France and the Politics of European Economic and Monetary Union

V. Caton

• Publisher: Palgrave Macmillan
• Year: 2015
• ISBN:
  9781137409171
• Topic: Politics & International Relations
• Subtopic: European Politics
• Index: Politics & International Relations

Why did France, with its strong sense of national identity, want to give up the Franc for the Euro? This book, by a former British diplomat in Paris, draws on new archive evidence to explore France's drive for European Economic and Monetary Union, and how unresolved Franco-German tensions over its design led to crisis.

Part I 1970–91

Engaging Germany, Modernising France: The Drive for a European Treaty on Economic and Monetary Union (EMU)

1

Introduction: Why Did France Want EMU?

It is not obvious why a country with such a strong sense of national identity as France should be so ardent an advocate of pooling sovereignty in a European Economic and Monetary Union (EMU). Like its UK neighbour, which by contrast opted to keep its national currency, France has been a major colonial power and has a long history of independent foreign policy. It still maintains its own currency zone with a number of former African colonies.

Moreover, unlike the UK, which openly prides itself on its ability to adapt its economy and financial markets to global competition and which moved quickly in the early 1980s to a relatively flexible labour market, France maintained a relatively closed and inflexible domestic economy until the late 1980s. Even now, after several decades of partial and full privatisation, state shareholdings in French domestic enterprises are proportionally higher than elsewhere in the European Union.

The differences in attitude between the two countries are essentially political and come down to their different experiences, not only of World War II (1939–45), but also of the breakdown, in the early 1970s, of the stable post-war economic order which had helped both countries to recover. The majority political support which, after a decade of declining UK competitiveness, Prime Minister Margaret Thatcher was able to forge, in the early 1980s, behind the radical supply-side reforms needed to cope with an open economy did not then exist in France.

On the contrary, the state interventionist ‘exceptional’ French economic model still commanded the strong domestic support it had enjoyed since the end of the Second World War. At that time, it reflected the needs of a generation emerging from the humiliations of wartime occupation to rebuild the country’s devastated infrastructure and its sense of national pride. Nationally owned companies like the electricity giant EDF, Air France and SNCF (French Railways) proved successful in galvanising and organising workforces to deliver national reconstruction. Prestigious state academies (les Grandes Écoles) for civil servants and engineers provided high quality managers who passed seamlessly between government Ministries and strategic industries. They placed France at the forefront of modern technology through 30 years of uninterrupted post-war growth up to the mid-1970s, known as the Trente Glorieuses.

Of course, French attachment to a strong, centralised state runs much deeper, back through Napoleonic times all the way to Louis XIV and Colbert. It has long been associated in French popular perception not with bureaucratic interference and the curtailment of individual liberties, as it tends to be in the UK or US, but with fairness, social justice and equal treatment of citizens across a highly diverse country. The alternative to a strong state was – and still generally is – seen to be petty corruption, trafficking of influence, inequality and injustice.

Since French public opinion is – between revolutions – profoundly conservative, there is little doubt that, were the economic model of the Trente Glorieuses still available today, it would continue to command solid political support on left and right alike.

But by the mid-1970s, the conditions which had made France’s post-war model viable no longer existed. The final demise in 1973 of the US-brokered international monetary system, known as the ‘Bretton Woods system’¹, leaving the dollar and other currencies to compete in an unstable relationship of fluctuating values, dramatically changed the international economic environment. For France, it spelled the end of an uninterrupted period of economic recovery and rising prosperity. Unable rapidly to adapt the country’s economy to such a sudden change without putting its political stability at risk, French leaders looked instead for a new way of restoring a stable monetary environment.

External monetary drivers for EMU

Why was monetary stability so important to France? The earliest French advocates of European economic and monetary co-operation harked back beyond Bretton Woods to the international gold standard of the late nineteenth century, a period of rapid industrial growth and rising prosperity in France, as elsewhere in Europe. They were in large part motivated by the desire to stimulate France’s economic recovery from war by creating a similarly stable external environment for French trade. By pegging currencies to gold, they hoped to maintain steady prices, encourage investment and minimise the opportunity for France’s trade competitors to seek a competitive advantage by devaluing their currency.

The French regarded a peg to gold as more advantageous to them than the Bretton Woods system, which the US had established in 1944 at a time when France, devastated by war and occupation, had been unable to play an active part in the negotiations. Under Bretton Woods, European and other currencies were pegged to the dollar, which in turn was pegged to gold. The French saw this as giving the US unilateral control over the world’s money supply and a disproportionate competitive advantage in the dollar’s status as dominant global currency for trade and investment. Initially, though, as US dollars flowed around the world, trade soared and the French economy benefitted from US Marshall Aid, the new monetary system brought stability and helped growth and recovery.

By the late 1960s, however, Bretton Woods had become increasingly fragile as the German economy boomed and the US economy struggled to cope with a large budget deficit and the costs of the Vietnam War, putting the US peg to gold and the dollar’s parity to the deutschmark under severe strain. France began to explore ideas for a European EMU as an alternative to Bretton Woods. In 1969, at a Summit in The Hague, European leaders adopted EMU as a formal goal. The first blueprint on how to achieve such a union, the 1970 Werner Report, drew on French ideas, especially those developed in the late 1960s by the economics professor (later Prime Minister), Raymond Barre, while serving in the European Commission. It proposed the creation in three stages, over ten years, of a common European currency, underpinned by a centrally managed fund pooling reserves from its member countries and centrally agreed frameworks for national budgets.

Unfortunately for France, most other European partners were sceptical that the proposal could be made to work. The Germans in particular disliked the idea of creating an alternative to the deutschmark. Their country had been deeply scarred by the experience in the 1920s of currency hyper-inflation which had destroyed the value of savings, ruined lives and contributed to the war. Since the end of the war, Germany’s central bank, the Bundesbank, had made building a strong, stable currency its top priority. Underpinned by Germany’s rapid industrial recovery, it had by the late 1960s succeeded. This was a matter of great national pride and an achievement which Germany would not lightly put at risk. The Werner Report’s proposal to support a common European currency through a pooled reserve fund was especially anathema to the Germans, who foresaw great risk that some countries would spend irresponsibly and then expect German savers to bail them out. The Werner-Barre vision remained just that.

France’s monetary problems were soon compounded by the final breakdown of Bretton Woods. Ironically, it was France’s President de Gaulle who had earlier helped to precipitate its eventual downfall² by insisting on France’s right to redeem its dollars for gold at a time when it was clear that the US no longer had enough gold reserves to justify the dollar’s peg. Equally, the US had done nothing to cut its own spending to defend the dollar, nor would it countenance devaluation of its currency. Something had to give.

In May 1971, under the pressure of speculative flows of money relentlessly driving up the value of the deutschmark against the dollar, Germany decided it had no option but to let the deutschmark float. Soon after, France sent a battleship to take home French gold from the US Federal Bank’s vaults. In August 1971, President Richard Nixon announced that the US would no longer exchange foreign-held dollars for gold. His Treasury Secretary, John Connally, brutally told Europeans that the dollar was ‘our currency, but your problem’.

France found itself particularly ill-equipped to cope with the resulting global financial turbulence. Under Bretton Woods, which had maintained a system of capital controls between countries, there had been limitations on the scope for currency speculation. In the 1970s, that began to change as currency traders began to find ways around capital controls to make gains from fluctuating exchange rates. The growth of the eurodollar market, the forced German decision to allow the deutschmark to float upwards, combined with increasingly large and unpredictable capital flows between the dollar and the deutschmark, all increased the strain on the French economy and the practical difficulties involved in managing the European Economic Community (EEC)’s common policies. Most importantly for France, compensation payments for politically powerful French farmers under the EEC’s Common Agricultural Policy were adversely affected by the impact on the deutschmark of inward capital flows, requiring complex readjustment negotiations. The absence of a stable monetary system thus threatened to disrupt what was then the EEC’s most important common policy and would make it difficult to develop new European policies.

Eventually, the Germans agreed to French demands for closer European currency co-operation. In April 1972, the ‘Basle Agreement’ set up an ingenious system known as the ‘Snake in the Tunnel’, which allowed European countries to limit the fluctuations of their currencies against each other, while also allowing them to continue to float against the dollar within the margins which had already been set by the US-brokered December 1971 ’Smithsonian Agreement’ (so named after the Smithsonian Institute in Washington where it had been agreed in a last-ditch attempt to salvage some elements of Bretton Woods).

The respite was short-lived. Nixon’s decision in March 1973 to float the dollar broke the Smithsonian Agreement and marked the end of US-led global efforts to stabilise exchange rates. This, combined with sharply rising oil prices and German anti-inflationary measures, rapidly made the franc-deutschmark parity unsustainable. Under the ‘Snake’ system, the franc, as the weakest currency, had to make all the effort to defend itself, rather than parities being defended collectively. The franc came under repeated pressure, leading to a series of costly and humiliating currency crises. In January 1974, France was forced to withdraw from the Snake. It re-entered in 1975 and left again in 1976.

The French economy was highly vulnerable to dollar movements: a sharp upturn fed inflation through higher commodity prices which stoked wage demands, while a downturn sparked capital flows into the deutschmark, which strained the franc-deutschmark parity and damaged French exports. France repeatedly found itself caught in the crossfire between US and German monetary policy and destabilised by the transatlantic flows of speculative ‘hot money’ which followed each decision by the US Federal Bank or by the German Bundesbank. Although partial capital controls were still in place, they became increasingly ineffectual as financial markets grew and became more adept at circumventing the rules. In the chaotic conditions of the late 1970s, as the franc lost credibility and value against the deutschmark and volatility returned to the oil market, inflation in France rose steadily, reaching just under 14 per cent by 1981.

In April 1979, on the initiative of French President Valéry Giscard d’Estaing and German Chancellor Helmut Schmidt, the European Monetary System (EMS) was set up, creating a new common currency, the ‘European Currency Unit’ (known as the ECU, which to French ears sounded pleasingly like the ‘écu’, a medieval French coin first minted in gold in the reign of Louis IX), based on a basket of European currencies. From a French perspective, the EMS had the advantage of offering improved collective financial mechanisms for defending parities. The currency which showed greatest divergence from the ECU rate, rather than as previously the weakest currency, was in the front line of defending the parity (i.e. if the deutschmark rose sharply above the ECU rate, the Germans would now have to take action rather than the weaker currencies). The EMS gradually helped to inject some stability into the French economy as currency realignments became less frequent (six from 1979 to 1982; five from 1983 to January 1987; just one from February 1987 to September 1992).

Overall, though, the franc lost around two-thirds of its value against the deutschmark between 1973 and the final fixing of exchange rates between ECU basket currencies under the first phase of EMU in November 1993.³

This chronic weakness of the franc over a long period meant that the French public had relatively little emotional attachment to it.

At the political level, the franc’s weakness was seen to place France in the humiliating position of demandeur, perpetually requesting realignments within the EMS, which in turn gave the strong currency countries, and Germany in particular, the whip hand in running the system. The internationally respected German Bundesbank became the de facto money manager of Europe, although, as the French were keenly aware, its decision-making remit related only to German economic interests. Weaker EMS currencies like the franc were repeatedly forced to adopt higher interest rates than were appropriate for their economies, which depressed growth and job creation. By contrast, the EMS served to lock in Germany’s competitive advantage by keeping the deutschmark undervalued in real terms between realignments.⁴ Since each realignment of currencies within the Exchange Rate Mechanism (ERM) of the EMS involved a painful negotiation and carried a high political cost, French governments inevitably kept this as a last resort. As a result, Germany made significant gains in market share in Europe throughout the period when the EMS was in operation.

The experience of these years fuelled the French desire to replace the halfway house approach of the EMS with a more ambitious single currency system. Full EMU came to be regarded by the French political elite, not as a ceding of national sovereignty, but rather as an opportunity to gain greater control of economic and monetary policy-making by binding Germany into shared European structures and circumventing the power of the Bundesbank. The aim was that far-reaching decisions now taken by unelected Bundesbank officials in the interests of Germany alone would, in future, be taken by Europeans jointly, at a political level.

A successful European single currency also offered the prospect of reducing France’s vulnerability to fast-growing speculative capital movements and, ultimately, of challenging the international supremacy of the dollar. This was a prime French objective. Indeed, re-establishing international monetary stability was at least as important to France as promoting economic and monetary integration on a European basis. Throughout the late 1970s and the 1980s, the French repeatedly attempted, through the Group of Seven (G7) wealthiest developed countries, to broker with the US a new multilateral system of managed exchanged rates. Their inability unilaterally to persuade the US to accept a shared global system to manage currencies, and the repeated breakdown of informal international efforts by monetary authorities to mitigate currency volatility, were major factors in convincing them of the need for European economic and monetary integration. They saw a European currency union, with Germany and France at its heart, as the only structure which could offer at least regional currency stability, as well as creating an entity capable of negotiating seriously with the US on global financial governance.

Economic and political drivers for EMU

There were also domestic economic and political reasons why the French leadership decided in favour of European EMU. Despite France’s drastically reduced international room for manoeuvre after the end of Bretton Woods, French public opinion continued to hanker after a strong interventionist (volontariste) state that was capable of independent action to maintain France’s key industries and its social model. The political effect of sharp dollar depreciation and rising oil prices in the 1970s was to provoke repeated resurgences of latent anti-Americanism and prote...

Table of contents

• Cover
• Title
• Part I  1970—91
• Part II  1992—2014
• Notes
• Select Bibliography and Further Reading
• Index