This week, I've read the biography of Wim Duisenberg, former ECB-President and President of the Dutch Central Bank. It's an excellent work by Bruno de Haas and Cees van Lotringen. It describes the career of Duisenberg and contains many interesting elements. It shows Duisenberg to be quite flexible, sensitive to atmospheres/moods. He is not so much the real interventionist ''on-top-of manager" but a listener who is very able to sense political realities and listen to differing viewpoints before choosing a path.
The authors have also succeeded in describing the international, economic and political developments surrounding the establishment of the Euro. It is clear that for this part of the book they have drawn extensively on the expertise of Andre Szasz, who was very much involved in all the proceedings towards the Euro. What I found most interesting in their book, was the description of all the discussions and developments that occured before the Euro came into being. It once again underlines that all the fuss that we now see in the Eurozone-context is not at all new.
When we now see France bashing Britain on their financial solidity, this is merely a different shape of an old discussion. Before we had the euro, the discussion could be just as tough between nations. Only the question at that point in time was: should the other country devaluate it's currency, yes or no? And in those periods we had different sort of agreements ('the snake') to glue the currency exchange rates into a certain bandwith of values. So inevitably, economic and fiscal developments in the different countries in Europe led to tensions, market reactions (declining exchange rates) just as we see the tensions occur now in sovereign bond rates.
The bottom line of where we stand right now is in my view the following. After 1972, the world has moved from the gold standard to a system of more flexible exchange rates. Whether or not these would be fully floating or subject to capital controls was a choice of individual countries. The general tendency since then is to allow for further free movement of capital and floating of currencies. Yet, the different nature of economies and countries meant that a fully free floating exchange rate might hurt the country to much. So ever since, there has been a varying set of solutions to solve this puzzle (see also this study on trade-offs in international capital flows and currency agreements).
What struck me in the book about Duisenberg, is that already in 1974 the French had a plan on the table which essentially meant that Germany and the Netherlands would finance interventions to soften the devaluation blow that the French Franc would suffer, due to economic developments of that time. It was laid aside. Eventually to reappear on the scene as the plan for the Euro. Because the French desire to counter the German economic monetary power remained ever so strong.
In the mean time, Europe decided to use 'snake mechanisms' later on, would all have the same characteristic:
- a political decision (leaning on economic insights, but not fully determined by it) on whether or not to devaluate/revaluate currencies
- an underlying agreement to assist with interventions to keep currencies within a certain bandwith,
- a lot of bickering between countries; which is why the authors of the book on Duisenberg use the term 'money wars' as subtitle to chapter 7.
So, what we see today is merely some repeated money wars between nations. The only difference is that right now it is occuring within our most recent institutional arrangement (fixed exchange rates and the euro as a single currency) rather than focusing on the subject of exchange rates themselves. We can observe that the rigid structure of the euro-arrangement now starts hurting the economies of the European Member States that are in it, as well as the countries that are out of it (Great Britain, but also the United States). Still, for now, the Member States seem keen on preserving the institutional arrangements, even if it means tough internal reforms, recession or depression.
Only time will tell if the euro will prevail without a true political union and without true support and solidarity of the people involved.
