Monetary Europe: unification or integration? What solution are we expecting from Paris and Berlin?

A Franco-German solution to the Eurozone debt crisis is expected to be announced today at the Brussels summit. The outcomes ofFranco-German agreementprovided 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 withprosperity.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 formonetary 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 wordsof his about Walther Funk show us the relevance of the model for settling paymentsin 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 andthe 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 thatan increase in loansandthe money supplyin Poland would affect only Poland’s economy and not Germany’s. The divisionof a monetaryareaand the creation of an economic model that elegantly separated the free movement of goods from the movement of capital represented akey developmentin European monetary cooperation.

  • The monetary experiments of the Third Reich

These plans were put into effect by Herbert Martinifrom 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 overloanandmonetary 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 inthe foreignpolicy of countries, even though in reality they would beso 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 mechanismwould 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 withouttapping intoGermany’s currency reserves formed the basis of the new trade and currency modelwithin the Berlin clearing union.
Another advantage of this model was that the cost ofmonetary 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 ofdecentralized operations, known by the politically-correct term“branches of the ECB”,and the non-implementation of uniforminterest rates.

As Walther Funk recommended, price inflationdue to a German policy of increasing loans through the national banks of the occupied countriesshould be tackled by applying German stability criteria. Germany thus wanted to benefit from increased trade with the occupied countries withouthaving 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 andshield 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 bothclearing payments (system of fixed exchange rates) andthe Eurosystem through theloan policy, fiscal instrumentsarekey factorsfor the monetarysterilizationofa German trade surplus. Funk also believed that such monetary cooperation couldpreordain price risesin theaffiliatedcountries without necessarily raising living standards within them.
Within thedecentralized clearing mechanism,national banks were obliged toreimburse deliveries to Germany immediatelyby making paymentsto exporters. Since the introduction of the euro,German exports within the EU have risen by over 60%, whileincreases in production costs in the peripheral states havedeindustrialized their economies and led to precipitous risesin unemployment. It is highly unlikely that these economies can now become competitiveat the European level. The highreal interest ratein the peripheral nations is making the investments necessary for their economic recovery more expensive.

As a result, there is nothing to stop usconcluding 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 forthe countries that would be integrated into Germany, such as Austria andCzechoslovakia. The Eurosystem model is a successor to the German model, as the latter was likewise based on fusion rather thanon substitution-based monetary union.
The Reich’s monetary chiefsdid 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 thataccording to Göring’s plans for the countries integrated into Germany, theexchange rate would undervalue the Reichsmark with respect tothe national currenciesin order to guarantee thatwagesin Reichsmarks would rise instantly, increasing support for the invasionbut simultaneously reducing economic competitiveness through an unfavourable exchange rate.
The rate of 1 schilling = 0.47 Reichsmarksincreased the value of the schilling by 30% with respect to the lastofficial rate. In the specialist literature, we findthat national currencies in the Eurosystem, too, were overvaluedwhen exchange ratesvis-à-vis the euro were set. Converting wages into euros naturally boosts the consumption ofimports, but it pushes production costs up and thereby makes an economy less competitive. In fact,this trend of overvaluationof the leu, as an ideal policyof national deindustrialization andjob-shedding, is continuing in Romania, too. Seraphim, the head of the Osteuropa-Institutin Breslau (Wrocław), asserted in 1941 that on no account should Germany agree to growthofthe electrical engineeringandmechanical industry in south-east Europe; raw materials from the“Hinterland” should be processed solelyby German industry, rather than at source.

  • How do we get out of the crisis?

Proposals for a new Marshall Plan for Europe shouldtake account of this deficienthistorical system that underpins that Eurosystem. We must ask how equitable and fair Europe now is, if social tensions arose under theGerman aegis of monetary cooperation in the 1940s andare 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 withthe treaties entered into in the 1940s?

We have invoked theTreaty on the Promotion of German-Romanian Economic Relationsof 23 March 1939 on countless occasions. This framework treaty, which Germany regarded as a model treatyfor Europe,paved the way for Romania’s economy to be integrated into German productionsystems. The country’s economic subjugation through the creation of mixed state companies to produce, develop and deliver agricultural and forestry productsand mineralsconstituted a special feature ofthe economic cooperationthat was without precedent. The price of this was Romania’s deindustrialization in accordance with Göring’sVierjahresplanand the creation ofagricultural entities. Probably, neither Greece nor Spainwill 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 theSüdosteuropa-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 withoutwounding 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 thatwithin a short space of time, the redistribution of economic resources in Europe would no longer follow the roadto 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.
Asnew 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 directedagainst not a specific enemy, but merely the extent ofausterity.