Europe’s forthcoming currency was almost aborted by committee

BERLIN – A five-minute toast, then off to the airport. When Europe’s central bank governors signed the April 1989 Delors Report on economic and monetary union the celebration was muted. Few believed the plan would see the light of ay. The general attitude was that EMU was not something that would happen in our lifetime, recalled Erik Hoffmeyer, former governor of Denmark’s central bank and a self-confessed EMU skeptic at the time. My judgment was that differences between France and Germany were so big that it was highly improbable that it would materialize, he added. The fact that the report, named after then European Commission President Jacques Delors, was translated into the 1991 Maastricht treaty, complete with dates and deadlines, undoubtedly owes much to the dynamic for European integration created by the dramatic end to the Cold War in the autumn of 1989. But 12 years on, the report still reveals the origins of the tension between fiscal and monetary policy that, just weeks before the launch of euro notes and coins, continues to haunt the currency union that started in 1999. Early disagreement The idea for the report was launched in January 1988 at the start of Germany’s six-month presidency of the then-European Community by foreign minister Hans-Dietrich Genscher. Genscher envisaged a group composed of academics and politicians, but Delors and then-German Chancellor Helmut Kohl agreed that central bankers should take the lead, realizing that without their backing any report would lack credibility. Upon learning the news, Bundesbank President Karl Otto Pohl was said to have been furious. Pohl felt cheated by Delors and the politicians. He did not like the idea of a commission person as chairman. But on the other hand Delors was ready to give in to German views to a certain extent, so that Pohl could not criticize very much, said Hoffmeyer. The 19 committee members met at the Bank for International Settlements in Basel, so as not to offend the governors who were wary of the intentions of the European Commission in Brussels. They did not want to put it at the commission. Delors accepted this and without opposition. In a sense he welcomed it… because he was an excellent political manipulator, said then-BIS General Manager Alexandre Lamfalussy, one of the outside experts on the committee. At their first meeting in September 1988 the committee agreed to work backward from a blueprint of what a European System of Central Banks (ESCB) should look like. Bundesbank diktat Pohl pre-empted the debate, presenting the meeting with what amounted to a Bundesbank diktat on what the future ESCB should look like. These things were accepted but the rest was extraordinarily messy, Lamfalussy said. According to committee members, there were heated discussions about the transition stages to EMU and technical issues, such as the role of the European Currency Unit. Some of us were worried about talking only about the future… but it’s turned out all right, said Niels Thygesen, who then as now is Professor of Economics at the University of Copenhagen. The hope of the future worked as a substitute for a more detailed transition plan. Like the Maastricht treaty that came later and the 1971 Werner report that preceded it, the Delors proposal was to create a monetary union in three stages, mapping out steps to be taken in each. However, it did not lay down a timetable. It was a compromise between those who felt you need convergence before you jump and others who felt that if you set up institutions they will ensure you get a degree of convergence, said BIS Secretary-General Guenter Baer, one of two official notetakers along with European Central Bank board member Tommaso Padoa-Schioppa. Some observers amazed Baer said he was personally amazed when the Maastricht treaty negotiators did introduce dates. At the time I thought it rather unlikely (the report) would be translated into a treaty change or even be implemented. Hoffmeyer said he and others, such as Pierre Jaans, then head of Luxembourg’s monetary institute, believed the issue of fiscal policy coordination was swept under the carpet. Many members believed financial markets alone would not sanction lax budgetary policies, but a majority also did not back creating an economic government opposite the central bank, an option favored by Delors and some others. The report recommended that finance ministers in the second stage set precise, although not yet binding rules on the size of budget deficits. In the final stage, the report said, the rules should become binding, but to what extent was left vague. Perhaps surprisingly, the report did not recommend any numerical limit on deficits and committee members said one was not even discussed. The now infamous ceiling of 3 percent of gross domestic product was a product of the later treaty negotiations. Abrupt end The tensions over fiscal policy and other arguments over the tone of the report nearly brought the work to an abrupt end in February 1989. We had a bit of a crisis. Like a couple a few days before getting married, all of a sudden there were doubts, Baer said. The report became too rosy in the sense that it mentioned quite a lot of advantages of EMU and became too positive on EMU. Some of us felt it should be a technical report and not a report which recommended an EMU, so it was re-written so it could be accepted by all members, including the British, said Hoffmeyer. The report fell against the backdrop of intense debates in Britain over the country’s role in the EC, sparked by a speech by prime minister Margaret Thatcher at the College of Europe at Bruges in September 1988, and exchange rate policy. Current ECB President Wim Duisenberg, then-governor of the Dutch central bank, was seen by most on the committee as part of the skeptical camp, led by Pohl, Hoffmeyer and Jaans. Nonetheless, one committee member recalled that Duisenberg played a crucial role in drafting the final part of the report that called for work on EMU to continue at government level. Looking back, committee members, even Hoffmeyer, are almost universally surprised by how well monetary union has worked, but did not rule out the fault line between decentralized fiscal policy and centralized monetary policy becoming more apparent should an economic downturn after the September 11 attacks in the United States start to push up unemployment. On the whole the framework has worked, maybe because of lucky circumstances, said Thygesen. We have not had any crises.

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