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Tensions Between Monetary and Financial Integration in the EMU

Within a year of the publication in 1987 of my historical account of the shifting priorities in Europe’s monetary and financial integration, dramatic first steps in a process of major changes in both areas were taken: In June 1988, the then 12 members states of the European Economic Community committed themselves to removing the residual controls on capital flows within a short time scale. And, in that same month, the European Council of Heads of State and Governments “confirmed the objective of progressive realization of economic and monetary union” and set up a committee, largely composed of national central bank governors, with Jacques Delors, then President of the European Commission as Chairman. The “Delors Report” of 1989 formed a stepping stone to the Maastricht Treaty, adopted at the end of 1991, and to the start of a common currency for 11 member states only seven years later. The scope and the speed of the process came as a major surprise, even to those most convinced of its net benefits, among whom this author has to be counted. Why did this strong momentum develop? And, in retrospect, would a more steady pace have been preferable? While the speed of action was certainly unanticipated by most observers, several of the arguments that prompted it were reviewed in the 1987 article. First of all, there was a perception of an interaction, indeed a synergy, between capital liberalisation and monetary union. Germany, supported by the Netherlands, had long argued that some of its partners – France, Italy and Belgium – in their efforts to defend the central rates for their currencies against the German Mark within the European Monetary System (EMS), had been unwilling to submit their national performance and policies to the judgment and discipline of international financial markets. On the other hand, once short-term capital flows were also liberalised, the EMS could be expected to become more unstable; if so, higher capital mobility would strengthen the case for more permanently fixed exchange rates, ultimately a common currency managed by a European central bank. The governments of France and Italy began to