Germany & the EU - Part 3

Germany is the most powerful state in the European Union. Unification ensured that, though the FRG was one of the most powerful since the beginning of integration. France remains one of the most powerful states in the European Union and was the instigator of the ECSC that began the integration project. The two countries, plus Italy and the Benelux countries (Belgium, the Netherlands, and Luxembourg) were combined in a decentralized coalition still no match for the USSR. Hence the move to a centralized coalition. As described by Rosato, there was a symmetrical balance of power in Europe (aside from the Soviet Union) so there was integration throughout the Cold War, most especially in the 1950s and 1960s. The United States provided some level of military assurance to Europe as a guard against the USSR. Nevertheless, the WEU was formed because of mistrust of US commitment and a desire to not be so beholden to the US, though the security it provided was welcome. Due to its distant geography, across an ocean, there was little to no concern of US seeking hegemony over the European continent. And certainly nowhere near as much fear of the US seeking it as the USSR.

The collapse of the Soviet Union, the obvious sign of the beginning of which was the fall of the Berlin Wall in 1989, changed the balance of power in Europe. No longer was there an overwhelming threat, though by then the European Community had added the UK, Ireland, Denmark, Greece, Spain, and Portugal for a total of twelve countries. The fall of the Soviet Union was not anticipated by the West, as evidenced by President Mitterand asking President Gorbachev to prevent the re-unification of Germany and the ten-point re-unification plan Chancellor Kohl announced three weeks after the fall of the Berlin Wall. Such a plan would have been already in place had the event been truly expected. It is possible that the accession of Greece and most especially Spain and Portugal wouldn’t have occurred had the states been aware of the dire economic straits in which the Soviet Union found itself in the 1980s and the collapse of the USSR that was in no small part a direct consequence of it. But that can’t be known.

What is known is that despite the fall of the Berlin Wall and the collapse of the USSR the countries of Europe went ahead with further integration anyway. In my analysis this is due to a desire on the part of France to bind a Germany bound to come into more power soon that would thus tip the balance of power within the European Community. The UK sought primarily to buckpass, leaving the binding to France and being more willing to take the change of an un-integrated but unified Germany. Italy, the fourth biggest power in the EC, would have sought to bind a more powerful Germany. The Benelux countries, Ireland, Denmark, Greece, Spain, and Portugal were all engaging in wave of the future bandwagoning. Of those seven countries, Spain is the only one with enough clout to even be able to attempt a strategy of binding.

Why binding and bandwagoning instead of balancing? If there had been no European integration prior to the re-unification of Germany balancing and buckpassing would likely have been the favored strategies. But the mechanism for binding existed, and so it was used by the great powers of Europe as a means of better preventing war. The smaller states can’t hope to balance without the support of the great powers, so they bandwagon instead.

Germany’s strategy is the most simple and compatible with Mearsheimer’s theory. Germany desires to gain as much power over its neighbors as it can, and it aims to become regional hegemon. Because of the prior integration during the Cold War, it can do so peacefully through the very institutions that France and Italy seek to use to bind it. Negotiations over the institutions, which one gains what power in what way, have been and will continue to be the new battleground over which control of Europe will be fought. France is able to increase its power over its other neighbors with further integration as well.

The Franco-German axis has been the most important in European politics throughout the integration process. The events from the SEA through German re-unification and the Maastricht Treaty did not change that. On April 6, 1990, the foreign ministers of France and Germany announced from Paris an EMU agreement and declared that the EMU negotiations would move forward without delay. Thirteen days later a timetable for political and monetary union simultaneous conferences was announced by President Mitterand of France and Chancellor Kohl of Germany with plans to have a working treaty in effect by the beginning of 1993. They also announced at that time the goals of a political union agreement, which were: increase the democratic legitimacy of the EC, increase the effectiveness of EC institutions, ensure political, monetary, and economic unity and cohesion, and define and put into place a common foreign and defense policy. (Baun, 1996, p. 46)

In fall of 1989 the chiefs of the various national central banks were charged by their finance ministers with “developing a set of statutes for the future ECB.” (Baun, 1996, p. 61) They were to have the draft statutes ready in time for an EMU conference to take place in late 1990. By December of 1989 the central bankers had created a list endorsing German EMU demands, prime among them the priority of inflation-fighting for the future ECB and the total independence of the future ECB from political or governmental influence and interference. (Baun, 1996, p. 61) The chair of this committee of central bankers of the twelve EC countries was the head of the Bundesbank (central bank of Germany) at the time, Karl-Otto Pöhl. (Baun, 1996, p. 61) Their proposals would be unveiled prior to the conference:

The one area of EMU negotiations in which there was relatively little controversy concerned the structure of a future European central bank. In fact, agreement on this had largely been achieved prior to the beginning of the conference. Basically, it had been decided that the ECB would be modeled on the German Bundesbank. This outcome reflected not only Germany’s direct influence and bargaining leverage but also the predominance in Europe of German monetary norms and values. (Baun, 1996, p. 61)

The ECB structure as proposed in the draft statutes the central banker committee came up with was to have six executive directors appointed by the European Council for eight-year terms and the twelve national central bank governors. More controversially the draft statutes also mandated, as a result, that the national central banks be given total independence like the ECB was to have and the Bundesbank did have. The ECB would also have a mandate to fight inflation, total monetary policy control to be shared with no other institution, and complete independence excepting its annual report to the European Parliament and the European Council. (Baun, 1996, p. 62)

There was a dispute on the ECB’s priority in exchange-rate policy. Germany wanted internal price stability to be privileged over external exchange-rate stability. The economically weaker EC countries desired the reverse. There was also dispute over the ECB control of exchange-rate policy. Germany wanted the ECB to have unquestioned control, but France, Italy, the UK, and other EC countries wanted national governments to have more power via the Council of Economics and Finance Ministers (Ecofin). This dispute on the role of the ECB in exchange-rate policy was settled by a compromise on March 31, 1990 when the finance ministers of the twelve EC countries agreed to give control of the broad parameters of exchange-rate policy to Ecofin but day-to-day handling of it was given to the ECB. (Baun, 1996, p. 63)

The location of the ECB also proved controversial, with several proposals being put forth. Germany wanted it in Frankfurt, the location of the Bundesbank, reasoning that it would assure the international financial community of the soundness of the ECB. Chancellor Kohl also thought that placing it in Germany would help overcome domestic opposition to the abandonment of the Deutsche Mark and the surrendering of monetary sovereignty. France reasoned that it should be in Paris or Strasbourg, fearing undue German influence if it was located in Frankfurt. The UK, somewhat dubiously given their skepticism of EMU, claimed that the ECB should be in London because of London’s history as the center of global banking and finance. Smaller countries sought compromise proposals placing the ECB in Luxembourg or Amsterdam. In the end the issue was put off until the signing of the EMU agreement. (Baun, 1996, p. 63)

In 1990 there were some events of note dealing with monetary policy within the now-unified Germany. On July 1, 1990 the Deutsche Mark became the official currency of both East and West Germany. Within a couple of months the effects of this became known, and the verdict wasn’t good. The Bundesbank attempted to use the experience to argue for a slower EMU implementation, and even a two-speed approach. (Baun, 1996, p. 49) On September 19, 1990 the Bundesbank took an unusual step for it and released a paper with conditions for the EMU: “a future European central bank would have to be closely modeled on the Bundesbank, with complete independence from political authority and a statutory commitment to fighting inflation,” “there should be no firm timetable for realizing full monetary union,” “greater strides toward economic convergence among individual countries were necessary before establishment of a European central bank could be considered,” and “inflation had to be effectively eliminated from all participating countries before the final stage of monetary union could take effect.” (Baun, 1996, p. 50) These four points were all major parts of the negotiations and the first, third, and fourth were put into effect in one way or another at varying levels of strength.