Britain and the Origins of the European Monetary System

Abstract

Early in 1978 the Federal German Chancellor, Helmut Schmidt, decided to propose the creation in Europe of a zone of monetary stability. He was offended by the neglect of the United States dollar by the administration of President Carter and by the effect on German competitiveness. He resented the pressure brought to bear on the German Government by countries such as the USA and the UK. They, unable to manage their own economies successfully, were seeking relief from their problems in the expansion of the German economy. This, he considered, would be inflationary. Germany's enormous reserves and its current account surplus were evidence of successful economic management. The USA and the UK should try to emulate Germany, not attempt to persuade it to become a ‘locomotive’ and thereby follow their primrose path. The zone of monetary stability in Europe was to be his answer to American neglect and American pressure. How exactly it would fulfil the role of an answer was never explained. But politics has its own rationale not always fit for frank exposition. The zone would be created by the linking of European exchange rates in a fixed but adjustable relationship. If, as expected, the yoking of weaker currencies acted as lead in the Deutschmark's balloon and thereby safeguarded German competitiveness, that would be a bonus, for the Chancellor if not for the Bundesbank. The now defunct Bretton Woods system had had the same objective of monetary stability and, indeed, had succeeded in it for many years. One of the surviving Bretton Woods institutions was the International Monetary Fund (IMF). In the same way the European zone of monetary stability would have its Fund, a European Monetary Fund (EMF), equipped with reserves subscribed by member states. Its activities would no doubt resemble those of the IMF, strengthening the resolve of governments in embracing the paths of economic prudence, thereby helping to calm markets when they turned against one currency or another. No doubt it would also, like the IMF, give governments advice which would not always be welcome.