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Germany Germany and the European Union
https://photius.com/countries/germany/economy/germany_economy_germany_and_the_euro~1406.html
Sources: The Library of Congress Country Studies; CIA World Factbook
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    Kohl believed that it was important for a united Germany to have a firm anchor in the West, especially in a structure for West European and, later, European, integration (see European Union, ch. 8). He therefore played a major part in gaining Europe-wide approval of the Maastricht Treaty negotiated at the European Council summit in December 1991. He refused to be deterred after a first Danish referendum rejected the treaty, insisting that Germany proceed to ratification. The two houses of parliament, the Bundestag and Bundesrat, vindicated Kohl's position, approving the Maastricht Treaty by overwhelming majorities despite reservations in some Länder that it might undermine the German federal system by giving the EC and its European Commission greater powers over the separate Länder than even the Bonn government possessed.

    Germany also strongly supported the creation of the European Economic Area (EEA--see Glossary), established in 1993 to create a trade area consisting of the EC and most of the states of the European Free Trade Association (EFTA--see Glossary). It later advocated the entry of four EFTA members--Norway, Sweden, Finland, and Austria--into the EU. By the same token, Germany has favored developing close links between the EU and the East European states, although German farmers and steel manufacturers have joined other EU producers in seeking to block those East European imports that would be most competitive with their own output.

    During the entire process of creating a more integrated Europe, Kohl and Minister of Foreign Affairs Kinkel continuously stressed the German commitment to integration. Kohl has told the Bundestag that Germany's national future lies in Europe, and he has used every possible opportunity to point out that Germany's firmly anchored position within Europe has been mainly responsible for giving Germany peace, prosperity, and its chance at unification.

    Germany in the European Monetary System

    West Germany helped to start the European Monetary System (EMS) in the late 1970s and has long provided the anchor of its principal operating element, the European exchange-rate mechanism (ERM--see Glossary). It has exercised considerable and sometimes even dominant influence on the evolution of European monetary affairs. Nonetheless, the EMS was much more difficult for West Germany to propose or even to accept than the EC. Although much of West German business and government felt very much at home in the EC from the beginning, Germany had reasons to be much more anxious about monetary cooperation.

    The concepts of the EMS and the EU are very different, although they may be complementary, and they look especially different to Germans. A common trading area within Europe helps Germany to do what it does best: produce and export. Although Germans have had to open their own borders to others, they have always been confident about meeting such a challenge.

    Money, however, is something else again, especially in Germany. West Germany's strict monetary policy was seen by many West Germans as the guarantor of the Federal Republic's stability and prestige. Any West German political or economic debate assumed the solidity of the deutsche mark. European monetary cooperation could only be acceptable in West Germany if it jeopardized neither the deutsche mark nor the policy that had given the currency its success and had given West Germany its prosperity and domestic tranquillity.

    Many West Germans feared that European monetary cooperation would have a pernicious effect on West Germany's own money by posing a risk to the independence and integrity of West German financial and monetary policies. They believed, and not without reason, that many other states in Europe did not share West Germany's belief in monetary stability as the principal objective of financial policy. They looked with particular suspicion at Britain, Italy, and the smaller countries of southern Europe.

    The West German government and the Bundesbank tried, therefore, to ensure that no European monetary arrangement would interfere with West Germany's freedom to choose its monetary objectives and policies. They consistently tried to construct arrangements that would give them a dominant influence over European policy or, if that was impossible, would at least enable them to continue pursuing their traditional goals. The West German government and the Bundesbank did not always agree about what constituted satisfactory arrangements, however, with the bank usually being more cautious than the government. Nonetheless, West Germany helped to establish the system of European monetary cooperation and was among its main beneficiaries.

    A number of proposals for European monetary cooperation were advanced and discussed as the European Coal and Steel Community (ECSC) came into being in 1951, as other plans for West European cooperation were considered, and as the Bretton Woods system began to crumble in the 1960s. None came to fruition, but they provided some of the intellectual foundations for later efforts. It was only in 1972, after the collapse of the Bretton Woods system, that the first arrangement for true European coordination was put into place--the European narrow-margins agreement, which came to be known as the "snake" (see Germany in World Finance and in the Group of Seven, this ch.). West Germany helped to establish the system, a joint European float whose purpose was to ensure that European currencies would not fluctuate more against each other than against the United States dollar.

    The deutsche mark became the strongest currency in the snake. It remained at the top of the snake's trading range, in part because of West Germany's export surplus but especially because West German domestic monetary policy inspired confidence that the deutsche mark's value would be protected and might even rise against other currencies. Others soon learned that staying in the snake meant a commitment to emulate the policies of the Bundesbank or to suffer the exchange-rate consequences of any divergence. Because most countries could not do this, the snake had to be abandoned as a major international currency arrangement. But a truncated snake did survive, in part because some smaller countries were prepared and to some extent were obliged to follow the West German lead, and in part because, despite its imperfections, it offered a modicum of stability.

    As the 1970s drew to a close, there were debates about monetary policy in almost every European country. Whatever the imperfections of the snake, it was clear to many states that any port in a storm might be better than none. The oil shocks confronted Western states with pressures that paradoxically could be both recessionary and inflationary. Some countries, such as the United States, chose to counteract the recessionary pressures. Others, such as West Germany, chose to counteract the inflationary threats. Most European countries increasingly found the West German approach more congenial than that of the United States.

    The main debate in West Germany, as in several other large European countries, was between those who came to be known as the "monetarists" and those who came to be known as the "economists." The monetarists believed that introducing fixed exchange rates would force countries to pursue similar economic policies and that this would make interventions less necessary, and perhaps even unnecessary. The economists argued that common economic policies had to precede fixed exchange rates because the exchange-rate system would break down otherwise. They thought that a common currency should cap a structure of common policy, not help to build it.

    Most West German economists as well as government and Bundesbank officials belonged solidly in the economist camp. They did not want to join in any European monetary collaboration until European states had shown that they would coordinate economic policies. The experience with the snake, and the costly and frequent interventions that it had required before it finally broke down, only hardened their attitudes.

    It was against this background of deep skepticism that Chancellor Helmut Schmidt decided in 1978 and 1979 to cooperate with French president Valéry Giscard d'Estaing in creating the EMS. Because of opposition from the Bundesbank and the Ministry for Economics, Schmidt conducted the crucial initial phase of the negotiations in great secrecy, keeping them secret from the German bureaucracy and the Bundesbank.

    The EMS established not only a zone of monetary cooperation but also a European currency known as the European currency unit (ECU--see Glossary). It was designated to represent a basket of currencies from the EMS countries, to be used initially for certain clearing and credit transactions and ultimately as a common European currency. Deutsche marks became the largest element in the backing of the ECU.

    When the EMS and its companion, the ERM, were formally established on March 25, 1979, Schmidt's role committed Germany to their success. Thus, West Germans became involved in an area of European economic policy that was of the utmost sensitivity to them. They did not do so without some reservations. But they saw no alternative.

    The EMS and especially the ERM succeeded in making Western Europe something of a zone of stability around the deutsche mark. After a difficult beginning, marked by frequent currency realignments during the early and mid-1980s, the exchange rates of the ERM currencies were much more stable relative to each other than in relation to the United States dollar or the Japanese yen until 1992.

    However one might choose to allot credit for the success of the EMS and ERM, they represented both a theoretical setback and a practical triumph for the Bundesbank, because they showed that the monetarist school might well have been correct and that a stable ERM, accompanied by a commitment to hold to the agreed rates, could compel states and their central banks to pursue congruent policies as long as they were determined to stay within a system. The effectiveness of the EMS and ERM also suggested that a system of fixed exchange rates might act as a catalyst in facilitating policy because it would give states an additional reason to coordinate and could be said to provide a sanction if they failed to coordinate.

    It has often been said that the ERM represents a "deutsche-mark zone" within the EU. The deutsche mark has been the EU's lead currency, the principal intervention currency, the principal reserve currency, and its psychological as well as practical anchor.

    During the twelve years from the onset of the ERM to the Maastricht summit in 1991, the revaluation of the deutsche mark against other ERM currencies had been 38 percent (including 58 percent against the Italian lira and 45 percent against the French franc), but most of the revaluation had taken place early in that period, with the practice becoming much less common after the mid-1980s. At the end of the 1980s, it could be said that the ERM had been a considerable success for all the states involved. But it had mainly been a success for West Germany, demonstrating the benefits to others of associating themselves with West Germany's economic philosophy.

    The members of the EC decided even before the end of the 1980s to explore further monetary cooperation as the community advanced toward the single market. In June 1988, at the European Council meeting in Hanover, they established a commission chaired by the president of the European Commission, Jacques Delors, to study and propose "concrete stages leading toward economic and monetary union." Delors's report, submitted on April 17, 1989, envisaged a transition in three stages toward an EMU with a single common currency. The objectives of the first stage, to commence on July 1, 1990, were to expand the ERM to include all EC members, to permit free capital flows, and to take other measures toward coordinating economic and monetary policies. In the second stage, for which no starting date was then proposed, a European system of central banks would be created, leading to the formation of a single central bank. In the third stage, a single currency managed by a European central bank would be created, and even greater powers would be granted to the EC to establish common financial policies among its members.

    After the Delors Plan was announced, the West German government and the Bundesbank reacted cautiously, although both the Ministry of Finance and the Bundesbank had helped to draft the report. Having been pleased with the achievements of the ERM, the West Germans were prepared to examine an arrangement that would go further toward monetary union. But they were not ready to agree to anything that would upset what they regarded as the foundations of their own prosperity. The Bundesbank in particular wanted to make certain that any European system would reflect its own thinking.

    Data as of August 1995


    NOTE: The information regarding Germany on this page is re-published from The Library of Congress Country Studies and the CIA World Factbook. No claims are made regarding the accuracy of Germany Germany and the European Union information contained here. All suggestions for corrections of any errors about Germany Germany and the European Union should be addressed to the Library of Congress and the CIA.

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