The Werner report


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The Prime Minister of Luxembourg, Pierre Werner, chaired the committee on European monetary union and gave his name to their report. Here he talks to Euromoney in the only such interview granted since the publication of the report.

M Werner, how did you see your task when your committee was preparing the Werner Report? It obviously went far beyond a mere mechanical tidying-up operation in line with the development Of the Community. In fact, many commentators believe that rnonetary union should have had a far greater priority in the early years of the EEC.

Well, of course, the whole dispute was about priorities. There are two schools of thought: those who believe that monetary union can only be the crowning achievement of political union, and the other school which says you have to take monetary policy and use it as a tool for pushing for the co-ordination of economic policy.

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from Euromoney
December 1970

At the beginning of our studies there were these two schools. Personally, I think you can achieve a lot if you put monetary policy into action. Of course, there were other views but I think we finally succeeded, after long discussion, in setting up a kind of parallelism between monetary action and economic co-ordination. It's not easy, because the two kinds of activity are different in themselves. Co-ordination in economic matters is a day-to-day business and you can only come to overall solutions, whereas monetary solutions are very precise and give a definite result within a definite time. However, I think we finally overcame this difficulty by trying to put this on a parallel basis.

The Common Market is intended to make the most efficient use of its members' resources and abilities as a whole, regardless of purely national considerations and the Werner Plan could push this forward much faster than many people, certainly than many politicians, would wish.

I have been surprised to see how quickly people can change their mind on this matter. Even eight or nine months ago many people were very sceptical of reaching monetary union within the Community but after having discussed this for many months, having seen the first provisional report, and having seen what is going on in the world, there is a greater open-mindedness towards this problem. I have seen many notable converts in this respect in recent months.

I think this is due to the fact that already in June the Six took the first decision which has had a certain bearing on international matters. That is, we decided on the basis of the first preliminary report that whatever happens in the wider area of the IMF in respect of greater flexibility in rates of exchange, the Six would maintain between them margins no wider than the existing limits.

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This decision has already had certain consequences which I particularly noticed at the meetings in Copenhagen, where I met a lot of American and British bankers who are already thinking in terms of the monetary union of the Six, which a year ago would not have seemed possible. I think the experience of the last year, with the two parity changes within the Community, has shown that there is something lacking.

Personally, I believe that there are three principal reasons for monetary union. The first lies with the treaties as they are now. It has very often been underlined that the Treaty of Rome has very ambitious goals but, especially in monetary matters, the provisions are not up to date or adequate to meet current problems. For example, there is an article that says that everyone has to have a monetary policy that is in the common interest, but this doesn't mean very much unless it means monetary union. Then you have to fix common objectives if you have to administer your own currency according to the standard of the Community.

If you aim to eventually remove all distortions in competition between the countries, then you have to arrange monetary matters as well. I mean the disturbances caused by the French and German parity changes showed us that the treaties have significant gaps in them.

The second point is that because of these deficiencies in the treaties a monetary and capital market has developed in Europe that to a high degree escapes national control — the Eurodollar market. There is a problem, in the capital market especially, of looking for a common denominator.

Of course, there are Eurodollar bonds denominated in Deutschemarks and guilders but there is no European currency, yet, which can take over the role of the dollar in Europe. This shows that the private sector is ahead of political and institutional developments.

The movements of capital which we had a year ago were getting out of control and disturbing the economies of the Six.

So you consider that a Eurocurrency would probably be the best means of controlling the Eurodollar market rather than attempting to impose controls per se?

Yes. By that I mean that this is only an indication that we do need something. On the other hand, you have had the developing problems of the dollar, which means that it is valuable to have what my colleague, M Giscard d'Estaing, called a secondary monetary pole in Europe.

The third point is, of course, as we say in our report, that there are steps which have to be taken and incentives which have to be given to economic co-ordination. The use of monetary policy and instruments also helps the easier development of political union. As I said earlier, I do not believe that monetary union should crown political union but should help it. Monetary union induces us to go ahead and is both an incentive and a means of co-ordinating economic policy.

Those are the three basic reasons behind monetary union, but I always insist that there are also reasons derived from the present treaty. Monetary union is not just a Utopian plan which has been developed; there is a practical need for it as well.

All this must mean the creation of a European central bank, whatever name you give it, which will be extremely powerful since, by their very nature, such bodies are collectively always more powerful than the institutions that appoint their members. Do you see further parallel political developments or will this body, presumably the Committee of Governors, have huge powers with very little control over how it uses them?

What we are proposing is a kind of federal system of central banks which has to devise the fiscal and monetary policy to be applied by the Six. This Board of Governors of such a system will have an independent position. In different countries there are different traditions of the relationship between central banks and government — in some countries the central banks are more independent than in others. In our report we have not laid down exactly what the relationship should be between the new federal system and the political power.

Of course, the central banks will apply monetary and credit policy in the framework of a broad economic policy which will have to be laid down by the governments or by the 'Centre of Economic Decisions', which we have not otherwise defined. It is a second body which we consider to be necessary in the final stage when parities are fixed and can no longer be changed.

This definition of an economic policy is made only as far as the needs of the Community and of monetary union are concerned. In one part of our report we insisted that there should not be excessive centralism. That means that the role of the Community as such, and of the common policy as such, will have to be harmonised with the very important duties and responsibilities which rest with national governments.

Doesn't this imply that a degree of centralist policy will be forced on members, not by a central body but by market forces?

To some degree. You know that there is already some argument around our report — for instance, the French Government are insisting on the letter of our report. I have sometimes felt there is some misunderstanding in this.

When we say that we will have a 'Centre of Decision' for economic policy this means the essential decisions which have to be taken to make it possible to have monetary union. For instance, as far as the Budget is concerned, this means that you have a common ruling or guideline for the way you finance your Budget, the way you take into account differences on the Budget or use surpluses, but it does not involve control of, for example, how you distribute subsidies or how national needs are met in the national Budgets or even how high the tax load is — one country may permit itself the luxury of high taxes, while others may not.

What will be the responsibilities of the 'Centre of Decision' in the final stage is the fundamental orientation of economic policy which is necessary to bring about the common monetary policy. It will not involve a daily, nor even a yearly, interference with the way countries divide their Budgets between, say, social and defence expenditure. This remains a national responsibility.

The mechanics of the Werner Plan, especially when read in conjunction with the Ansiaux Report, are admirably clear and straightforward, particularly on the swap arrangements and the steps towards narrower bands between EEC currencies, but how do you envisage coping with a situation where one member is indulging in strongly inflationary policies relative to the other members?

You know that in the first instance we shall make a real effort (and we have proposed methods of doing this in our report) for the co-ordination of economic policies, but the success of this is likely to be gradual. In the beginning it may well be more difficult but, of course, in the long run we shall achieve a common orientation for our economic policies.

Now, of course, there is the possibility of accidents, social developments in one or another country, which we had to take into account. Therefore, the policy had to be completed by what we call a regional and structural policy which tries to improve the structure of regions which are not as productive as others. This may be through official aid; for instance, there is a regional unemployment fund and the European Investment Bank.

We also hope and think there will be private transfers of capital from one area to another as soon as it is allowed to move freely. I think that in the long run deficiencies in some parts of the Community can be corrected by official action and by private transfers of capital.

So that once you get full freedom of capital movement within the Six investment will find its own level as the labour market has already tended to do?

Yes, that's true.

But that's at the end of the road. Meanwhile all the internal factors, fiscal policy, credit supply, bank liquidity, interest rate structures, etc, will still have to be brought into line by mutual agreement?

Yes, Of course. This is why the first three-year stage is more than just the first of a number of steps. It is during this stage that we must form the basis of the whole system, and I think that the success of the first stage will be the success of the whole enterprise.

Of course, as you say, fiscal, credit, liquidity and interest rate policies are not yet sufficiently harmonised to avoid discrepancies or even accidents, but we consider this first stage to have, to some degree, a pragmatic and experimental character. For instance, during the first stage when we begin to reduce the margins of the fluctuations of the rates of exchange we shall see how much and how far this affects the economies and budgets of different countries. If we find that there is no unacceptable disturbance we shall take the second step, and so on.

Most businessmen and central bankers are much keener on the whole idea of monetary union than are many politicians. Do you think, therefore, that the programme could take a shorter time than currently envisaged?

I think so. We have envisaged a period of ten years. We have not yet defined the details of the second stage because I think the fundamental decision, which will have to be taken within three years, should come after having made these experiments.

During this experimental period parity changes will still be possible by agreement and after discussion by members of the Community of the effect of any such change on their common policy in monetary matters. The real political mutation will come when parities are fixed.

So the French and German parity changes will be the last decided unilaterally?

Yes. In future it will only be possible to have a common change of parity towards third currencies, that is the dollar. I think that will be the real political mutation and the stage at which some political conclusions will have to be drawn.

Meanwhile, during the first stage and, perhaps, during the greater part of the second we shall maintain some flexibility in all this. Knowing that harmonisation of our policies is going to be gradual and irreversible we cannot be sure of succeeding all at once in the first stage.

How do you see sterling fitting in with the Community's plans for monetary union?

Very well. Besides the more political reasons for British membership there is the role sterling plays in the world as a reserve currency and also the experience and great tradition of the City of London. If we want to build up a monetary role of some consistency and importance which means something I feel it would be enhanced — would be much stronger — if sterling joined the Community. It would be of great profit to the United Kingdom and to the Community itself. Of course, there are some great problems, too, but these must be solved.

It has been claimed that British entry to the EEC would, to put it crudely, merely result in the vices of the pound being supported by the virtues of the Deutschemark.

I understand that according to the Basle Agreement there is already some support for sterling by European countries, so this would not be a fundamental change, at least not in the first period.

Do you feel that UK entry to the EEC will require a degree of unemployment to give sufficient flexibility to help adjust to new circumstances?

Of course, it all depends on the conditions of entry. There will be some kind of readjustment but I do not feel this will necessarily require a degree of unemployment. We all had to adjust to some degree. In my own country we had to make some very important adjustments in prices and conditions in our agricultural industry due to the common agricultural policy. The first year of entry puts problems before a government, but if the Market has any meaning I think it means enlarging a country's markets and putting new opportunities before it. Any problems should be transitional, although, of course, some British firms will profit from the first day of entry. Others will have to reorganise and merge as we have all had to do in the Community. However, the overall picture should not mean unemployment if we reach the main aim, which is expanding trade.

The Werner Plan should undoubtedly lead to a strong Eurocurrency, whether it has one name or six, which will become a trading and reserve currency. Do you see EEC central banks holding more and more of their reserves in the Eurocurrency at the expense of dollars, and do you think this will lead to a decline of the Eurodollar market?

It will in the long run change the conditions of the Eurodollar market. I am sure that the move toward narrower bands and fixed parities will, when a single currency evolves, result in that currency becoming very important on the capital markets. This might mean that, in the long run, the Eurodollar market may function in a very different way under different conditions than it does now. At present the capital which is circulating between our countries through the agency of the Eurodollar market is, after all, mostly our own European capital.

As soon as people have confidence in a Eurocurrency it will have an important part to play. I think this will be a good thing for the dollar too because I doubt that it is a desirable situation where the dollar, as a reserve currency, has no one else to compete with.

In fact, the dollar could be freed from Europe rather than the other way about?


Which could mean that with a Eurocurrency competing with the dollar the whole question of the monetary price of gold could become very much more a practical rather than an academic matter.

I don't think this is likely in the early stages of the plan. It could come in some years but I think the dollar will maintain a very strong position because the economy is so strong and dynamic; so I do not fear for the dollar. On the contrary, I feel that the existence of this second monetary pole would enable the Americans to measure the value of the dollar against some other currency and this might be a good thing in giving them indications which would be a help in dealing with their own economic problems.

The Eurocurrency will obviously be freely transferable throughout the FFC but, as I see the situation, it would also have to be freely convertible externally as well.

In my mind the Community should be an open community. If we want to make our contribution towards solving the financial problems of the world — and I mean by this, among other things, firstly, our contribution to the international monetary system and, secondly, to the developing countries — I feel that we must have a freely convertible European currency.