Orchestrating Europe (Text Only)

Sporadic moves towards a more comprehensive currency alignment revealed similar discords and inertia. Ideas about a European Monetary System had been aired even in de Gaulle’s day, when Giscard d’Estaing had been finance minister, with the support of the Banque de France. Additionally, EC central banks had always cooperated together, albeit secretively, both in the Governors Committee (established at Basel in 1964) and on the EC’s Monetary Committee where, with finance ministers, they provided advice to the Council. Monetary Union had been latent as an ultimate aim since 1957 and had been recommended by the Werner Committee in 1970 as an aim realisable by 1980.

Such dreams had faded fast after the end of Bretton Woods. But French re-entry to the ‘Snake’ and the evolution of a system of managed rates around the DM anchor encouraged hopes of a zone in which, crucially, the franc and lira might be stabilized. The liberal Giscard’s long intent was to abandon the policy of habitual devaluations as acts of French policy. France was, in fact, forced out of the ‘Snake’ again early in 1976 and the DM had to be revalued later that year. But in the face of continued, variable rates of inflation, the new Commissioners of 1977, and above all the President, Roy Jenkins, were avid to restart the immobile machine and again set their sights on EMU.

Jenkins’s proposal for a European Monetary System (EMS) reached Council at a moment in late 1977 when Japan’s trade surplus and its aggressive competitive edge seemed only too clear to a Community locked into a pattern of weak growth and high unemployment. Among member states, Britain was now far more amenable to the imposition of an external discipline, its chancellor, Denis Healey, having imposed a measure of budgetary restraint and money supply control after the IMF’s intervention in November 1976. There is evidence of consultation between the UK Treasury, Bonn and Paris, at ECOFIN meetings. But at this stage both Banque de France and Bundesbank opposed it. Among bank governors, only Gordon Richardson and Paolo Boffi of the Banca d’Italia supported it (the latter seeing progress to EMU as a restraint on his own reckless political class). These two however drew indirect support from German industrialists who wanted a lower DM – as in fact occurred in the early 1980s.20

They would have got nowhere without Franco-German concertation. Initially sympathetic to the Bundesbank’s view, put by Otmar Emminger, that EMS would weaken the Bundesbank’s independence and its capacity to control inflation through domestic price levels, as well as impose stresses on the DM as core currency that would ultimately force West Germany to become a leading political force,21 Helmut Schmidt tried at first to share the burden with France, Italy and if possible Britain. Callaghan declined, but Giscard accepted, taking this as a first step towards EMU. The Italian government hesitated. But for three months the scheme stalled on France’s unwillingness to accept what looked like a West German initiative.

Schmidt finally accepted the DM’s anchor role in February 1978 during the French elections, but since it was a political-economic initiative rather than a fiscal discipline, it was agreed that EMS should be handled by the Council, not the Commission.22 Germany’s conversion owed much to Schmidt’s perception that, as the dollar fell steadily during 1978, President Carter had abdicated the role of Western leadership and that something had to be found to fill the gap. Thus at the Bonn Summit in July 1978 (before the Bremen Meeting where EMS was given its final shape by heads of government, with bank governors filling in the details), West Germany reluctantly agreed to reflate, under US pressure.23 A stimulus of 1% of GDP was thus given, with some success. But Germany met massive retribution later, when the second oil crisis seriously weakened the DM and aroused a new surge of inflation.

On the macro-economic level, German unease at a rising DM coincided with the Plan Barre’s anti-inflationary aims. But EMS was intended by the Commission and the main participants to lead on to a full exchange rate mechanism (ERM) from which would emerge a European Monetary Fund or pan-European Central Bank with pooled reserves – with the ecu acting as a reserve currency.24 Delayed because of objections, by Ireland among others, it finally came into force on 1 March 1979. Britain, though a member of the EMS, refused to join the ERM. By 1981, despite severe balance of payments problems, worst in Belgium, Denmark and Ireland, all had regrouped except sterling and the drachma, hoping to enforce discipline on their unruly domestic economies. (In the event, since sterling rapidly became a petrocurrency when North Sea oil came on stream, only massive EC intervention could have sustained Britain as a member, even if its new Conservative government had been willing at first to measure sterling against the DM rather than the dollar.)

Yet despite the appearance of stability guaranteed by EMS, German reflation, and Carter’s new energy policy, the second oil shock initiated another recession and four realignments more occurred before 1982. Since West Germany would not revalue, the weaker currencies had to fall, causing growing resentment among their governments. Central bankers, led by the ever-reluctant Bundesbank and with Council assent, postponed the Monetary Fund indefinitely.

In the brief period of renewed optimism however, and before the French Presidency of the Community opened in January 1979, Giscard determined that French political leadership should be reestablished lest West Germany fulfil the role that Emminger feared, or the Commission take advantage of its enhanced status.25 In French terms, reform of EC institutions, crucial to preparations for the next stage of enlargement, therefore implied reducing the Commission’s initiating role, subordinating the European Parliament’s ambitions, and putting the Council firmly and formally in control. This involved a revival of de Gaulle’s early concept of a Directoire, with greater sway for the larger member states.26 Hence the appointment of the Comité des Sages set up under the French Presidency, with a brief to examine the reform of institutions, while retaining the Council’s role, together with the Luxembourg Compromise, except in cases where qualified majority voting (QMV) had been unanimously accepted.

The three ‘wise men’, Berend Biesheuvel (NL), Robert Marjolin (Franee) and Edmund Dell (UK) could not but be influenced by the inter-governmentalism of the time: the way the EMS had been instituted, the impact of Franco-German leadership on smaller members, and the Atlanticist dimension set by the Group of Five.27 Moreover, their report in October 1979 reached a Europe in which members were either self-absorbed, like Italy and Britain, or on the defensive like Belgium. It was not a time for visionary thinking outside the limits set by France and West Germany.

Nevertheless, despite the French Presidency’s leverage, the Committee did not simply follow Giscard’s agenda, but tried to measure the validity of small states’ complaints (Luxembourg, Denmark and Ireland) against the larger ones. In particular, they examined the methods used to operate the European Council, and the suggestion of a two-tier Presidency in which large states would serve for longer periods. In the end, the three accepted the logic that the Council should give ‘overall direction’, setting out the EC’s priorities, but that the Presidency should not be extended beyond the existing six months for each member state in rotation.

This report was a symptom of the prevalent malaise rather than a factor in what followed. The Commission had not, despite Jenkins’s attempts, recovered its old influence as it had existed under Hallstein. It now suffered criticism from West German leaders as much as French ones – often directed at individual Commissioners for their national partiality – criticism whose validity both Jenkins and Emile Noël, Secretary General since 1958, had to admit, yet could not easily remedy, and from the European Parliament President, Emilio Colombo, who saw it becoming ‘renationalized’. The Spierenberg Committee claimed that it had become too large and recommended that the number of members of the Commission should not increase pro rata with future accessions from Mediterranean countries.28 Worse, from Brussels’ point of view, despite manifest delays, some of the big states were not prepared to ease their veto powers under the Luxembourg Compromise, even though some of the smaller ones, led by Belgium, might have been.

The conflict between the Council and the Commission, latent ever since 1965, produced a condition of immobility, on which the diversity of reforming ideas made little impact – hence the lourdeur of which Giscard frequently complained. In practice, most initiatives were decided by the leading member states, even if the initiative came from the Commission or outside: EMS, Greece’s accession, and responses to the Tokyo/GATT round. Such CAP reforms as occurred were possible only because of Franco-German agreement: the Three Wise Men could not have operated without this backing. And whenever the European Parliament asked for more competence, it aroused deep antipathies among both Gaullists and British Conservatives.

But the European Parliament could and did play successfully on West German Länder aspirations, and those of Italian regions whose politics had sprung vigorously into life in the 1976 local elections. Even before the Parliament used its single, ultimate weapon and rejected the EC’s budget in December 1979,29 it had induced the Council of Ministers to address three important issues: economic disparities, convergence, especially of the regions, and the EC’s transport infrastructure – with a future common transport policy in mind. The European Parliament’s sense of its own dignity and tactical responsiveness increased with direct elections, while some sense of common identity on EC matters also developed between parties in certain countries. This had long been true in West Germany and Benelux and it became so under Italy’s pentapartito governments, before and after Aldo Moro’s death. Karamanlis’s creation of New Democracy can be seen as a bid to create a similar centrist governing philosophy in Greece. What may be called ‘insider parties’ tended during the 1980s to find similar affinities inside the Parliament, while the ‘outsiders’ (all communist parties save in Italy,30 both main parties in Britain, many French socialists and the majority of Gaullists) emphasized inter-governmentalism at the European Parliament’s expense.

Meanwhile the ECJ began to accumulate a body of judgments which increasingly underpinned the Commission’s initiating role. In Kramer (July 1976) it ruled that EC institutions’ competences within the EC extended under the treaties to the international engagements required to fulfil them. In March 1976 came the Simmenthal judgment that defined direct applicability to mean that EC legislation had to be implemented uniformly in all member states, not only through transposition but implementation and enforcement – which implied a direct obligation by governments towards individuals to implement directives. This had a stringent effect not only on backsliding states (Italy being already notorious) but also gave recourse to individuals or firms prejudiced by their own government’s failure. The Court’s 1978 judgment against Distillers’ policy of pricing one brand of whisky differently in different countries forced the company to withdraw from the UK market altogether. And in the area of state aids, where member states had frequently disobeyed rulings with impunity, especially in declining industries such as steel and shipbuilding, the legal revolution begun in the 1960s continued, leading to a sharp increase in the number of instances where the Commission dared to intervene.31

By giving effet utile, that is interpreting the treaties to give the law its fullest and most efficient effect, with consequences often not obvious in the original texts, the ECJ thus widened the scope of EC law and extended Commission or other competences. Its continuous activity thoughout the 1970s was probably the most important single factor in keeping the sense of ‘Community’ alive in an era of inter-governmentalism.

Simmenthal was perhaps inherent in the Treaties, but Kramer seems in retrospect a more creative interpretation, as does the ECJ’s October 1978 opinion in the ‘foreign policy arena’, that the Commission had competence to use international trade sanctions or embargoes to achieve the EC’s agreed aim. In the Roquette judgment (October 1980) the ECJ laid an obligation on the Council of Ministers to ask Parliament’s opinion – and to wait for it. But all these were overshadowed by the consequences of Cassis de Dijon 1979,32 which established the principle of mutual recognition of members’ own national standards and health or other regulations. The court ruled that a product which was lawfully produced, subject to minimum standards, and distributed in one member state could not be banned from sale in another unless it constituted a clear risk to public health.

The political extent of this battle was not won immediately. In the always contentious area of foods, exclusions and evasions continued, even though the criteria were outside the food standards arena: France ignored both the rules and the ECJ’s judgments by banning lamb imports in 1980, Germany restricted beer under its ancient production regime, and non-fizzy mineral water,33 Denmark for ecological reasons prohibited beer and soft drinks unless sold in recyclable containers, Italy rejected German pasta, not being made with grano duro, Belgian margarine was to be sold only in cubes not rectangles, and so on. Whatever its logical consequences for the generic harmonization policy, the Cassis de Dijon judgment and its sequel, the pressure vessels case which Arthur Cockfield used in the mid–1980s, could not solve all cases. Indeed similar obstacles survive today, in complicated, obscure forms (such as the effects of the German waste and recycling law) requiring in most cases to be abolished one by one.

Yet it is hard to overestimate the significance of the new approach in which the establishment of basic standards and mutual recognition replaced harmonization. From that point on, the Commission sought to collaborate more effectively with member states’ own technical departments and standards agencies, and to relegate Article 100 (harmonization) only to areas essential for the EC as a whole. By insisting on the overriding aims of the Treaty, the ECJ had given the Commission a powerful instrument to break up the huge log-jam of draft legislation stacked up by a decade of unsuccessful detailed harmonization. It may even have saved the EC’s original ethos from the delays for which the Council and its members were to blame; it certainly helped to recover momentum and renewed the internal market’s attractiveness. It also established a golden rule: that future directives and rules should be simpler, less specific, and aimed at setting basic standards in a general context within which national agencies could operate: if they wished, more but not less strictly.34 A long search for general EC competences thus led to an early definition of what subsidiarity (a phrase harking back to 1957 if not the 1890s) might eventually mean.

The second OPEC oil shock forced the crude oil price to over $20 a barrel at the end of 1979, helping to precipitate a severe and prolonged recession. Domestically, the EC’s endemic budgetary crisis was reinforced by the new British Conservative government’s determination to revise downwards its net contribution. Margaret Thatcher’s single-minded advocacy of ‘our money’ galvanized the next Dublin Council in November, so that the fractious disputes about the EC’s budget overran into farm prices and the common fisheries policy. Thatcher took the subsequent compromise solution with ill grace, letting it be seen as merely a temporary expedient.

In that same, particularly gloomy, year, the EC’s international context was disrupted, firstly by events in Iran (the Shah’s fall, the seizure of American hostages, and the end of Carter’s presidency), then by the Soviet invasion of Afghanistan (roundly condemned by all EC members in January 1980) and thirdly by the new Reagan presidency’s apparent intention (with Thatcher’s support) to revert to an arms race in order to counter and if possible permanently impair Soviet superpower capacity. Tensions rose at the same time in the Middle East and in Poland, where Solidarity’s early successes – though partially reversed by General Jaruzelski’s military dictatorship – exposed both the limits of Soviet power in eastern Europe and the unstable nature of Comecon, the state trading system linking Soviet and satellite states.

The EC coordinated its responses to these crises rather more successfully than it had done in 1974, though the EC’s London Report pointed out the shortcomings in its political cooperation processes.35 But the possibilities of cooperation were limited both by the recession and the ‘sovereign debtors’ crisis (Mexico, Brazil, Argentina, Poland) which lasted well into 1982 with consequences lasting to the present day (Brazil’s debt, for example, had increased from $63.5 billion in 1980 to $116.5 billion in 1991). The recession laid serious, long-lasting burdens on European industries which found themselves at the same time exposed as inefficient, overmanned and technologically backward in competition with Japan and the new Asian ‘tigers’, while the debtors’ crisis tested the banking systems almost as severely as the 1974 liquidity crisis. Steel suffered worst of the industries: this time, however, the British steel strike, and its outcome – defeat for the unions and harsh rationalization – provided a contrast with the EC’s crisis cartel solution, following the 1975–6 model, which was instituted in October 1980.

Such a conjunction of severe economic and strategic problems encouraged EC governments to respond in a piecemeal fashion and inhibited their feelings of commonalty, except in the most defensive, protectionist sense.36 Germany’s earlier attempt to reflate and act as the EC’s motor led to pressure on the DM, a deficit and high interest rates. French policy in 1981–3 moved rapidly in the other direction. A period of frequent realignments followed in which, given the existence of capital controls in most member states, domestic players rather than world markets set interest rates, allowing France until March 1983, together with Italy and Ireland, to devalue apparently without penalty, whereas Germany, Belgium and Denmark emphasized currency stability. But when France reversed its policy in March 1983, it become clear that Italy and Ireland would have to follow. Even the Netherlands, which had stuck with the DM, would have to switch from neo-Keynesianism to the disinflation, industrial adjustment and supply-side policies already being put into effect in Germany by the Kohl administration.

It was hard for the Commission, whatever its responsibility for macro-economic guidance, to check such defensive, protectionist activity during the recession despite the consequences for employment and the existing industrial base. They found it easier to maintain the EC’s coherence and integrity by brokering the lowest common denominator of member states’ most urgent needs, by sponsoring crisis cartels and national schemes for industrial support. The criteria for permitting state aids to industry were made less stringent, especially for shipbuilding, ship repairing and textiles: this despite the fact that state aids should have ceased altogether in the former case. On the industrial side, delays built up in establishing even the most urgent standards for TV systems, video-recorders, telephone systems and mobile telephones. In the computer field, despite demands from the ten or more world-ranking firms for the Commission to set an EC norm for interfaces, progress was painfully slow. It was not surprising that the Spinelli and Dahrendorf plans for scientific and technological policy also ossified.

The Community appeared to be reverting to national and inter-governmental activity. Yet at the same time, its weaknesses were emphasized, weaknesses which could only be remedied by collective action. The EC might have been able to limit the danger from Japan by ‘voluntary export restraints’ (VERs) for a time, but for all its protests, it had little leverage against the Reagan administration, high US interest rates, and the embargo imposed by the White House on EC equipment, first for the Siberian gas pipeline, and then on all high technology supplies for Comecon. Neither did it have a easy defence against US criticisms of the CAP or EC steel subsidies, which were avidly fostered by American producer lobbies, culminating in the imposition of countervailing duties on EC steel exports in June 1982.

In conditions of growing protectionism, not only between the EC and US, but between the US and Japan (which was, of the three, the most successfully impervious to liberal trade), the Community slipped away from its initial consensus on industrial policy37 argued by Davignon and Willi Claes in 1977–8. This had defined goals for the emergency reconstruction of the most stagnant industrial sectors: steel, textiles, aeronautics and defence-related high technology (to which were added infrastructure development and large industrial projects under the ‘Ortoli Initiative’). In that period, a genuine attempt had taken place to break away from sustaining ‘national champions’ (mainly in Germany and France, but also in the Netherlands and Italy). Some of that legacy nevertheless survived as the recession threw the emphasis back onto those markets – electronics, telecoms and cars – most at risk. Davignon’s lead – at a time when his was the most vigorous in the Commission college – went into research and development arrangements such as ESPRIT (information technology), or RACE (communications), which had the effect of sharing the work among the twelve major telematics corporations, but also marked an important new stage in Commission-industry relations.

As for those mergers which came under competition policy because they implied abuse of market dominance, the ECJ gave an interpretation of Article 86, beginning with the Continental Can case in 1972, and extending it with Philip Morris in 1981, which was controversial but confirmed the Commission’s powers.38 But for several years, member states blocked the Merger Regulation proposed by the Commission, being unwilling to see its competence confirmed in detail. The Commission’s struggle to define the nature of the European market and to curb state aids and illegitimate mergers led, however, towards liberalization and the internal market initiative, a contrast to the macro-industrial policy for structural adjustment embodied in the Commission’s other defensive measures or crisis cartels. The latter proved easier than the former, in contemporary conditions: at the request of France, backed by Britain and Benelux, and despite German reservations, the Council agreed unanimously in October 1980 that a ‘manifest crisis’ existed in the steel industry. It was easier to protect than to adjust and, as in the case of managed trade, temporary relief became semi-permanent accommodation (see below p.573).

Among member states there existed no single view of what industrial policy should be, and certainly very little common ground between traditional French and German standpoints. Neither was this surprising in the economic climate of the time. Lack of clarity here contrasted with the developments in competition policy, where most member states wished to retain competence for their national regulatory agencies. Thus the Commission had some ground on which to act in the general interest, declaring that there should be a European industrial outlook, even if it fell short of being a synoptic policy.

A cluster of hopes, in training and professional skilling, assistance for small and medium-sized enterprises (SMEs), transport, regional policy and social action continued to reappear in all Commission documents. Meanwhile ‘anti-trust cartels’ provided time and space for firms penalized beyond the average by the costs of modernizing to produce plans for reconstruction. At a deeper level, belief in the internal market and liberalization spread outwards from the crisis sectors and high technology industries, influencing firms’ behaviour and through them, national governments.