By the early 1980s, the French economy had succumbed to the disastrous austerity imposed by the Barre Plan. Unemployment had risen sharply and the French people were in a mood for a change away from the conflictual politics and poor economic outcomes that had characterised the 1970s. The Socialist François Mitterrand was elected president on 10 May 1981, after more than two decades of the French left being excluded from office (ever since the establishment of the Fifth Republic in 1958). Five weeks later, the left backed up Mitterrand’s success by winning a majority of seats in the National Assembly in legislative elections. That set the stage for the formation of a government that (for the first time since 1947) also included Communist ministers. This inspired a widespread belief – as incredible as that may sound to us today – that France was headed for a radical break with capitalism. To appreciate this point, it is important to understand the context of the French left’s triumph in 1981. As we have seen, by the late 1970s and early 1980s the monetarists had already won some significant ideological and political battles against the post-war ‘Keynesian’ consensus – most notably in the US and UK. But the war was far from over, especially in continental Europe.
At that time, the old continent was still very much wedded to the ‘old’ post-war social-democratic consensus. Socialist/communist parties – notwithstanding a slide to the right among their ranks following a period of increased radicalisation up to the mid-1970s – still yielded significant political and electoral power (to give an idea, in the early 1980s the Italian Communist Party still regularly raked in about 30 per cent of the votes). Even though the balance of power had already started to shift away from labour towards capital, unions were still capable of paralysing economic activity through massive general strikes. Social and protest movements – not to mention various left-wing paramilitary organisation, such as the Red Brigades in Italy and the Rote Armee Fraktion in Germany – were sending shockwaves across the continent (barely over a decade had passed since May 1968, after all).
Most European countries (with the notable exception of Germany and a few others) still firmly believed in the need for capital controls and regulated financial markets. As a matter of fact, the need for capital controls was even ‘embedded’ in the EEC’s directives.1
This reflected the fact that in the early 1980s economic policy was still very much defined along national lines. Throughout the 1970s, national rivalries had led to a stagnation of the European integration process known as ‘eurosclerosis’. Economic problems, the slow pace of enlargement and a perceived lack of democracy meant that negative and apathetic attitudes to the EEC were high. The French, in particular, were reluctant to agree to any supranational authority – a consistent position that had hampered progress towards economic and monetary union since the inception of the idea. In general, globalisation was not yet seen as something inevitable and inescapable; there was still the belief that individual nations had the power to shape their own economic and political destinies – and even to challenge the capitalist system itself. Nothing exemplifies this better than Mitterrand’s victory in the spring of 1981.
The new president’s policy agenda embodied an ambitious reform programme, encapsulated in his campaign platform – the famous ‘110 Propositions for France’. Mitterrand came to power in the midst of a deep crisis of French capitalism. Confronted with rising unemployment (largely as a result of the previous government’s austerity policies), growing inflationary pressures, low productivity growth and stagnant business activity, the new president promised to take drastic measures to revive the French economy. As radical as it may seem to us today, Mitterrand’s manifesto was, in fact, a pretty straightforward programme of Keynesian economic reflation and redistribution. It proposed to fund research and develop innovative ways to fund small and medium businesses that struggled to gain working capital through conventional means; to create at least 150,000 jobs in the public sector as a vehicle for improving health services, education, the postal service and the efficiency of government; to reduce working hours to 35 hours per week; and to impose a solidarity tax on wealth to reduce inequality. Income support payments would also be increased.
It also proposed extensive nationalisations of France’s increasingly uncompetitive industrial conglomerates, in order to maintain employment levels and aid the process of economic reconstruction. In the context of French politics in the late 1970s, the government’s nationalisation plan was not as radical as it might appear in retrospect. Indeed, French capitalism had a long tradition of government planning and state-led economic growth. Essentially, Mitterrand’s nationalisation plan represented an attempt to revive and extend the post-war dirigiste model that the previous right-wing government had attempted to dismantle. The government also intended to subsidise economic activity through deficit spending, primarily through a major expansion of the welfare state. By implementing this platform, Mitterrand claimed, his government would precipitate a ‘rupture’ with capitalism, and lay the foundations for a ‘French road to socialism’. It’s easy to see why this represented a moment of immense hope not just for the French left, but for the entire European left – of the kind that Europe has not witnessed since.
By the end of 1982, overall public expenditure had risen by 11.4 per cent. The retirement age was lowered from 65 to 60. Meanwhile, minimum pensions were increased by 20 per cent and family allowances were raised by 25 per cent. The country’s statutory minimum wage (the SMIC) was increased by almost 40 per cent. Furthermore, government employment was expanded, with the government hiring 200,000 new civil servants. Union rights were expanded as well, notably through the 1982 Auroux Law, which required annual negotiations between employers and union representatives. Soon after the Mitterrand experiment began, however, it started to unravel. The president’s reflation efforts were hampered by a number of factors. First, capital started fleeing the country almost immediately – a sign that French capitalists and financial markets didn’t appreciate the government’s plan of economic reform and social redistribution. As Rawi E. Abdelal, professor of business administration at Harvard Business School, writes in his book Capital Rules:
The French government tightened its controls on outflows of capital first in May 1981, then again in March 1982, and by March 1983 the regulations were rewritten as restrictively as possible. Importers and exporters were not allowed forward exchange transactions, foreign travel allowances were further reduced, personal credit cards could not be used abroad, and the infamous carnet de change, a booklet in which the French were to record their foreign exchange transactions, was introduced. According to John Goodman and Louis Pauly, the new regulations amounted to ‘draconian capital controls’.2
However, the French government was unable to halt the flight of capital. At the same time, French capital also went on strike, refusing to invest in the economy. Meanwhile, France, at the start of the 1980s, was also confronted with a particularly unfavourable global economic environment. The French economy was still reeling from the effects of the second oil crisis (1979) and subsequent global recession, which had hammered France’s already-weakened industrial sector, crippling traditionally important industries like steel. Moreover, the effects of the recession were exacerbated by the US Treasury’s high interest rate policy. The shakeout from the Volcker shock had not only resulted in a severe decline in the US economy, but also in ripple effects throughout Western Europe. With the value of the dollar at an all-time high, officials in other countries quickly moved to deflate their own economies, in order to prevent their currencies from losing value relative to the dollar. In response to the US Federal Reserve Bank’s move, the Bundesbank also hiked interest rates in 1981 in an effort to stabilise the mark against the dollar, in what the press of the time described as ‘a punishing interest-rate war with the United States’.3 The effects of these deflationary policies were felt all over Europe, particularly in France, where Mitterrand’s reflationary policies exacerbated the downward pressure on the franc.
The problem was that Mitterrand’s domestic policy objectives were incompatible with France’s membership in the European Monetary System (EMS), the precursor to the eurozone. The EMS was a currency arrangement comprising most EEC countries (designed by former French president Giscard d’Estaing and the German chancellor Helmut Schmidt) that essentially anchored all participating currencies to the German mark, by means of the Exchange Rate Mechanism (ERM), effectively forcing the central banks of other European economies to shadow the Bundesbank’s monetary policy. This meant that a nation facing reduced international competitiveness had to cut costs (for example, by constraining wage rises) to bring its inflation rate down and constrain domestic demand to reduce growth in national income and GDP, which would lead to reduced spending on imports. By tying the French franc to the German mark, through the ERM, the EMS restricted the French government’s ability to adjust monetary policy to meet the country’s macroeconomic needs. France was always going to face downward pressure on its exchange rate while it tried to maintain the currency peg with the mark; by the same token, domestic policies that sought to expand employment and increase domestic spending were always going to come up against a balance-of-payments constraint. With rising imports and a widening external deficit, especially in the context of Germanys’ mercantilist policies, central bank policy was biased towards higher-than-warranted interest rates and domestic recession. The same problem plagued all the members of the EMS.
One could say that the French wanted everything: political popularity associated with lower unemployment and improved living conditions on one hand; a straitjacket on perceived German pretensions to European power and continued German subsidies to the Common Agricultural Policy (CAP) on the other. This proved impossible. Continued speculation against the franc forced the Banque de France to buy the currency in large quantities in international exchange markets to maintain the peg. By the time of the third currency realignment, in March 1983 – the French government had already devalued twice, in 1981 and in 1982, mostly to deal with the strengthening mark and the diverging economic policies between the two nations – the French were at a crossroads and the incompatibility of these competing ambitions was obvious. Mitterrand found himself in a position where a decision had to be made about whether to leave the EMS or abandon his progressive agenda. Regrettably, he chose the latter path.
In the spring of 1983, Mitterrand and the Socialists suddenly and drastically reversed course, in what came to be know as the tournant de la rigueur (‘turn to austerity’): rather than growth and employment, the emphasis was now to be on price stability and fiscal restraint. Indeed, by this time Mitterrand had become ‘obsessed with inflation’ (to quote one of his colleagues).4 Mitterrand was convinced by his finance minister (and future president of the European Commission) Jacques Delors to adopt a ‘strong franc’ (or franc fort) policy, in which the French currency would be purposely overvalued to ensure monetary stability and to counteract inflationary pressures. On 16 May 1983, the European Council extended a large foreign currency bailout to France to stabilise the franc on the condition that it tighten fiscal policy. The French agreed to limit their fiscal deficit to 3 per cent of GDP in 1983 and 1984, restraining social security and unemployment insurance payments and cutting the capacity of state-owned enterprises to borrow. Further, the Banque de France was required to reduce the money growth target to create a marked reduction in the rate of domestic credit expansion. The decision was brazen. For being compliant and abandoning its ‘Keynesian’ programme, the French government was given some short-term foreign currency funds to bolster the exchange rate – in a manner not dissimilar from the IMF’s policy of offering loans to struggling nations in exchange for harsh conditionalities.
After the turn to rigueur, the president’s economic outlook began to mirror the concerns of the business establishment. By 1984, the government had begun to relax employment regulations and cut subsidies for French industry, forcing uncompetitive firms to reorganise and reduce costs. This resulted in a spate of mass layoffs in the country’s once-core industries: among the hardest-hit sectors were steel, where the government announced that it was eliminating 25,000 jobs; ship building, which saw its capacity reduced by 30 per cent, resulting in a loss of 6,000 jobs; and mining, which suffered a reduction of state aid by more than a quarter over just five years, resulting in a loss of 20,000 jobs. As noted by Jonah Birch, ‘[i]n subsequent years, the government oversaw the wholesale restructuring of French capitalism’: removing subsidies for struggling firms, allowing large swaths of industry to go bankrupt and dismantling the core institutions of the post-war dirigiste model.5
Meanwhile, capital controls and restrictions on financial activities were rolled back. The government began to loosen its ‘draconian capital controls’ at the end of 1983, continuing in the summer and autumn of 1984. In 1985, the Socialists began to liberalise virtually all transactions. Domestic capital markets also experienced a complete transformation, and the process of deregulation between 1982 and 1985 was just as profound. Oriented around a new banking law in 1984, the French financial reform involved privatisations and, ultimately, the removal of credit controls. ‘Essentially, the domestic financial reform ended the state-organised dirigiste financial system, which had been the very basis of French policy activism for forty years’, Rawi E. Abdelal writes.6 The Mitterrand government also commenced the long-term process of privatising the French state’s large collection of public assets.
The reduction in domestic inflation and shift to a current account surplus that resulted from the government’s ‘scorched earth’ approach were celebrated as a demonstration of the policy’s success. And on its own terms – centred on a very narrow set of macroeconomic variables – it was. Yet the social and economic costs of that success were enormous. Net wages fell by 2.5 per cent in 1984, with the wage share, after peaking in 1982, dropping steadily thereafter. The official unemployment rate rose from 7.4 per cent in 1982 to 10.2 per cent in 1985 and continued to increase after that. Not surprisingly, the savings ratio (household savings out of disposable income) fell from 16.4 per cent in 1982 to 13.5 per cent in 1985 as a result of the declining economic growth and rising unemployment. France’s output gap (the difference between actual output and the maximum potential output) nearly trebled between 1982 and 1985.
The sudden shift in policy in March 1983 should be understood in the context of the long-standing intellectual battle between the old-school planners – who supported a policy known, literally, as l’autre politique, or ‘the other policy’ (essentially to close off France’s markets, to float the franc and reject the constraints of the EMS) – on one side, and the economists and technocrats in the Trésor (finance ministry) and the Banque de France on the other, who had been advocating price stability, financial austerity (rigueur) and ‘European solidarity’ long before 1983. These included prime minister Pierre Mauroy, Trésor director Michel Camdessus (who subsequently went on to become the über-liberal governor of the Banque de France and then the head of the IMF) and finance minister Jacques Delors. It is they that convinced Mitterrand to accept austerity and the constraints of the EMS because ‘allowing the franc to float would bring disaster’.7
Analysing in detail why the French left came to embrace neoliberalism so enthusiastically is beyond the scope of this book. There were multiple agendas at play. For some, such as Mitterrand, it was probably a way of retaining power; to others, ‘it offered an appealing political identity, a “modern”, “competent” profile, in contrast to the “archaic” and excessively “ideological” image’ of the old-school left;8 others likely underwent a genuine conversion, as they came to see capital liberalisation and financial integration as the necessary price to pay for the modernisation and ‘normalisation’ of France. What concerns us here are the effects of that pivotal U-turn. These cannot be overestimated. Mitterrand’s victory in 1981 had inspired the widespread belief that a radical break with capitalism – at least with the extreme form of capitalism that had recently taken hold in the Anglo-Saxon world – was still possible; by 1983 the French Socialists had succeeded in ‘proving’ the exact opposite: that neoliberal globalisation was an inescapable and inevitable reality. British economist Will Hutton, like almost everyone else, drew the lesson that ‘the old instruments of dirigisme and state direction were plainly outmoded’.9 ‘The tournant, the Mitterrand U-turn, was an admission of defeat: capital had won the battle of wills and ideologies. The socialist experiment had failed. Mitterrand had succeeded only in destroying Keynesian reflation and redistribution as a legitimate alternative once and for all, or so it has seemed since then.’10
The repercussions of that decision are still being felt today. Mitterrand’s about-turn is held out by many left-wing and progressive intellectuals as proof of the fact that globalisation and the internationalisation of finance has ended the era of nation states and their capacity to pursue policies that are not in accord with the diktats of global capital. The claim is that if a government tries autonomously to pursue full employment and a progressive/redistributive agenda, it will (i) be punished by global capital (through capital flight, delocalisation, etc.) and (ii) will inevitably incur a balance-of-payments deficit and eventually a balance-of-payments crisis. The result would be economic crisis. This narrative claims that Mitterrand had no option but to abandon the Keynesian agenda encapsulated in the ‘110 Propositions’. To most modern-day leftists, Mitterrand thus represents a pragmatist who was cognisant of the international capitalist forces he was up against and responsible enough to do what was best for France. For the left, this has essentially meant giving up on the notion of achieving any form of meaningful change at the national level, and accepting the idea that true change can only come at the supranational (and ideally global) level.
In the second part of this book we show that sovereign, currency-issuing states – such as France in the 1980s – far from being helpless against the power of global capital, still have the capacity to deliver full employment and social justice to their citizens. Before we get to that, though, we first have to understand how the idea of the ‘death of the state’ came to be so engrained in our collective consciousness. This means looking at how the French Socialists, after having embraced neoliberalism, then proceeded to export their newfound views – on everything from capital movements to monetary integration – to the rest of Europe.
As we have seen, Mitterrand’s finance minister, Jacques Delors, was instrumental in persuading the Socialist Party’s hardliners that Keynesian (let alone socialist) national economic strategies were no longer an option in an increasingly globalised world. ‘National sovereignty no longer means very much, or has much scope in the modern world economy. … A high degree of supra-nationality is essential’, he told John Ardagh.11 This was a radical departure from France’s traditional souverainiste stance. Especially if we consider that, by choosing EMS membership above domestic policy considerations, France (and other EMS member states) had effectively accepted to subjugate its own monetary/fiscal policy independence to the Bundesbank, which had became the de facto central bank of the entire EEC.
For all of France’s historical concerns about supranational (that is, ‘European’) encroachment on its national sovereignty on the one hand, and German hegemony on the other, it is somewhat ironic that it took the Socialists to give up that freedom – and then not to Brussels, but to Germany of all nations. It was argued that the growing acceptance of the primacy of ‘price stability’ among French politicians on both sides of the political divide was a reflection of their desire to regain some semblance of French domination in Europe. De Boissieu and Pisani-Ferry noted that ‘only a low-inflation, stable-currency France could pretend to some form of leadership in Europe’ and ‘maintaining France’s status within the EC and within the so-called French-German couple’ required them to fall into line.12 In other words, the French political establishment saw rigueur as a way to retain power, and the cost to the citizens in the form of suppressed real wages and rising unemployment was subsidiary, at best. Mitterrand ‘made the choice of giving priority to France’s European commitments over his own initial economic program in 1983’.13
This brought about a distinct shift in attitudes among the Socialists towards Europe. Reflecting on the limitations of the national solution in October 1983, Delors said: ‘Our only choice is between a united Europe and decline.’14 As Rawi E. Abdelal notes: ‘To the extent that the French left continued to hope for socialist transformation, its members could see Europe as the only arena in which socialist goals could be achieved.’15 The problem was that, by that point, the French Socialists had little to offer in terms of a Europe-wide progressive alternative. Not only had they already agreed to forsake their national progressive agenda in favour of austerity, but policymakers throughout Europe interpreted the failure of Mitterrand’s experiment as the failure of redistributive Keynesianism, essentially leaving only the Bundesbank’s monetarism as a legitimate paradigm.
In 1985, Jacques Delors became president of the European Commission, a post he would hold for a decade. The Delors presidency (1985–95) is understood to be groundbreaking, giving the European integration process a forward momentum that had been lacking in the preceding decade. It is also the period in which the foundations of monetary union, and more generally of neoliberal Europe, were laid down – a development in which Delors played a key role. Although Delors and the Commission cannot take all the credit (or blame, depending on your point of view) for the establishment of monetary union, for much debate was still to come, they ‘nonetheless performed a pivotal part as recruiting agents for the cause of EMU’, as Nicolas Jabko notes.16
The French understood that, within the EMS, the Bundesbank effectively set the interest rates for all EMS nations, irrespective of whether the rates were appropriate for other countries. Further, while the formal EMS understanding placed equal burden on the central banks to maintain currency stability, the reality was that nations facing downward pressure on their currencies had to shoulder the burden of adjustment because the Bundesbank increasingly refused to do its share, given that the mark was the strongest currency. For the Germans, intervention would have meant selling marks in the currency markets, which they feared would have ignited domestic inflation as a result of the expanding money supply (in line with monetarist theories). Horst Ungerer and others concluded that ‘the hegemonic role of German economic policy … narrowed the choice of economic strategies for its partner countries, impeded growth-oriented policies on their part, and thus perpetuated unemployment problems’ and was ‘contrary to the community character of the EMS’.17
Thus, the French became increasingly convinced that the only way to preserve a fixed exchange rates system (which they were strongly committed to since the introduction of the CAP and, later, the adoption of the franc fort policy) while at the same time regaining a degree of policy independence and wrestling control of monetary policy away from Germany, was to push for a full European monetary union. As Jacques de Larosière, then governor of the Banque de France, explained in 1990: ‘Today I am the governor of a central bank who has decided, along with his nation, to follow fully the German monetary policy without voting on it. At least, as part of a European central bank, I’ll have a vote.’18 For Delors, EMU – that is, a single European currency – became a priority, and in his role as president of the Commission he set out to persuade his reluctant fellow European policymakers to embrace it.
The first attempt to nullify German dominance of the EMS, which had effectively become a mark zone, came in the mid-1980s during the debate leading up to the signing of the 1986 Single European Act (SEA), the first major revisions of the 1957 Treaty of Rome. The SEA set the objective of establishing a single market by 31 December 1992. It also aimed at improving the speed of decision making in the EEC (by implementing qualified majorities for certain Council decisions) and empowering the European Parliament. But Delors failed to include a commitment in the SEA towards creating an independent (from Germany) European monetary authority, mostly as a result of Germany’s reluctance to give up its policy dominance within the EEC by ceding power to a supranational monetary authority. As president of the Commission, Delors also proceeded to export France’s new views on capital movements to the rest of Europe, by pushing for the full liberalisation of capital flows across the continent. As Abdelal notes, Delors came to believe that EMU required capital liberalisation: ‘Although I had concerns, I came to the realization that the free movement of capital was essential to the creation of the internal market.’19 Economist Jacques Melitz describes the significance of the French tournant for Europe:
When economic historians look back at this important juncture in European financial history, I believe that they will conclude that the French liberalization program was the single most important forerunner of the [EMU]. With this liberalization program came the French support for an integrated European market for financial services, without which the proposal of a Single Market would never have gotten off the ground.20
The Commission’s initial proposals – including the failed attempt to include the full liberalisation of capital flows in the SEA – were met with fierce resistance in a number of governments, including France, still in the middle of its own transformation, and Italy. As already mentioned, most European countries (with the notable exception of Germany and a few others) at the time still firmly believed in the need for capital controls and regulated financial markets. The breakthrough for Delors came in 1987, with the signing of the Basel–Nyborg agreement. By playing the French and the Italians against the Germans, Delors got the former to agree to further capital liberalisations (thus paving the way for the codification of the norm of capital mobility in Europe) in exchange for the latter committing to coordinating interest rate changes with the other countries and, more importantly, intervening in foreign exchange markets on behalf of the weaker currencies in the EMS. What was truly unprecedented, though, was Germany’s official commitment to the goal of monetary union as contained in the agreement. In an impressive display of political shrewdness, Delors had succeeded in killing off two birds with one stone. According to Nicolas Jabko, the two policy objectives – capital liberalisation and monetary union – were, in fact, strictly linked. Europe’s central banks had already essentially relinquished their monetary autonomy to the Bundesbank through the EMS. The Commission thus ‘raised the political stakes of EMU, acting decisively to liberalise capital movements while exhorting European governments to embrace EMU as a compensatory instrument for regaining monetary sovereignty’.21 Abdelal writes that:
Delors and his team also were able to emphasize to policymakers ... [that] Europe had already painted itself into a corner. Having chosen free capital and fixed exchange rates, only one choice remained for them, whether it be de facto or de jure. … Liberal capital rules, authored by French policymakers in Brussels, played a decisive role in encouraging European policymakers to recognize that with monetary union they were giving up a monetary policy autonomy that already was illusory in favor of a seat at the table.22
It should be noted that various developments played into Delors’ hand, first and foremost Germany’s concerns about the growing anti-German sentiment in Europe. In this context, the German Foreign Office took the diplomatic decision to push for monetary union to quell the ongoing criticism of the ‘ugly German’, which threatened to derail the progress that the nation had made in restoring its image in the post-war period. The situation had been reached where the French pushed for monetary union to undermine the dominance of the Bundesbank, despite their historical distaste for ceding domestic policy discretion to supranational bodies, and the Germans supported monetary union as part of their vision of a ‘European Germany’. The German willingness to advance the common currency was highly conditional, however, and reflected the dominance of the Bundesbank. Hans-Dietrich Genscher, Germany’s foreign minister, understood that he could reduce opposition to EMU within Germany (particularly from the Bundesbank) if he could get the other member states to agree to the creation of a fully independent central bank – that is, fully insulated from what the democratically elected polity, at the national or European level, might desire – with the sole mandate of ensuring price stability.
Genscher’s proposal was considered at the European Council meeting in Hannover on 27–8 June 1988, which established a working party headed by Jacques Delors to develop a detailed implementation plan for the creation of an economic and monetary union. The Delors Committee deliberately excluded the economics and finance ministers at the suggestion of Delors himself. He wanted the committee to ‘consist of the governors of the central banks, who were more independent than the governments’.23 Delors knew that the Bundesbank would not budge on the independence of a new European central bank and that it would have been difficult to find an agreement if the countries’ finance ministers had been involved. ‘National treasury officials from several countries balked at German demands on autonomy and focused a great deal more on the economic side of EMU’, Howarth and Loedel wrote.24 Further, the central bankers had been explicitly excluded from the design of the EMS in 1979, which Delors considered had rendered the system prone to failure. Delors thus constituted his committee to minimise any (legitimate) discussions of member state sovereignty and to push through a homogenised monetarist vision for the new united Europe.
By excluding a diversity of opinion, Europe was setting itself up for monumental failure, which manifested itself in 2008 and continues to this day. Verdun asked how the ‘consensus on the creation of EMU in the Community could have been reached so easily’.25 She concluded that the Delors committee constituted an ‘epistemic community’, defined by Haas as ‘a network of professionals with recognized expertise and competence in a particular domain and an authoritative claim to policy-relevant knowledge within that domain or issue-area’.26 This network also shared normative and causal beliefs and was engaged in a ‘common policy enterprise’, which means they agreed on ‘common practices associated with a set of problems’. The central bankers met regularly and held a similar worldview about the primacy of monetary policy, and the need for fiscal policy to be a passive support to the deflationary strategy defined by the Bundesbank. The neoliberal groupthink was consolidating. In simple terms, the exclusion of the ECOFIN ministers meant that the monetarist-oriented central bankers would quickly come up with a consensus. All members of the committee were firmly wedded to the abandonment of Keynesian macroeconomic policies in favour of the hard-line pursuit of price stability.
Delors said in a 1999 documentary produced by the European Commission that the ‘the overall philosophy behind what we proposed and even the structure of the Delors Report were very heavily influenced by the Werner Report’.27 However, the Werner Report – drawn up in 1970 by a working group chaired by Pierre Werner, Luxembourg’s then prime minister and minister for finance – clearly stressed that, in addition to the creation of a European central bank as the issuer of the new single currency, ‘transfers of responsibility from the national to the Community plane will be essential’ for the conduct of economic policy.28 The Werner plan thus saw economic and monetary union ‘as a lever for the development of political union, which in the long run it cannot do without’.29 The later MacDougall Report (1977) reinforced the need for a central fiscal authority and the responsibility of a European Parliament for the decisions taken by that authority.30
Conversely, the committee’s report – known colloquially as the Delors Report – constructed the EMU in terms of the continuation ‘of individual nations with differing economic, social, cultural and political characteristics’, noting that the ‘existence and preservation of this plurality would require a degree of autonomy in economic decision-making to remain with the individual member countries’.31 Delors’ plan deviated starkly from Werner’s vision for a European-level fiscal capacity. Modern federations align the primary fiscal responsibility at the level of the currency issuer. But the Delors Committee concluded that the primary fiscal policy responsibility would remain at the member state level; that is, at the level of the currency user rather than the currency issuer. The European-level oversight would be limited to imposing arbitrary but binding fiscal rules and, importantly, prohibiting the newly created central bank from directly supporting member state governments in times of need. The so-called Delors plan ignored the conclusion of both the Werner Report and the MacDougall Report that the European Parliament should take responsibility for economic policy decisions at the Community level.
There were several reasons cited for this shift, one being that the French had rejected Werner’s vision, which involved a significant transfer of economic policymaking capacity to the supranational level. Officially, the shift was justified by appealing to changes that had occurred in the world economy in the decade following the release of the Werner Report, including the demise of the Bretton Woods system, the introduction of the EMS, the inflation spikes that followed the two oil price hikes in the 1970s and the opening up of global financial markets. But all these ‘reasons’ simply provided a smokescreen obscuring what had really changed: the monetarist disdain for discretionary fiscal policy being used to smooth out fluctuations in private spending and maintain low levels of unemployment was now dominant. The Delors Report’s treatment of fiscal policy reflected this new consensus. It recommended ‘binding rules’ that would impose upper limits on the budget deficits of individual member countries, exclude access to direct central bank credit and other forms of monetary financing, and limit recourse to external borrowing in other currencies.32
In other words, the Delors plan constructed counter-stabilisation policy purely in terms of central banks adjusting interest rates to maintain price stability, with an independent central bank being the macroeconomic policy institution deemed necessary at the federal level. This starkly contradicted basic Keynesian theory, and represented a triumph of Bundesbank-style monetary discipline – and a victory for Germany. The Delors Report essentially acted as a blueprint for the construction of the EMU in the coming years. Indeed, the report’s outline became, with few modifications, the very text of the Treaty of Maastricht’s provisions for the progression towards EMU. On 23 January 1972, the governor of the Danish central bank, Frede Sunesen, wrote in the Financial Times: ‘I will begin to believe in European economic and monetary union when someone explains how you control nine horses that are all running at different speeds within the same harness.’33
What eventually allowed the ‘nine horses’ to be harnessed together into the monetary union was not a diminution in Franco-German rivalry, but a growing homogenisation of the economic debate. The surge in monetarist thought within macroeconomics in the 1970s – first within the academy, then in policymaking and central banking domains – quickly morphed into an insular groupthink, which trapped policymakers in the thrall of the self-regulating free market myth. The accompanying confirmation bias overwhelmed the debate about monetary integration.
Delors also succeeded in persuading EU member countries to introduce full capital mobility by 1992, effectively making the free movement of capital a central tenet of the emerging European single market. This was a binding obligation not only among EU members but also between EU members and third countries. The consequence of this was a European financial system ‘that was in principle the most liberal the world had ever known’, according to Rawi E. Abdelal.34 The global implications of this counter-revolution are well explained by Abdelal: ‘This new definition of the European [was] itself the engine of free capital’s spread on the world stage. … Global financial markets are global primarily because the processes of European financial integration became open and uniformly liberal.’35 The Delors Commission’s strategy of promoting capital liberalisation on the way to monetary union almost backfired when, in September 1992, a series of speculative attacks on several of the currencies in the EMS caused the collapse of the ERM. The 1992–3 crisis demonstrated that a system of fixed (or even tightly linked) exchange rates between economies that were disparate in structure and performance would always fail in the context of mobile capital. But, once again, Delors’ gamble paid off. The neoliberal groupthink was so entrenched by that point that most politicians took this as evidence of the need to accelerate the move to the single currency. As one commentator put it at the time:
The significance of this episode lies in the fact that the international capital markets were effectively able to subvert the policies of democratically elected governments in major European countries, despite all the tools and resources available to national governments and despite the monetary cooperation between European countries that had been developed on an inter-governmental basis and through the EU. This would suggest that there are severe limits to the economic sovereignty of European nation states in the late twentieth century.36
The notion that the exchange rate instability of the early 1990s, like that of the previous decades, could have happened because of, not despite, the flawed view of ‘monetary cooperation’ that dominated European policymaking – centred around the idea that national monetary and fiscal discretion (that is, economic sovereignty) needed to be subjugated to external discipline, and that all restrictions on capital should be lifted – was lost on most commentators. And so the self-deception continued, leading to the adoption of the euro in 1999. The rest, as they say, is history.