What’s the link between the Comoros Islands and interest rates in Germany and Finland? Never even heard of the Comoros? Join the club, the euro club. For the Comoros, soon to be joined by Cape Verde, San Marino and the Vatican City, will from January 1 1999 have a fixed exchange rate with the euro, an arrangement blessed by the Ecofin (the council of EU economics and finance ministers) and hallowed through a formal decision under Article 109(3) of the EU treaty. There.
This is not a joke, though the smiles of French finance minister Dominique Strauss-Kahn when he announced the French parts of the deal to the media were entirely unforced. France has succeeded in putting in place another building block in the construction of an exchange-rate policy for the euro, an edifice that will overshadow the European Central Bank (ECB) in its Frankfurt eyrie.
There is no obvious reason why the existing exchange-rate link between the French franc and the currencies of many former French colonies should not continue unchanged when the franc is replaced by the euro next January. The implications of the present link are, as France keeps telling its euro partners, budgetary ones for the metropolitan country. When, as in 1994, the budgetary costs of this arrangement become uncomfortably large, Paris simply tells the dependent countries that the exchange-rate peg has to be devalued. There should, in principle, be no implications for the euro area: France could quite simply agree with its dependants that the franc link becomes a euro link.
Yet France, through both the Bercy (the home of the finance ministry) and its Brussels branch office, aka the monetary affairs department of the commission, has successfully insisted that the link must be formally recognized by the Ecofin. The exchange-rate agreement under article 109(3) will be binding on the ECB. The treaty is totally unclear about what that means. But what is politically clear is that France has succeeded in making the link one that involves euroland. The next step will be to insist that the link is a formal exchange-rate agreement under article 109(1) of the treaty, implying that the ECB can be forced to support the exchange rate of France’s monetary dependencies.
Suppose the West African countries get into difficulty. France will certainly argue that euroland, having concluded an agreement with these countries, has to show “solidarity” with them by printing euros, whether the ECB likes it or not. Of course, France now swears blind that it will never do anything of the sort. But it has got a foot in the legal door of exchange-rate policy. Its use of article 109(3) is a quite deliberate reminder to the ECB that the provisions of article 109 as a whole were put into the treaty at Maastricht to ensure that the Ecofin can overrule the bank if necessary. The ECB will steer as close to the wind as it can in its relations with the politicians, but the Sword of Damocles, in the form of the provisions of article 109, will be hanging over its head if it annoys the politicians too much, it will be hammered with exchange-rate agreements that take away its monetary policy independence. So we can be sure the ECB will not annoy the politicians too much.
But making sure the ECB is properly house-trained is not the only reason for France to pursue the aim of a euro exchange-rate policy with great determination. Its geopolitical aims also depend on being able to use the euro as weapon against the US. The recent remarks of former foreign minister François Poncet, echoing those made some time ago by Jean-Pierre Gérard, then member of the Banque de France’s monetary policy committee, are unsurprising to anyone who has followed French attitudes to monetary questions: the euro, France hopes, will suck capital out of the US, force up American interest rates, create unemployment there and force the US to come to the negotiating table.
To negotiate about what? About steering the world economic order away from its brief flirtation with free-market capitalism, of course, but also about carving out zones of influence. Members of the French government are, for the moment, somewhat more circumspect. But when European affairs minister Moscovici recently told American audiences that the euro was not a threat to the US but instead provided an opportunity for the US and Europe (ie France) to manage the world together, he was in effect saying that the Anglo-Saxon model so reviled by continental politicians can no longer be allowed to hold sway unchallenged.
More immediately worrying for world economic and financial stability, France’s euro commissioner, Yves-Thibault de Silguy, has declared that the coming of the euro must lead to the establishment of “a system of continuous monitoring and surveillance of excessive fluctuations in exchange rates” and that it will be necessary to eliminate the causes of these “excessive fluctuations”. What, can one imagine, are these causes in de Silguy’s estimation? One is the world capitalist order itself, for stable exchange rates are quite simply incompatible with the ferment, “the gale of creative destruction”, the permanent economic revolution, that capitalism needs if it is to survive. Justifying that incompatibility theorem would require a whole article. But for now, let us concentrate on another supposed cause of “excessive fluctuations”, for in doing so we shall be able to see the significance of another unconsidered trifle so serendipitously sneaked into the Maastricht Treaty.
President Jacques Chirac, part of a line of French policy-makers going back to the seventeenth century, fulminates incessantly against “speculators”: the forced devaluation of the franc during his premiership in January 1987 was a major factor, in Chirac’s personal demonology, in his defeat in the presidential elections the following year. That devaluation prompted the Louvre Accords, an exchange-rate agreement whose malign effects are, via the Japanese “bubble” economy and its subsequent pricking, still with us. De Silguy, Bercy, Matignon and the Elysée all want a new set of Louvre Accords. If they get their way, of course, “speculators” will have a whole season’s worth of field days.
But the technocrats have another weapon up their sleeve. Under the Treaty of Rome, individual member states could impose exchange controls if their balance of payments position was under threat. Maastricht abolished this possibility as of the start of the second stage of Emu. Instead, it put in place a new provision, article 73(f) that allows a qualified majority vote in the Ecofin to impose exchange controls between all member states (including those that do not participate in stage 3, the single currency) and the rest of the world if capital movements “cause, or threaten to cause, difficulties for the operation of economic and monetary union” (in theory, these controls cannot be maintained for more than six months, but there is nothing to stop the Ecofin reimposing them time and again). That article, let it be remembered, is not some musty hangover from the Bretton Woods era thinking that underlay the original Treaty of Rome: it was expressly formulated as a new weapon in the Maastricht treaty. France has recently been insisting in closed-doors meetings that it must not be a dead letter: if it is there, it is there to be used.
In fact, article 73(f) could well get its first run-out on the field of play sooner than most people imagine. The commission, prompted this time primarily by Germany, wants to impose withholding taxes on non-resident interest income in all member states. For the moment, Britain is resisting this interference with national prerogatives on direct taxation, but may well succumb to the Blairian imperative of wanting to be liked by everyone, especially those nice Europeans. And one can be nice to the jolly old Channel Islands at the same time useful when you are getting ready to hit them with all sorts of unpleasantness in terms of their tax and defence arrangements with the United Kingdom.
How so? Well, the naïve argument goes, if Britain allows the Ecofin to force Luxembourg to tax interest paid to Belgian dentists and their German counterparts, then all those juicy deposits will move out of range of Brussels diktats to the Channel Islands, which are not part of the EU. Unfortunately, the idea that the EU will put in place legislation whose only impact is to shift deposits from Luxembourg to St Helier or St Peter Port is quite ludicrous. How could the shift be avoided? Article 73(f), of course. Britain could not veto such a use of the article to block capital movements between the EU (including Britain) and the Channel Islands.
The imposition by Brussels of exchange controls between Britain and the Channel Islands would be extremely embarrassing for the British government and would highlight the anomalous constitutional position of the British crown in the EU. It is possible that Whitehall will wake up (assuming that it was genuinely sleeping and not plotting when article 73(f) was inserted into the treaty) and that in consequence Britain will veto the withholding tax legislation. But if article 73(f)’s present potential for political embarrassment over the Channel Islands can still be forestalled, its future potential for inflicting financial catastrophe on London may prove much harder to avoid.
Euroland is heading for a financial crisis when peripheral country booms, stoked by interest-rate convergence and a post-Maastricht-criteria “let’s party” attitude to budgetary policy, go bust in few years’ time, budget deficits blow out and markets realize they cannot be brought down again without a massive depreciation of the euro.
European central bankers and even finance officials talk about little else in private when they get together. But they know the politicians are so thrilled with having secured their places in history that they care not a jot about the dreadful future they have created. When the crisis erupts, the politicians will not blame themselves for it. Instead “speculators” will once again be fingered as the root of all evil. While new treaty negotiations to ram a euro treasury, the only technically feasible solution to the crisis, down the unwilling throats of electorates in Germany, Britain and Scandinavia are in progress, article 73(f) will be used as a sticking-plaster. But exchange controls will then not be applied only to the Channel Islands: they will apply to all the major non-EU financial centres. The impact on London will be devastating.
The devil is in the detail; and the undigested detail of Maastricht is, from London’s perspective, truly diabolical.
Bernard Connolly, an executive director of AIG International, is working on an update of his book “The rotten heart of Europe”
