Or has it? Certainly, the succession of shocks-the meltdown of Europe’s exchange-rate system; devaluations in Italy, Britain and Spain; and, just before Sunday’s French referendum on European unity, word that President Francois Mitterrand has prostate cancer-has stunned the Continent and stalled the unity bandwagon. “The European Monetary System is bleeding all over the floor,” said harried Paris stockbroker Franklin Craig as Swedish interest rates hit 500 percent. Yet despite the week’s hysteria, the foundations of the Community are still in place, and the process of eliminating remaining obstacles to the free flow of goods, services, money and people within the world’s largest free-trade area by the end of 1992 is still on track. It’s hard to find anyone eager to return to the days when Italy put quotas on French cars and Belgian beer was deemed too impure to be sold in Munich.
What is now in jeopardy is the next phase of the grand design: the EC’s transformation from a 12-nation trading bloc to a single economy with one currency and, some hope, in the distant future one government in Brussels controlling everything from parental leave to foreign affairs. The crisis made clear what Europe’s politicians have tried their best to obscure: millions of Britons and Germans and Spaniards and Danes are far from ready to submerge their identities and their interests for the sake of some unproven entity stretching from the Mediterranean to the Baltic. While Europe may be a community, it isn’t yet a state of mind. Until it is, pressing on with European union will be a tricky business.
Most Americans watched the events from the sidelines: this was a European affair. But the implications are worrisome. While lower European interest rates might give the U.S. economy a boost later this year, coping with the aftershocks of the crisis will make it hard for the EC to focus on other matters. The languishing global trade negotiations in Geneva, where the United States and the EC are still at odds over farm subsidies,may be a casualty. And Europe’s ambitions to play a larger role in world affairs, already suffering from the EC’s bumbling efforts to make peace in Yugoslavia, are likely to be scaled back.
That is not at all what the EC’s prime ministers and presidents intended when they met last December in the Dutch town of Maastricht and voted to give the Community broader powers, a central bank and a common currency. The politicians blithely assumed that faster economic and political unification could make people think European. But they were so busy haggling over the future seat of the future central bank-with Amsterdam, Barcelona, Frankfurt and a host of other cities in the running-that they missed the public’s growing disquiet about Eurocrats in Brussels making decisions that were once left close to home. Says French economist Alain Lipietz, a leading Maastricht critic, “It is stillborn, because it divides instead of uniting.”
That message came in loud and clear on June 2, when Danish voters unexpectedly gave the treaty a thumbs down. To re in the momentum for Maastricht, Mitterrand decided to forgo ratification in the French Parliament and instead put the issue to the people-who, the pollsters advised, would endorse the pact overwhelmingly. Bad move: the Sept. 20 vote quickly became a referendum on the unpopular Mitterrand himself Investors worried that a No vote would destabilize weaker currencies, and they stampeded into the mark. It wasn’t much of a gamble. “They set up the markets for a reasonably good one-way bet focused on the referendum,” says a high U.S. official. “They encouraged people to go to their bookies.”
But the real center of the crisis, when it came, was Germany -or, more precisely, Frankfurt, home of Germany’s central bank. The staunchly independent Bundesbank sees fighting inflation as its overriding task. Ever since 1990, when Chancellor Helmut Kohl sought to stem the flood of refugees from East Germany by letting them trade their communist funny money for rock-solid Deutsche marks at a bargain rate, Bundesbank officials have warned that Bonn’s generosity would overheat the economy. As Kohl borrowed billions to rebuild eastern Germany, the bank raised interest rates nine times in two years.
That worked, for Germany: prices are now rising at an annual rate of only 2.5 percent. But tightfisted monetary policy was disastrous for the rest of Europe. When they should have been lowering interest rates to revive their slow economies, central banks had to hike rates to keep their currencies in line with the mark. Across the Continent, the high price of money brought growth to a screeching halt. The Banque de France begged the Bundesbank to ease. In Britain, higher interest rates turned recession into depression. Even Washington objected that Europe’s slump was throttling demand for U.S. exports. It was all to no avail: as Europe screamed in agony, the Bundesbank raised rates yet again in July. Any country that doesn’t like it, Bundesbank president Helmut Schlesinger said, is free to break away from the mark and set interest rates as it wants. Translation: our job is to worry about Germany, not about Europe.
It took remote Finland to break the logjam and trigger the event that’s now being referred to as Black September. When the Finns cut their markka loose from the Deutsche mark on Sept. 8 so their domestic interest rates could fall, Europe yawned at the news. Not for long: the Swedish krona began to plummet almost immediately, and the Swedes, determined to avoid devaluation, hiked a key short-term interest rate to 75 percent and later to 500 percent to persuade traders to hold kronor. Meanwhile, the bottom fell out of the lira, and on Sept. 11, Kohl paid an unusual visit to the Bundesbank to express his concern. The bank, which had bought an astonishing $16 billion worth of lire in order to prop up the exchange rate, was ready to deal-provided that Italy abandon its pledge not to devalue. The bargain: the lira would fall against other currencies, and the Bundesbank would ease interest rates. But the markets took its negligible rate cut as a sign that it wanted other countries to devalue as well. Spain’s peseta tumbled, and two British interest-rate hikes, from 10 percent to 12 percent and then to 15 percent, didn’t blunt speculators’ eagerness to sell pounds.
After a day of crisis in London-interest rates are a hypersensitive issue in Britain, where most mortgage payments rise promptly if rates go up-the British abruptly reversed course. Chancellor of the Exchequer Norman Lamont dropped rates back to 10 percent, leaving the pound to fall like a stone. At the weekend, both Britain and Italy had given up pegging their currencies to the mark. Things didn’t stop there: with the press calling for Lamont’s resignation, he pledged to make economic policy " British" in the future. Such remarks, Kohl retorted, “are inappropriate for a minister.” Chimed in Conservative Party Chairman Norman Fowler: " If anyone should resign, it should be the president of the Bundesbank."
Who’s to blame for last week’s crisis? Outside Germany, almost everyone points a finger at the Bundesbank, whose officials openly object that the proposed European. central bank won’t be vigorous enough in fighting inflation. Germans, however, rose almost as one in defense of their central bank, which more than any other institution symbolizes their country’s postwar achievements. “The Bundesbank leaves the battlefield victorious,” said the Bonn newspaper Express, smugly summing up the week’s events. And in London, followers of Margaret Thatcher, the most prominent critic of the drive for a more powerful Community and a single currency, gloried in the EC’s disarray.
For Germany, however, the be Pyrrhic. Kohl has been among the fore-most backers of a stronger European Community. But the slump the Bundesbank’s tight-money policies has forced on Europe has quelled much of the enthusiasm for integration. A June poll by Britain’s MORI showed that most citizens of the EC’s three largest economies Germany, France and Britain-think Maastricht will make them worse off personally. While a majority of voters in most countries, including Germany, still support the treaty, last December’s fervor is waning. “The original spirit of Maastricht is dead, and the letter is probably no longer applicable,” says economist Christopher Potts of Banque Indosuez in Paris.
What can replace it? One scenario has six of the EC’s stronger economies-Germany, Denmark, France, Luxembourg, Belgium and the Netherlands moving toward one currency, which other countries could adopt if they wished. That would, at least, assuage the growing resentment of Germany’s dominant role in the EC. Sa s Princeton University economist Peter Kenen, “A European central bank would not have followed the monetary policies the Bundesbank has followed for the past two years. It would have taken a European view.” Another possibility is that advocates of the Maastricht pact will try to push on; while their public is skeptical, most political leaders remain strongly in favor. The third choice is simply to let exchange rates float freely, without pegging them to the mark. But a surprising number of experts fear that floating exchange rates could prompt countries such as Italy to put new controls on financial flows to keep their currencies from tumbling-exactly the sort of measure European unity was meant to do away with.
In the short run, however, Europeans have little choice but to rebuild the 13-year old monetary arrangement that has served them well. Trade within the EC is so vital that most Europeans believe that curbing volatile exchange rates is worthwhile even if it means bowing to the Bundesbank’s view of the world. But throw away those grand plans for a common Europe and the timetable, too. Matrimony, when and if it comes, won’t look quite the way Europe’s matchmakers had in mind.
The turmoil begins: Finland cuts link to Europe’s currency; Sweden hikes interest rates to 75 percent.
German Chancelor Kohl secretly visits the Bundesbank and urges its officials to lower interest rates.
The Bundesbank cuts a dey interest rate, but the move doesn’t halt the sell-off of weaker currencies.
Emergency meeting is called in Brussels as Britain withdraws from the European exchange system.
Markets stabilize as traders await a vote on unification treaty in France.
