A Franco-German solution to the Eurozone debt crisis is expected to be announced today at the Brussels summit. The outcomes of Franco-German agreement provided the basis for European monetary cooperation, but how European can this solution be, given that it was devised by just two states for an entire continent? The fundamental EU principles of degressive representation, whereby large states are relatively under-represented and small states are relatively over-represented in EU decision-making bodies, have been consigned to history.
What was Sarkozy referring to when he recently spoke of Germany’s egotism with regard to the Eurozone? Politically correctly, we associate the EU with peace, and the euro with prosperity. However, the idea of monetary integration in Europe under German leadership is not as new as we might think. Since the Eurosystem is, despite the currency’s single name, not a classic monetary union whose architecture and structure obey the principles of optimal monetary union, we would do well to analyse the history of this hard-to-understand mechanism in greater depth.
Why did Keynes praise the governor of the Reichsbank?
When the German army defeated France in June 1940, many models for monetary cooperation in the occupied countries were developed. No less a person than John Maynard Keynes had the following to say about the governor of the Reichsbank in 1940: “The most definite of the German plans, so far, is the currency scheme of Dr. Funk.” Keynes added: “If Funk’s plan is taken at its face value, it is excellent.” These words of his about Walther Funk show us the relevance of the model for settling payments in Europe through the clearing mechanism developed in the Third Reich, but what does it have in common with the Eurosystem?
Of particular significance was Germany’s experience in Poland. According to a 1940 analysis by German experts of the new post-war monetary order in Europe (R 2501/7015), Germany needed to pursue a policy of increasing loans and the money supply in the occupied countries. High prices would be beneficial for German exports and an important means of deindustrializing the occupied countries. After the Reichsmark was introduced in Poland, the Reichsbank noted that this monetary policy had led to an inflationary backflow in Germany and decided to withdraw the Reichsmark from Poland, replacing it with a new zloty administered by Germany. This meant that an increase in loans and the money supply in Poland would affect only Poland’s economy and not Germany’s. The division of a monetary area and the creation of an economic model that elegantly separated the free movement of goods from the movement of capital represented a key development in European monetary cooperation.
The monetary experiments of the Third Reich
These plans were put into effect by Herbert Martini from the Reich Ministry of the Economy. Countries had to retain their national monetary institutions, which meant that they could continue to have different interest rates, but control over loan and monetary base policy would be exercised by Germany. According to the expert’s recommendation, the retention of a national bank would demonstrate a degree of independence in the foreign policy of countries, even though in reality they would be so closely bound up with Germany that they would be unable to exit the clearing system. The novel aspect here was the fact that an exchange rate between the Reichsmark and the currencies of the countries in the clearing mechanism would be set at a level that would boost German exports and, at the same time, make the economies of the countries concerned less competitive. A European trade system that provided raw materials for German industry and a sizeable outlet for sales without tapping into Germany’s currency reserves formed the basis of the new trade and currency model within the Berlin clearing union.
Another advantage of this model was that the cost of monetary administration for Germany would be cut, as it would be borne by the occupied countries alone. The current architecture of the Eurosystem is likewise based on a system of national central banks operating according to the principle of decentralized operations, known by the politically-correct term “branches of the ECB”, and the non-implementation of uniform interest rates.
As Walther Funk recommended, price inflation due to a German policy of increasing loans through the national banks of the occupied countries should be tackled by applying German stability criteria. Germany thus wanted to benefit from increased trade with the occupied countries without having to pay the costs that went along with it. As Funk stated in 1940, only a European trade system based on fixed exchange rates could give Germany a trade surplus and shield the Germany economy from the currency devaluations suffered by its trading partners.
In the past as nowadays, these stability criteria, which are today known by the inoffensive name of “Maastricht criteria”, took the form of a vast range of fiscal measures imposed on governments to curb inflation and public spending. In the case of both clearing payments (system of fixed exchange rates) and the Eurosystem through the loan policy, fiscal instruments are key factors for the monetary sterilization of a German trade surplus. Funk also believed that such monetary cooperation could preordain price rises in the affiliated countries without necessarily raising living standards within them.
Within the decentralized clearing mechanism, national banks were obliged to reimburse deliveries to Germany immediately by making payments to exporters. Since the introduction of the euro, German exports within the EU have risen by over 60%, while increases in production costs in the peripheral states have deindustrialized their economies and led to precipitous rises in unemployment. It is highly unlikely that these economies can now become competitive at the European level. The high real interest rate in the peripheral nations is making the investments necessary for their economic recovery more expensive.
As a result, there is nothing to stop us concluding that from a financial perspective, there is no difference between Germany’s modern-day trade surpluses and the surpluses that resulted from clearing transactions. Martini recommended this policy of monetary fusion (with fixed exchange rates) only for the countries occupied by Germany and not for the countries that would be integrated into Germany, such as Austria and Czechoslovakia. The Eurosystem model is a successor to the German model, as the latter was likewise based on fusion rather than on substitution-based monetary union.
The Reich’s monetary chiefs did not seek monetary union based on the Reichsmark (substitution) across the entire European economic area, because it could not combat the threat of inflation effectively. True monetary union was planned only for those countries that were to be integrated into Germany. Analysis of specialist material indicates that according to Göring’s plans for the countries integrated into Germany, the exchange rate would undervalue the Reichsmark with respect to the national currencies in order to guarantee that wages in Reichsmarks would rise instantly, increasing support for the invasion but simultaneously reducing economic competitiveness through an unfavourable exchange rate.
The rate of 1 schilling = 0.47 Reichsmarks increased the value of the schilling by 30% with respect to the last official rate. In the specialist literature, we find that national currencies in the Eurosystem, too, were overvalued when exchange rates vis-à-vis the euro were set. Converting wages into euros naturally boosts the consumption of imports, but it pushes production costs up and thereby makes an economy less competitive. In fact, this trend of overvaluation of the leu, as an ideal policy of national deindustrialization and job-shedding, is continuing in Romania, too. Seraphim, the head of the Osteuropa-Institut in Breslau (Wrocław), asserted in 1941 that on no account should Germany agree to growth of the electrical engineering and mechanical industry in south-east Europe; raw materials from the “Hinterland” should be processed solely by German industry, rather than at source.
How do we get out of the crisis?
Proposals for a new Marshall Plan for Europe should take account of this deficient historical system that underpins that Eurosystem. We must ask how equitable and fair Europe now is, if social tensions arose under the German aegis of monetary cooperation in the 1940s and are doing so again today. What future will the countries on Europe’s periphery have if the rate of youth unemployment in Spain, Portugal, Italy and Greece is close to 40%? What model can deliver sustainable economic growth? If clearing was such an inspiration for the Eurosystem, why not also the plans to boost German-European relations in line with the treaties entered into in the 1940s?
We have invoked the Treaty on the Promotion of German-Romanian Economic Relations of 23 March 1939 on countless occasions. This framework treaty, which Germany regarded as a model treaty for Europe, paved the way for Romania’s economy to be integrated into German production systems. The country’s economic subjugation through the creation of mixed state companies to produce, develop and deliver agricultural and forestry products and minerals constituted a special feature of the economic cooperation that was without precedent. The price of this was Romania’s deindustrialization in accordance with Göring’s Vierjahresplan and the creation of agricultural entities. Probably, neither Greece nor Spain will have any way of absorbing foreign capital and funds other than through treaties whose application will bypass sovereign state institutions, with German standards and requirements being applied directly.
Experts at the Südosteuropa-Gesellschaft (SOEG) concluded in 1942 that in the interests of Germany industry, it was better for the sovereignty of the south-eastern European states to be preserved, as this would make it easier to deindustrialize their economies, implement various policies and so on without wounding their national pride. Why not let Greece return to the drachma, devalue its currency and reduce its trade deficit? Is Germany afraid that other countries would follow suit and that within a short space of time, the redistribution of economic resources in Europe would no longer follow the road to Berlin? In a free economy, every country has the right to develop according to its own rules, to industrialize and to give its own citizens a decent standard of living, and in particular, to protect its own interests.
As new citizens of the EU, we make little distinction between integration and unification. Whereas unification leads to uniform living standards, the German model of integration means that the sovereign state is preserved on a fictional level, while social unrest is directed against not a specific enemy, but merely the extent of austerity.