1. The Joint Committee has considered the Commission’s communications to the Council on the prospect of economic and monetary union [Com (77) 620 of 17th November, 1977], on the economic and monetary action programme for 1978 [Com (78) 52 of 14th February, 1978], and on improving the co-ordiation of national economic policies [Com (77) 443 of 5th October, 1977].
2. The Commission’s proposals recall earlier efforts by the Community to progress towards economic and monetary union [EMU]. Accordingly in Part I of this report reference is made to the original programme for EMU and to a number of important relevant reports. Part I concludes with a summary of the Commission’s recent proposals.
3. The Commission’s proposals range over practically the whole area of the Common Market and it is not possible to deal with all of them in the context of a single report. The Joint Committee has decided to concentrate in this report on the monetary aspects of EMU. Part II of the report deals with this topic. In Part III of the report reference is made to some implications for Ireland.
4. At the Summit Conference on 1/2 December, 1969 at The Hague, the Heads of State and Government of the Member States agreed that “a plan by stages should be drawn up by the Council during 1970 with a view to the creation of an economic and monetary union”. On 6th March, 1970 the Council of Ministers appointed a group, comprising the Chairmen of the main economic and monetary committees of the Community under the Chairmanship of Mr. Pierre Werner, then Prime Minister of Luxembourg, “to prepare a report making it possible to identify the basic issues for a realisation of stages of economic and monetary union in the Community”.
5. The Werner Report published in October, 1970 envisaged complete economic and monetary unification being accomplished in three stages over a ten-year period. The recommendations made in the Report which were adopted as targets by the Council in March, 1971, were
(i)the complete and irreversible convertibility of the various currencies, the elimination of exchange rate fluctuation margins, the irrevocable pegging of parities—these measures to lead finally to a single common currency,
(ii)the abolition of all restrictions imposed on movements of capital within the Community, and
(iii)the co-ordination of economic policies.
6. Acting on the Werner Report the Council adopted a three year programme of action to run from 1st January, 1971. This programme covered economic, monetary and regional policies as well as policies relating to capital movements and tax harmonisation, all elements indispensable to the achievement of EMU. Although machinery aimed at the co-ordination of short-term economic policies was established, it did not, in the event, result in the envisaged degree of harmonisation of economic policies of the Member States. Liberalisation of capital movements suffered a setback as restrictions on the free movement of capital were reintroduced. There was little progress on tax harmonisation and the formulation of regional and structural policies. Some progress was made on the monetary front. A Community exchange system involving a narrowing of fluctuation margins for exchange rates between Community currencies (the “snake”) was established in April, 1972, and the European Monetary Cooperation Fund (EMCF) was set up in April, 1973. Schemes for the provision of financial aid to Member States with short-term or medium-term balance-of-payments problems were also implemented.
7. The second stage which was due to commence on 1st January, 1974 was postponed because of lack of agreement on regional and other structural policies. At the time the economic situation was not favourable. The international monetary crises of the early 1970s had led to floating exchange rates, and the oil crisis followed soon afterwards.
8. At the beginning of 1974, the European Commission asked a group of experts in different scientific fields to draw up a study on EMU. The group met under the Chairmanship of Mr. Marjolin, former Vice-President of the Commission, in charge of economic and monetary affairs. The Report on European Union produced in March, 1975 highlighted other causes for the lack of progress towards EMU. There was a weakening of political will and insufficient understanding of what EMU entailed and what was necessary for its achievement.
Tindemans Report on EMU
9. At the EEC Summit meeting in Paris on 9/10 December, 1974, Mr. Leo Tindemans, Prime Minister of Belgium, was asked to prepare a Report before the end of 1975 on European Union. In his report Mr. Tindemans concluded that no real progress could be made if it were insisted that all stages of progressive co-ordination of policies should be reached at the same time by all the Member States. Those States which were able to progress had a duty to forge ahead. The other Member States should receive whatever help the more advanced States could afford to give them towards catching up. Mr. Tindemans emphasised that this approach did not mean a “two-tier Europe”; each country would be bound by common agreement as to the final objective and only the time-scales for achievement would vary.
10. The suggested programme of action for those countries able to move towards EMU was based on a consolidation of the “snake” and an extension of its arrangements. As far as the remaining countries were concerned, Mr. Tindemans did not offer a specific programme of action. He stated that measures should be devised to help them to join the “snake” but that the appropriate measures might vary between countries; regional, social, industrial and agricultural policies should all contribute. On regional policy, Mr. Tindemans said that “it must necessarily involve a net transfer of resources from the most prosperous areas of the Community to the less favoured areas”. A significant statement was that the regional policy would “have to expand gradually in step with progress made in aligning the economic and monetary policies of the member countries”. He appeared to view the extension of regional policy as a corollary of progress towards EMU rather than as a precondition for such progress.
11. The Tindemans proposals on EMU were strongly criticised by the then President of the Commission, Mr. Ortoli. His view was that they would aggravate the structural differences between Member States rather than fulfil the Community’s aim of gradually eliminating them. Mr. Tindeman’s reaction was that whenever a Member State was authorised not to implement immediately all its commitments, the European Council would simultaneously decide what aid should be granted to the Member State to enable it to fulfil them; the non-fulfilment of commitments would be strictly temporary.
President Jenkins’ Speech on Monetary Union
12. On 27th October, 1977 President Jenkins renewed the debate on monetary union in a speech made in Florence outlining the advantages of such a union in dealing with the problems of unemployment, inflation and international financing. He advanced seven arguments in favour of monetary union, namely:
(i)Monetary union favours a more efficient and developed rationalisation of industry and commerce than is possible under a customs union alone. Exchange rate risks and inflation uncertainties make it impossible to plan a rational European dimension to enterprises.
(ii)The advantages of creating a major new international currency backed by the economic spread and strength of the Community. The benefits of a European currency as a joint and alternative pillar of the world monetary system would be great, and made still more necessary by the current problems of the dollar.
(iii)Monetary union would lead to a common rate of price movement and achieve a decisive break with the present chronic inflationary disorder.
(iv)Monetary union would change radically and for the better institutional weaknesses that have been hindering the ability to restore high employment in conditions of price stability and a sound external payments position.
(v)Monetary union would assist in the regional distribution of employment and economic welfare in Europe. The weak regions of the Community must have a convincing insurance against the fear that monetary union would aggravate their economic difficulties. The strong regions must for their part have a counterpart in terms of more stable, secure and prosperous markets.
(vi)Financial policies are needed that will help support the integration of the European economy and the maintenance of regional policy.
(vii)Monetary union stands on offer as a vehicle for European political integration.
Commission’s Communication on EMU
13. The Commission in its communication of 17th November, 1977 calls for a re-affirmation of the commitment to EMU. In the Commission’s view economic and monetary union and the process leading to it would in the short and medium terms contribute substantially to improving the employment situation, stabilising prices and contributing to international monetary stability. The Commission argues that it is essential to strengthen the cohesion of the Community in view of the expected accession of Spain, Portugal and Greece. The Commission proposes a five-year plan involving annual decisions on specific matters by the European Council. This would help maintain the political impetus which has been lacking in the past. The programme would be aimed at:
(1) Lasting Convergence of Economies of Member States.
The steps to be taken to achieve this, the prime objective of the programme, would comprise—
(i)increased co-ordination of short-term economic policies;
(ii)greater cohesion between European currencies, and
(iii)greater financial resources for the Community for the implementation of its regional, social, industrial and energy policies.
(2) Establishment of a Single Market.
The steps suggested are—
(i)harmonisation of taxes, particularly indirect taxes,
(ii)furthering the free movement of goods and services by harmonising and simplifying customs legislation, abolishing technical barriers to trade, opening Government tenders to genuine competition, facilitating activities by European firms, ensuring freedom to provide banking and insurance services, achieving freedom movement of capital, eliminating monetary compensation amounts and ensuring the full exercise of the right of establishment.
(3) Structural and Social Changes.
The Commission envisages greater Community involvment in influencing the changes necessary to secure growth and maintain competitiveness particularly in relation to (a) industries in difficulties, (b) growth industries, (c) energy policy, (d) public investment and (e) social policy.
14. In the monetary area, the Commission is proposing
—increased co-ordination of monetary and exchange rate policies setting individual objectives,
—a Community-wide exchange rate mechanism,
—a strengthening of the mutual aid schemes together with a strengthening of conditionality,
—an examination of the idea of a parallel currency,
—liberalisation of internal capital movements, and
—elimination of monetary compensatory amounts.
Action Programme for 1978
15. In regard to the increased convergence of economic policies, the Commission proposes that the Community in 1978 make substantial headway in monitoring achievements and divergences, strengthen the co-ordination of short-term economic policies, begin to work towards some measure of stabliziation of exchange rates between the snake currencies and other Community currencies with a view to more orderly exchange rate relationships at Community level, and set up a new Community borrowing and loan instrument to finance investment programmes of joint interest e.g. energy, industry and infrastructure work.
16. As regards the establishment of a single market the Commission is asking the Council to adopt in 1978 draft directives which are before it on co-operation between national customs authorities, harmonisation of procedures for the release of goods for free circulation, the simplification of the Community transit scheme, the removal of technical barriers to trade in industrial products and foodstuffs, the admission to official stock exchange quotation, action in the insurance field, tax harmonisation and company law.
17. Under the heading of structural and social policies the Commission proposes in 1978 the re-organisation of the steel, textiles and shipbuilding sectors, the carrying out of studies on the co-ordination of Community intervention, progress towards greater energy independence and the establishment of a common energy market, progress in agricultural structural policies, the adoption of an active regional policy, the provision of aid for the creation of jobs for young people, action on incomes and working conditions, improved social protection and more worker participation at company level.
Co-ordination of National Economic Policies
18. A Council Decision of 18th February, 1974 “on the attainment of a high degree of convergence of the economic policies of Member States of the European Economic Community” provides the legislative basis for the co-ordination of economic policies. This Communication of 5th October, 1977 from the Commission is concerned with ensuring a more satisfactory implementation of this Decision.
19. The Commission considers that, within the framework provided by the Council Decision of February, 1974, a more precise and coherent definition of economic policy objectives is needed. Better dovetailing of short-term economic policies into guidelines set out in the medium-term programme is proposed together with a more methodical review of progress based on Commission reports prepared for this purpose.
20. Adjustments are proposed in the budgetary, monetary and exchange-rate policy areas. It is proposed that quantitative guidelines relating to changes in a significant monetary aggregate for each of the Member States be fixed and published. The Committee of Governors of the Central Banks of the EEC and the Monetary Committee should be asked to speed up their work on the development of consultations on exchange-rate trends. It is proposed that the Council discuss regularly the implementation of exchange-rate guidelines and that the Commission be involved in the discussions of “snake” members.
21. The draft conclusions prepared by the Commission (but not adopted by the Council which is awaiting the views of the expert Committees) include the undertaking to set objectives for domestic monetary policy in quantitative terms. It has also been suggested that the Council invite the Committee of Governors and the Monetary Committee to report on the results of their consultations to date on exchange rates.
22. In his statement to the Dáil on 11th April, 1978 [O.R., Vol. 305, Cols. 342-343] dealing with the meeting of the European Council in Copenhagen on 7-8 April, 1978 the Taoiseach stated that the Council “felt that the endemic monetary instability of recent years had a large role in creating the problems from which we suffer”. It is widely believed that the search for monetary stability played a large part in the Council’s deliberations and it is not therefore unreasonable to anticipate that some concrete proposals in this area will emerge in the near future. According to press reports among the matters discussed by the Council were suggestions
(i)that the EEC should aim to create a new zone of monetary stability by including the pound sterling, lira and French franc in a new enlarged currency “snake”. The present “snake” (the joint float of the strong EEC currencies against the dollar) would continue unchanged, but the three weak currencies would be attached, although with wider margins of allowable fluctuation than the present snake’s 2-25%,
(ii)that the European Monetary Co-operation Fund should be greatly strengthened,
(iii)that in future, most interventions to support EEC currencies should be made in EEC currencies instead of dollars, the main currency used at present, and
(iv)that settlements between EEC central banks should be measured in European units of account. While the European unit of account is merely a notional unit, it would become a reserve currency like Special Drawing Rights.
23. The Joint Committee understands that plans are at present being examined in the Community which might give a new impetus to European monetary co-operation. These plans envisage retaining the “snake” in its present form while introducing some new mechanism which would associate other European currencies with it. In an interview published in L’ECHO DE LA BOURSE on 19th April, 1978 Mr. Jacques Van Ypersele, Chairman of the EEC Monetary Committee, having outlined certain ways in which this might be done dealt with the problem of what currency should be used for foreign exchange-market intervention by countries not in the “snake”. He suggested that the EMCF’s mechanism for granting short-term assistance which was currently used only for currencies within the “snake” should be enlarged to include the other EEC currencies. In his view EMCF credits should be repaid, at least to a certain extent, in a European monetary unit, equal to the European unit of account which represents a basket of EEC currencies. This unit would be issued by the EMCF and backed partly by gold deposits made by the Fund’s members.
24. The notion of a European monetary unit seems to the Joint Committee to raise a fundamental question about progress towards monetary union. If there is a genuine desire to move towards such union it would appear essential that some mechanism be adopted which cannot be altered by individual Member States in the interests of any one of them. Some commentators therefore have argued for the introduction of a parallel currency. Such an innovation would undoubtedly be seen as an irrevocable commitment to monetary union and as such could be expected to have a profound psychological effect on the Community. At a recent Round Table on Economic and Monetary Union held in Brussels which was organised by the Association for the Study of European Problems and which Senator Mulcahy of the Joint Committee attended, various projects for a parallel currency were discussed and it may be of interest to refer to a number of plans which have the backing of eminent economists.
“The All Saints’ Day Manifesto” and the “Europa”
25. “The All Saints’ Day Manifesto for European Monetary Union” was published in the Economist on 1st November, 1975 by nine prominent European economists. It advocated the creation of a parallel currency or “Europa” which would be European money of constant purchasing power. It would be issued by EEC central banks in accordance with a European monetary treaty and would be purchasable by nationals of EEC countries with their national money. The parallel currency would have a fixed purchasing power. According to the Manifesto, the mechanism for maintaining an inflation proof parallel currency or “Europa” would be to keep the prices level of a representative commodity basket constant in terms of “Europas”. The commodity basket can be defined as the weighted sum of the national commodity baskets used to calculate national consumer price indices. The weighting ought to reflect the relative share of each country in Community GNP, intra-Community trade, etc. The “Europa” itself would be expressed in terms of a (weighted) basket of national monies. Being issued against national monies only it would not add to the total Community stock of money. This, of course, would rule out the “Europa” being issued by means of the purchase of State Bonds, or by any other forms of granting credit. Citizens would be free to hold and use either the “Europa” or their national currency as a medium of exchange and to denominate contracts in terms of either the “Europa” or national currencies. The conversion price of the parallel currency expressed in national currencies, would increase proportionately to the inflation rates prevailing in the respective European countries. If the “Europa” eventually transplanted national currencies altogether and became the common currency of the Community, its supply, according to the Manifesto, should be controlled according to a steady non-inflationary growth rate.
European League of Economic Co-operation
26. The League is arguing that the time is now opportune for the adoption of a parallel currency as a practical step towards economic and monetary union. It would favour an “Europa” based like the European Unit of Account on a basket of EEC currencies. It envisages the “Europa” as an alternative to but not a replacement for the currencies, principally the dollar, used in international exchange. Eventually the “Europa” could be used in transactions with third countries including the OPEC states. The launching of the “Europa” would involve banking institutions allowing their customers to open accounts and settling debts in the new currency.
27. A project has been developed by the Société d’Economie Politique for a consortium of Eurobanks to put into circulation amongst themselves, on an experimental basis, a unit of payment called the Eurostable. The Eurostable would have the following characteristics:—
(a)It would be a unit of payment and not merely a unit of account. In other words it would be accepted directly in transactions and could be transferred, deposited and lent whereas a unit of account is merely a means of calculation for a payment that is made in national currency.
(b)It would be solely extraterritorial and would be used only for international transactions.
(c)It would have a constant purchasing power. It is envisaged as a composite currency equivalent to an aggregate of given quantities of several reference currencies, the initial amount of each such currency being modified every day according to the cost of living index of the country of issue. The conversion rate of the Eurostable into a third currency would be calculated each day by means of a formula that incorporates two sets of parameters, namely, cross exchange rates and the consumer price indices in the countries of the reference currencies.
Advantages of Parallel Currency Approach
28. In regard to the advantages of the Parallel Currency approach the Joint Committee would like to refer to the views of Dr. Roland Vaubel, Kiel University. Dr. Vaubel regards the parallel currency approach as possessing at least nine characteristics of an optimal currency unification process. In his view the parallel currency approach
(i)operates without foreign exchange interventions and without the hazards of international ex-ante agreements on national rates of money supply growth,
(ii)it triggers an automatic mechanism which works without political discretion,
(iii)it provides a common standard of value, means of payment and store of value at a very early stage, thus facilitating market integration while still leaving control over national monetary policies with the member governments,
(iv)it has all the political and economic advantages of gradualism,
(v)it permits the speed and pattern of currency unification to be determined by the needs of the market and the degree of money disillusionment,
(vi)it avoids the temporary unemployment created by the downward harmonisation of inflation rates under exchange rate unification,
(vii)it discourages competitive inflation and devaluation and makes it impossible for Governments to use inflation as a way of augumenting tax receipts,
(viii)it avoids national rivalries and hegemony, and
(ix)it gives the member governments a consistent incentive to accept and desire currency unification.
29. Also, Professor Bela Balassa in an article entitled “Monetary Arrangements in the European Common Market” which was published in December, 1976 in the Banca Nazionale del Lavoro said that a parallel currency such as a “Europa” would serve a variety of functions in the private and public domain: “(a) it would be used as a contractual unit of account, a means settlement, and a medium for holding working balances in private international transactions, capital and current; (b) it would be used in transactions between member country governments and the Community; (c) it would become a reserve and an intervention currency; and (d) it would serve as a numéraire in defining national exchange rates”. As regards the value of the parallel currency, Professor Balassa’s view was that it should be defined “as a weighted average of the currencies of the EEC member countries”.
Difficulties of a Parallel Currency
30. Various operational difficulties in regard to the parallel currency have of course been voiced to the Joint Committee, not least of which are the problems of (i) who would guarantee the constancy of the purchasing power of the parallel currency, (ii) the prospect of countries, whose currencies (initially the weaker currencies) would be converted into a parallel currency, losing control over their monetary policies, (iii) coping with the unemployment that could arise for countries with high inflation rates moving into a monetary union which implies an equalisation of inflation rates at a lower level than some have been accustomed to, (iv) the implications of whatever institution administers the parallel currency being free from political control, and (v) the existence of separate institutions responsible for the forumlation and implementation of monetary and economic/fiscal policies.
Alternative Approach to Parallel Currency
31. It has also been suggested to the Joint Committee that, apart from the parallel currency approach to monetary unification, any strategy that would have the effect of locking the participating countries’ exchange rates into some form of fixed or reasonably stable relationship would be more desirable. The advantage of any such strategy or strategies is that they would enable the participants, while co-ordinating their economic and monetary policies, to accept the disciplines of participation yet leave any country which is unable to accept the rigours of participation relatively free to opt out until such time as its problems have been rectified. It would seem therefore that rather than opt for a parallel currency approach, the practical and political implications of which have not been thought through as yet, the more realistic approach at this stage would be to seek to improve the co-ordination of economic policies to be linked with a move towards a “snake” type arrangement between all member countries’ currencies.
Implications of Monetary Union for Ireland
32. The point has been made that for all of the past 150 years we have been in a monetary union with Britain and for much of it in an economic union. However, Ireland can have little influence on British monetary institutions. At least in a European monetary union we would participate in the policy decisions. Moreover, it is reasonable to expect that monetary union would help to control inflation. On the other hand there are grounds for fearing that monetary union could aggravate existing regional im-balances within the Community. The tendency towards equalisation of costs could make it difficult for Irish industry to compete with those of more developed regions of the Community. Moreover, Ireland might find it much more difficult to compete for the capital investment which she so badly needs. The fear therefore is that monetary union might lead to more unemployment and emigration. In the Joint Committee’s view these dangers can only be faced if the Community is prepared to commit itself to a meaningful regional policy which will ensure a significant redistribution of resources from the richer to the poorer regions.
Debates in the Houses
33. In adopting this Report, the Joint Committee is anxious to generate debate on an issue which though it has lain dormant for many years must soon become the pivot on which the future of the Community will hinge. Accordingly, the Joint Committee requests that this Report be debated in the Houses. In this connection, the Joint Committee refers to the Order of Seanad Éireann on 3rd May, 1978 in the matter.
34. The Joint Committee wishes to acknowledge with thanks the invaluable assistance it received in considering the Commission’s communications from Professor David O’Mahony, University College Cork, Dr. Roland Vaubel, Kiel University, Mr. Brendan Dowling, Economic and Social Research Institute, the Irish Congress of Trade Unions and Messrs. George Reynolds and Pádraic O’Connor, Central Bank of Ireland.
35. Also, members of the Joint Committee who visited Brussels at the Commission’s invitation from 9th to 11th April, 1978 availed themselves of the opportunity to discuss the monetary aspects of EMU with officials of the Commission. The Joint Commission wishes to thank the Commission for the informative briefings provided.
(Signed) EOIN RYAN,
Vice-Chairman of the Joint Committee.
28th June, 1978.