit upon is by no means the most advantageous one (the Governing Council decided that 8% of banknotes issued by the national central banks should be ECB banknotes and appear on the ECB’s balance sheets).

As for the third aspect, we point out that adopting a monetary policy based exclusively on moving the nominal interest rate does not address the need to ensure balanced (unbiased) development of the entire eurozone. The assessment that the (nominal) benchmark interest rate set at union level represents a barometer for lending within the member states is merely a desideratum which is not reflected in equal opportunities for the development of all member states. In fact, this is a natural consequence of the way in which the objective of maintaining price stability (i.e. maintaining purchasing power by controlling the money supply) was conceived, because the objective was adopted at union level, yet the responsibility for its implementation is assigned exclusively to the member states.

As for the fourth aspect, we judge that in EMU there is a single monetary policy and 16 governments responsible for budgetary and structural policies at the same time. Although a framework of multilateral monitoring procedures was established through a) the informal meeting of finance ministers of the eurozone countries, b) the ECOFIN Council, which has decision-making power, and c) the European Commission, the reality is that the situation is now out of control. This reality is reflected in non-compliance with the rules and procedures laid down in the Treaty and the provisions of the Stability and Growth Pact.

The absence of budgetary discipline (which was supposed to be a necessary corollary of the single monetary policy of particular importance for EMU) has meant that the member states no longer regard their own economic policies as issues of “mutual interest”; as a result, the impact that their budgetary decisions have had on the eurozone has been disastrous. The current institutional structure has shown that it cannot monitor the budgetary deficits of the governments of the member states.

To look at the situation from another angle, although it was hoped that “free-rider” behaviour would be avoided within the monetary union, the reality is that some member states have irresponsibly engaged in precisely this kind of behaviour.

The conclusion that can be drawn from this is that the absence of a powerful fiscal central institution capable of coordinating national budgetary policies in a uniform and prudent manner and working to support monetary policy has not prevented the member states from putting their own national interests before the interests of the Union.

Although the aspects presented above were also analysed in a previous work8, only in the middle of May 2010 did the first concerns about the lack of a fiscal union within EMU emerge. Now that the problem of the public finance crisis (the case of the PIIGS countries) has been debated at length, the new challenge for analysts is the effect of the lack of a fiscal and political union to support the European monetary union. The German Chancellor, Angela Merkel, said that we have a single currency, but we don’t also have a political and economic union, and this is precisely what we need to change: this is the opportunity presented by the crisis. In the same context, we also highlight the French finance minister’s proposal to create a federal European state. Much more challenging is the proposal of the European Commissioner for Monetary Affairs (Olli Rehn) to take control of the budgets of the eurozone countries in order to oblige them to show fiscal discipline and to impose penalties. However, sceptics question whether the excessively great impetus for centralism and the handover of fiscal sovereignty to Brussels might not deter financially strong countries (the Netherlands, Germany or France) from staying in the monetary union. We believe that within a relatively short space of time, the fears of a possible disintegration of EMU will focus not on the crisis in Greece, but on certain weaknesses inherent in the Eurosystem’s structure.

Instead of ending our analysis with a definitive conclusion, we prefer to challenge readers to answer the following questions: was a period of crisis really essential to bring certain architectural tensions with regard to convergence to light? Were the signals coming from those who knew about the weaknesses of the Eurosystem not enough?

In light of the analyses presented above with regard to the principle of operational decentralisation, we judge that the necessary reforms should focus on both rethinking the role of the ECB (so that it can be a true central bank) and creating a central fiscal authority for the Union capable of keeping the excesses of the fiscal and budgetary policies of the member states in check.

b) As for the strategic framework, a quantitative definition of price stability and a medium-term orientation were established as the mainstays of efforts to ensure the effectiveness of monetary policy.

b1)A quantitative definition of price stability was adopted by the Governing Council of the ECB in October 1998, and was confirmed and presented in May 2003. Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) close to 2% (but not above this limit) over the medium term. The goals of stabilising this margin were to make the strategy symmetrical and to achieve a correlation with the inflation differentials within the eurozone. The rule worked over the medium term, but over the long term, due to the widening gaps between rates of inflation, the strategy has lost substance (we say this because more than ten years have passed since the introduction of the single currency, making a long-term approach necessary).

b2)The medium-term orientation for the single monetary policy is based on a two-pronged approach: the economic approach (which examines circumstantial, economic and functional indicators relating to the main causes of inflation in the short term) and the monetary approach (which is based on a monetary explanation for long-term inflation).

Although the eurozone economies were characterised over the first few years by a high level of structural convergence, low inflation (close to 2%, i.e. 1.8-1.9%) and monetary and financial conditions which were favourable to economic activity, the global crisis of the past few years has shattered this state of affairs, highlighting the system’s inability to correct itself under its own steam.

Although there was (according to empirical analyses) growing economic homogeneity within the eurozone over the first few years (even though EMU did not display a uniform rate of growth for all member states), at present their situations are very diverse (growth, recession, stagnation).

Although the mechanisms for transmitting the single monetary policy indicated growing homogeneity in the responses of the member states’ economies to monetary policy impulses during the first few years of EMU, these mechanisms are now no longer as effective as they once were, and trigger extremely varied reactions from one member state to the next.

In light of the analysis of the strategic framework presented above, we conclude that it enabled monetary policy to be effective in a situation where there were changes that did not lead to any major imbalances (over the medium term). Against the background of the global crisis of the past few years, the situation has worsened, and the strategic framework has lost much of its substance.

We therefore conclude that the Eurosystem needs to be reformed in such a way as to guarantee that it will be effective and functional not only under normal conditions, but also when major imbalances occur.


When economic and social life proceeds normally, no one asks whether “miracles” (supernatural efforts) are necessary. But when signs of extreme economic and social phenomena appear (usually crises which trigger social unrest), many analysts, experts and commentators, be they informed or uninformed, scratch their heads, rack their brains and say that certain “miracles” are needed to resolve a situation, impasse or problem. At the same time, one or more persons capable of finding solutions to save the day are identified; such people (“enlightened minds”) have a clear vision of practical ways of breaking the deadlock and are able to offer true rescue plans.

Below, we shall attempt to ascertain whether the German economy has experienced miracles or whether German society has created or imported superior minds capable of finding solutions to crisis situations.

Instead of launching into a diatribe, we propose to begin by identifying the “miracle” (i.e. innovative ideas and perseverance in implementing them) that enabled Germany to get back on track after the First World War.

When we search for writings about the socio-economic and political consequences of the First World War, we find that Germany was a defeated, humiliated and demoralised country on the brink of collapse. However, Germany was able to get back on its feet quickly and play an important role in Europe’s subsequent development. Besides the consequences of losing the war, Germany also had to endure the outcomes of a disastrous economic policy. Furthermore, the post-war inflation, which came to be measured in trillions of marks, only made the socio-economic problems more acute.

Two things led to this hyperinflation: the plugging of budget deficits with loans from the bank of issue (the classic option) and Germany’s obligation to pay reparations to the victorious states (a political and economic factor). These reparations, which were imposed by the Dawes Plan,stirred up controversy among the Allies, but they continued to deepen the German crisis.

The agitation of that time motivated witnesses of the collapse in all aspects of socio-economic life to come up with ideas that would truly save Germany. The rescue plan, with currency as its centrepiece, proved to be innovative both in theory and in practice.

The creator of the German “miracle” was Karl Helferich (a professor and author of economic and monetary works), who based his solution on the circulation of money. This was because money was regarded as a factor inextricably linked to economic realities, on which the wellbeing of the entire social system depended. The rescue plan was based on the following rationale: since the German currency was experiencing hyperinflation, and the Reich’s economy was becoming increasingly affected and lacked a means of redress, only the creation of a healthy mark could solve the problem.

With the mark disgraced, the state and the bank of issue (the Reichsbank) had proven themselves to be incapable of managing the monetary system. The old Papiermark was no longer able to fulfil its main monetary functions (as a means of exchange and a means of saving) and was beyond reform.

The new currency (which was to circulate in parallel with the old currency, and was regarded as an exclusively domestic currency) needed to be capable of getting the economy going again. However, public confidence in the new currency hinged on two factors: strict control of the quantity of new marks put into circulation (in line with the economy’s actual needs) and material backing for issue. Since Germany had little gold in the 1920s, a middle course (between nominalism and metallism) was steered, insofar as the initiator attributed a value to back the new currency, but not in gold (the new currency was to lead, in that situation, to a gold-based currency).

The Rentenbank, which issued the new parallel currency (the Rentenmark), was created as an independent private institute. Its capital was held in equal amounts by agricultural and industrial professional corporations, separately from the Reichsbank (the new institute of issue was conceived in such a way that it would not affect the prerogatives of the old institute at all). Up until that time, no one had thought of taking the value of agricultural land, industrial companies and other privately-held property and using it as a guarantee for the issue of the new mark.

Since the new currency was created to plug the state’s budget deficits, avoiding the danger of new inflation on top of the existing inflation was a sensitive issue. By means of an unwritten rule, it was established that the conversion rate would be 1 billion Reichsmarks to 1 Rentenmark, which meant that the new mark’s stability would cause the old mark to be stable. The new monetary symbols were withdrawn from circulation through the repayment of loans in Rentenmarks, with the final time-limit for transactions being 10 years from that point.

To avoid the valuation of mortgaged property (for reasons of time and cost), each economic entity had to participate to a value equivalent to 4% of the war tax. The Rentenbank was authorised to issue bonds, each with a nominal value of 500 gold marks. Since the Rentenbank was authorised to grant loans to the German state, the German state had to undertake not to take out any more loans from the Reichsbank on the basis of treasury bills.

Although it ran into some political and intrinsic difficulties, the new mark scheme had an almost instant positive effect, and the German economy – which now had a healthy currency available to it – began showing ever-clearer signs of recovery. The main political difficulty encountered was the lack of political support for the project, while the intrinsic difficulties arose out of the fact that the new currency was backed by property rather than precious metal.

During the period when the last banknotes issued by the Rentenbank were to be withdrawn from circulation by law (the 1930s), the most implacable opponent of the new monetary order (Hjalmar Schacht, a campaigner for monetary orthodoxy, i.e. the gold standard) adopted a gold-based monetary system. This rapid turnaround revealed the first signs of an economic collapse. Seeking to save the currency, governments increasingly favoured a deflationary policy which exacerbated the economic crisis (culminating in the banking crisis of 1932). These were sufficient grounds for the creation of a new government headed by Adolf Hitler as Chancellor on 30 January 1933. Its first order of business was to build large networks of motorways – an investment which served not only an economic purpose, but also a geopolitical one. Since an enormous amount of funding (which was not supposed to trigger new inflationary effects) was necessary to realise this objective, it was decided that the Rentenbank (the special institute created by Helferich), which had been renamed, would be used. By contrast with the initial purposes for which this institute had been created (to finance consumption), the new institute was intended to finance investment.

In the context of a new regime taking power, we cannot neglect to mention a new situation which led to a sad experience for Romania, though it was notable for the originality of its solutions for Germany. The cornerstone of this new scenario was clearing agreements*. During the period when Romania was in the thrall of Hitler’s Germany, an agreement on the “settlement of payments between the German Empire and the Kingdom of Romania” was signed in 1935. This agreement stipulated that payments between Romania and Germany arising out of the exchange of goods and other state and private obligations would be made through bilateral clearing between the National Bank of Romania and the German Compensation Fund in Berlin. Under a clause inserted in 1940, the National Bank of Romania was obliged to pay exporters in Romania even if the amounts necessary to do so exceeded importers’ payments in lei. Since Germany under Hitler imported much more from Romania than it exported to it, by 1942 this obligation, which was initially limited to a given amount, no longer had any agreed maximum amount. The flow of Romanian goods to Germany, which was not matched by a corresponding flow from Germany to Romania, deprived the Romanian population of goods, leading to a rise in inflation (due to the increase in the supply of money in circulation) and a debt in marks owed to the Romanian National Bank by the German Compensation Fund which could not be called in. This debt represented a forced loan of goods granted to the German economy by the Romanian economy. In the middle of 1944, Romania’s balance under the Romanian-German clearing arrangement stood at 57.8 billion lei, or approximately a billion marks.

Although there were concerns and concrete plans to slow down the growth in the balance due to the unequal trade with Germany, Berlin rejected them or only made an outward show of accepting them. This was because, needless to say, the higher this balance was, the greater was the absorption of Romania’s wealth at no cost by Germany.

We shall now highlight another “miracle” strategy for getting Germany out of a crisis. In 1968, the West German mark crisis flared up (due in particular to the enormous surplus in the balance of payments, especially the balance of trade payments); in 1967, exports exceeded imports by 16.9 billion marks, and in 1968 the gap widened to 18.3 billion. This development was attributed to two economic and monetary factors: a) the transfer of West German capital from the arms industry to the manufacture of industrial equipment, and b) the sale of the West German mark at an exchange rate below its actual purchasing power (this undervaluation made West German goods more attractive to foreign buyers).

Although France, the UK and the USA were anxious to reduce West Germany’s competitiveness and suggested that the mark should be revalued (so that currency equivalence would be brought into line with the currency’s actual purchasing power), the West German government rejected this idea outright and instead came up with a strategy that served its own interests: implementing fiscal measures to reduce exports and boost imports. However, until this goal was achieved, speculators converted large amounts of currencies considered to be weaker (the French franc, the British pound and even US dollars) into West German marks in order to obtain a profit in proportion to the anticipated revaluation; this led to increased disruption of the money markets in western Europe.

Furthermore, the attempts to make economic gains from the devaluation of their own currencies (as in the case of the United Kingdom and France) became highly dangerous due to West German competition, which made the economies of the countries regarded as the victims less competitive.

Refusing to relinquish its monetary advantage (i.e. to agree to revaluation of its currency), the West German government proposed another original idea: devaluation of the French franc. The argument used to justify it was that the French franc was the weakest currency of all of the major capitalist powers. The French government’s rejection of this idea heightened the tensions and made the battle for hegemony fiercer. Although the two countries did implement the long-awaited monetary reforms (the French franc was devalued in 1969, and the West German mark was revalued subsequently), the conflicts highlighted the contradictions between the major capitalist powers and their desires to gain dominance by using their currencies to conquer markets and/or positions. Of course, it was Germany’s that was the least “ruffled”!

Our reasoning can be extended and analysed in the context of the current economic and social upheavals.

Although Greece is currently the focus of attention within the eurozone (with a range of scenarios having been worked out as to how it can recover from the crisis), it is just as important for us to analyse the situation of Germany and the way in which it is helping (as part of a system which was intended to be optimal) to solve the Eurosystem’s problems.

To make things more interesting, we challenge our readers to answer the following question: who are the spiritual creators of the European idea?

Germany’s need for raw materials and markets to sell to has given rise, from 1848 to the present day, to various models of European integration. In 1903, one of the most influential German associations, which was led by the German economic and political élite, under the aegis of the Central European Economic Association, came up with not only the idea of creating a European customs union (encompassing the Balkans) and the creation of a central European empire led by Germany, but also the clearing model. The fourth point of that programme mentions the permanent need for the study of integration9. This integrationist tool appears, even today, to be a good way of immunising politicians against social needs associated with European integration through the single currency. But what is the weak link in this monetary chain? Where does the law of this form of mechanics come from? The Eurosystem mechanism based on fixed rates stems from a monetary integration model devised by Walther Funk, the last president of the Reichsbank, and Emil Puhl10, its vice-president11. Puhl developed and encouraged a multilateral clearing system involving Germany and European countries.

The creation of various models of monetary cooperation in Europe from 1940 onwards, once war had broken out, enabled Germany to engage in an open dialogue without having to reveal its true intentions in an overly diplomatic tone. Germany’s acute need for currency in the wake of the Treaty of Versailles spurred experts at the Reichsbank to develop new models of monetary cooperation in Europe which did not rely on foreign currency. The clearing agreement model was a sound way of eliminating the problem of Germany’s chronic lack of foreign currency. A new form of European trade which would provide German industry with raw materials and a large market in which to sell without tapping into Germany’s foreign currency reserves, which were needed to pay war reparations, formed the basis of the new trade model. From the outset, Hjalmar Schacht, the president of the Reichsbank, recommended that Germany should try to establish clauses to override the agreement so that quantities smaller than the ones initially pledged could be delivered. It was an indirect form of lending with foreign commercial assets; at the same time, by obliging the national banks of the clearing partner countries to pay for exports in the national currency, even if importers’ payments in the national currency were much smaller (due to the reduction in the volume of German transfers), it also financed Germany indirectly.

As a result, clearing-related inflation was an integral part of the entire working model, and was perceived as an indirect means of taxing partner countries which directly impoverished the population.

Returning to the present day, we need to gain a clearer picture of what the Maastricht stability pact really is. Walther Funk said that the success of a European monetary system depends, first and foremost, on the setting of fixed exchange rates. As Funk said, only European trade based on fixed exchange rates could guarantee Germany a trade surplus, freeing the German economy from the currency depreciations of its trading partners. At the same time, Funk stressed that the fixed-rate model posed a risk of inflation to Germany, for which reason its partner countries had to adopt German stability criteria. These stability criteria, which are today known by the harmless name of the “Maastricht criteria”, take the form of a wide range of fiscal measures imposed on governments to reduce inflation and budget deficits.

In both the clearing model and the Eurosystem, fiscal instruments are central to the monetary sterilisation of a German trade surplus. Proceeding from the Reichsbank’s motto (the stability of German prices and wages is a good anchor for clearing partner countries), Funk also stated that such monetary cooperation could lead to a rise in prices in the partner countries, but not necessarily also a rise in living standards in these countries. Taking this line of argument further, Funk asserted that by this means, Germany would be assured of exclusivity in the supply of raw materials and agricultural produce from south-eastern Europe indefinitely. The price rises in the clearing partner countries, which were caused by the setting of prices which were favourable to Germany, had a significant impact on the economies of the partner countries and damaged long-standing trading relationships. The decrease in economic competitiveness led to an increase in clearing trade with Germany, thereby consolidating the dependency on the leader state.

But the price rises in the partner countries were not matched by comparable price rises in Germany. What do we see happening in the Eurosystem? Over the past few years, the price rises in countries such as Greece, Spain and Portugal have dented their economic competitiveness and damaged their trade balances. This effect is also being indirectly induced by a real-terms fall in German prices, which is a key aspect in the context of the current crisis. The expansion of German intra-Community trade has generated a German trade surplus. The Eurosystem model is a successor to the German model, because it is based not on the model of a monetary union involving substitution, but on fusion. The current architecture of the Eurosystem, which is based on a system of central national banks following the principle of decentralised operations, also allows for a policy of sterilising Germany’s trade surplus at the expense of Romanian, Greek, Spanish, Portuguese and Italian taxpayers.

1 Müller, Klaus-Peter (2007), Gemeinsamer EU-Finanzmarkt: Ein Weg mit vielen Etappen, in “Die Bank”, no. 3

2 Hans von Groeben and Jürgen Schwarze (2003), Kommentar zum Vertrag über die Europäische Union und zur Gründung der Europäischen Gemeinschaft, Art. 56, line 30, Baden-Baden

3 Ibid. (art. 56, line 12) and Klaus-Dieter Borchardt, Die rechtlichen Grundlagen der Europäischen Union

4 Fisahn, Andreas; Niggemeyer, Lars, Zum absehbaren Scheitern der Finanzmarkt-Regulierung, “Bremsklotz EU-Recht”

5 Bischoff, Joachim (2008), Criza financiară globală, Hamburg, “Informaţii politico-economice”, issue 7

6 Jörg Huffschmid (2002), Politische Ökonomie der Finanzmärkte, Hamburg, p. 268

7 Opinion of the ECB of 5 March 2009, published in the Official Journal of the European Union, 22.04.2009

8 Golban, R., Silaşi, G. (2009), Eurosistemul – o tensiune arhitecturală a convergenţei, Editura Economică, Bucharest

* Clearing is a method of compensating all debts and obligations of one country towards another. A (bilateral or multilateral) clearing agreement must clearly state certain details, such as: the date on which the agreement will enter into force, the length of time for which it will be valid, the responsible bodies representing each partner country, the method used (clearing with one or two accounts), the clearing currency, the payments permitted to be made by means of clearing, the requirements for granting technical credit, the arrangements for settling the final balance, and so on.

9 Wolf Julius, Ein mitteleuropäischer Wirtschaftsverein, in: Zeitschrift für Sozialwissenschaft (1903).

10 Entwurf zu einem Kurzreferat des Herrn Vizepräsident Puhl über das “multilaterale Clearing” für eine Presseveranstaltung (Auslandspresse) der Rechsregierung am 12.12.1940.

11 Walther Funk: “Neuaufbau der europäischen Wirtschaft”, Sitzung im Reichswirtschaftsministerium, 22. Juli 1940; Abschrift: Künftige europäische Währungsordnung. Zur Rede von Reichsminister Funk, in: NZZ 11.7.1944; Zum deutschen Plan einer intereuropäischen Clearinganleihe, in: NZZ 24.7.1944; Deutschland und die internationalen Währungspläne, in: NZZ 31.7.1944


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