Accessibility links

EU: Monetary Union Starts On Wrong Foot

  • Breffni O'Rourke

Brussels, 4 May 1998 (RFE/RL) -- The most important monetary project since World War Two came to fruition at the weekend when leaders of the European Union affirmed the coming introduction of a single currency in 11 member states.

The decision means that from next January 1, the Euro will be used by major countries of West Europe as a legal tender in commercial and international accounting transactions. In the second stage, by 2002, these countries will consign their marks, francs, liras, pesos, punts and other national currencies to the pages of history, and there will be one currency in an area stretching from the Arctic ice of Finland to the volcanoes of Sicily.

In their various speeches at the Brussels summit, EU leaders and officials referred repeatedly to the historic importance of the moment. British Chancellor of the Exchequer, Gordon Brown, current President of the Finance Ministers' Council, made prominent use of the word, saying a new era is beginning for Europe. He said this is not the end of a road, but the start, with the next challenge being to carry through the necessary structural reforms, which, combined with the euro, would give the EU new vigor and economic growth.

Historic it may have been, but despite the smiles it was a difficult day and sadly flawed. That's because the 15 heads of state and government were not able to find more than a shoddy compromise over the issue of who will head the powerful European Central Bank. The issue is an important one for confidence in the new currency, as the central bank is meant to set monetary policy for the euro zone free of political pressure. But back-room politics of the smudged and smoky variety ruled the day. The heads of state and government disappeared for lunch and stayed closed in the room for more than 11 hours before even starting their formal session.

Their problem was considerable, namely how to reconcile the irreconcilable. The treaty setting up the central bank calls for a single president, who serves an eight-year term. But there were two candidates, one backed by France alone, the second by Germany and most of the other states. Neither side would give way. The classic solution had already been suggested days before -- namely to split the term in half and have both men serve four years. But how could this be reconciled with the treaty? For politicians to openly flout the treaty law would be morally an impossible start for the new single currency era. Moreover, it would send the worst signal to the markets about the bank's independence. So the leaders stepped beyond reality into fiction.

They agreed to appoint Dutchman Wim Duisenberg, the candidate backed by the majority, for a full eight year term. Duisenberg currently heads the Frankfurt-based European Monetary Institute, the forerunner to the bank, and is highly prized for his work there. But Duisenberg declared in a statement that, on account of his age, he will step down before the term expires -- voluntarily and without feeling under any pressure. Although it is not written anywhere, he will go after four years, and his replacement for the rest of the term will be Bank of France governor Jean Claude Trichet.

As incredulous journalists asked in post-midnight press conferences, how do you appoint someone to a post for eight years when he says he won't serve for eight years. And who will believe he is entirely free from pressure. British Prime Minister Tony Blair, who as current EU President led the negotiations, kept his famous smile -- but only just.

He said the treaty terms had clearly been respected, and everyone was now satisfied the stage was set for a strong euro. Blair, one of the youngest leaders present, had just spent 11 hours sandwiched between two determined heavyweights, Chancellor Helmut Kohl and President Jacques Chirac, and was looking somewhat dazed. For some hours before that, criticism of the British leader had been growing. Officials were saying he had underestimated the problem and, as EU President, should have put more effort into finding a solution in pre-summit negotiations, so as to avoid the public spectacle of differences.

At another press conference, Kohl also sought to calm the waters.

He said his objective had been achieved. He said Duisenberg had suggested the formula himself, and that if Duisenberg had decided to withdraw his candidacy, then he, Kohl, would have ensured that no-one else would have been appointed that day.

Chirac, who had set his face against the majority will and thereby ruined the day, gave a shorter press conference at which he avoided triumphalism.

And so the deal was done.

But there is a further factor in the equation which could upset calculations. The President of the European Parliament Jose-Maria Gil Robles, said he could not believe national pride could prevent the new central bank from having a single head.

He said he has no doubts that the deal breaks the spirit of the treaty, and he noted that the parliament has demanded a single president serving the specified term.

The head of the parliament's financial affairs committee, Karl von Wogau, said that when Duisenberg comes before a committee hearing, he will ask the banker exactly how long he plans to serve. The implication being that if it is substantially less than the full term, this defacto represents a splitting of the term. There's speculation that parliament could decide to take a case to the European Court on this issue.

The righteous anger of the parliament leaders of course has its political side. Parliament, the directly democratic arm of the EU, has mainly only advisory powers and it feels this weakness acutely. If it can appear to be the champion of the people against the back-room politicians who broker dubious deals, it can heighten its own profile accordingly.