As will be recalled, the creation of the euro was not a short-term project; many years of preparation were necessary before the single currency could come into being. As is almost invariably the case, a complete understanding of the present situation can only be achieved if the historical background is explained. Consequently, it is necessary to explain—it is hoped, not in excessive detail—some of the milestones on the road to European Monetary Union (EMU), and to examine some of its foundations.1
For these purposes, it is necessary to return to the very origins of the European Community. The Treaty establishing the European Economic Community was signed by the six original Member States on 25 March 1957. Under Article 2 of the Treaty, the objective of the Community was ‘to promote throughout the Community a harmonious development of economic activities, a continuous and balanced expansion, an increase in stability, an accelerated raising of the standard of living and closer relations between the States belonging to it’. This objective was to be achieved ‘by establishing a common market and progressively approximating the economic polices of Member States’. With these objectives in mind, the activities of the Community included:
(a) ‘the abolition, as between Member States, of obstacles to freedom of movement for persons, services and capital’;2
(b) ‘the abolition of rules which restricted the right to establish branches, agencies, or subsidiaries in other Member States’;3 and
(c) ‘the application of procedures by which the economic policies of Member States can be co-ordinated and disequilibria in their balances of payments remedied’.4
In terms of a purely legal analysis, and against the background of the Treaty framework, it is apparent that monetary union is principally concerned with the free movement of capital and payments5 and the conduct of economic policy throughout the Member States. In this context, the key provisions of the 1957 Treaty, and Directives issued pursuant to it, included the following requirements:
(a) Member States were required progressively to abolish as between themselves all restrictions on the movement of capital belonging to persons resident in Member States and any discrimination based on the nationality or on the place of residence of the parties or on the place where such capital was invested; however, this requirement only applied ‘to the extent necessary to ensure the proper functioning of the common market’.6 Current payments (for example, payments of interest) in connection with a movement of capital were to be freed from national restrictions7 and—to the extent to which national systems of exchange control remained in force—Member States were required to be ‘as liberal as possible’ in granting any authorizations required in relation to capital movements and the connected current payments which fell within the scope of the Treaty.8 Finally, Member States had to ‘endeavour to avoid’ the introduction of any new or more restrictive rules against the movement of capital or associated current payments.9 The language of these provisions was deliberately equivocal; they allowed some scope for discretion and value judgment as to the manner and precise extent of their implementation. Indeed, in purely legal terms, provisions of this kind hardly impose definite obligations of any kind. As a result, these Treaty rules were found not to create rights which were directly enforceable by individuals in the context of domestic legal proceedings within a Member State.10
(b) Articles 104 to 109 of the Treaty contained various rules on the balance of payments of Member States in the context of overall economic policy. At a general level (and, to some extent, foreshadowing the more detailed provisions which would later be inserted by the Treaty on European Union), each Member State was required to ‘pursue the economic policy needed to ensure the equilibrium of its overall balance of payments and to maintain confidence in its currency’ and to ‘treat its policy with regard to rates of exchange as a matter of common concern’.11 Provisions of this kind create obligations of an inter-governmental nature, and are thus incapable of creating rights directly enforceable by individuals.12 More substantively, however, each Member State undertook to authorize payments to creditors in other Member States (in the currency of the creditor’s home country), where such payments were connected with the movement of goods, services, or capital or any transfers connected therewith, to the extent to which these movements had been liberalized pursuant to the terms of the Treaty.13 Of course, until the free movement of capital was fully liberalized, it necessarily followed that these treaty provisions could not have direct effect in Member States.14 By way of derogation from these provisions, Member States were allowed to restrict the free movement of capital when faced with serious balance of payment difficulties.15
(c) The early 1960s saw the issue of a series of Council Directives which gradually gave substance to the principle of free movement of capital; for example, Member States were required to provide authorization for payments to residents of other Member States for services rendered, and for the investment of capital as between the Member States.16 These directives demonstrate a recognition that the core freedoms for the movement of goods and services, and of establishment, can only be fully achieved if money, likewise, can flow freely across national borders.
Matters virtually rested here until 1970 when, at a meeting at the Hague, the Member States determined to establish an Economic and Monetary Union, and commissioned the Prime Minster of Luxembourg, Pierre Werner to produce a report on the subject. Very briefly, the Report17 noted the following key points:
(a) Economic and monetary union would allow the Community to create a geographical area in which goods, services, persons, and capital could circulate freely, without competitive distortions and without giving rise to structural or regional imbalances.18
(b) The creation of a monetary union would necessarily involve the complete liberalization of capital movements, the final abolition of exchange control regimes, the elimination of margins of fluctuation in exchange rates, and the consequent fixing of parity rates. It will be apparent from the final part of this statement that the Werner Report did not necessarily contemplate the establishment of a monetary union in the strict sense of the working definition formulated earlier.19 Nevertheless, the Report did assert that the ultimate creation of a single Community currency would be ‘preferable’.
(c) Economic and monetary union would involve the transfer of national sovereign powers to new, supra-national institutions which would be established within the framework of the Community. In particular, these institutions would become responsible for monetary policy; policies affecting the capital markets; and public budgets (including the available methods of financing those budgets).
(d) The coordination and approximation of economic policies were necessary prerequisites to the achievement of a monetary union. The Report also notes (perhaps a little optimistically) that the convergence of economic and monetary policies would have the practical effect of fixing exchange rates at appropriate levels, without the need for national Governments themselves to adjust exchange rate parities.
A review of the Werner Report serves to emphasize that a monetary union—whether or not within the strict definition of that term—will not normally be an end in itself. It will usually play a supporting role (albeit a crucial one) in attempts to create a geographical area in which economic and monetary policies are to converge and to be harmonized.20 This can be a difficult point for the lawyer to grasp, yet it is vital that he should do so, for the Treaty provisions dealing with monetary union must be interpreted in the light of Community objectives.21
Unfortunately, the Werner Report was published when the world was on the brink of a period of serious monetary instability. Stable exchange rates were supported by the Bretton Woods system of parities and perhaps represented one of the main assumptions upon which the Report had been based, but that system was to break down barely a few months after the publication of the Report.22 Difficult economic conditions and inflationary problems plagued the 1970s, with the result that it would have been extremely difficult to progress the necessary harmonization of national economic policies—even had the political will to do so existed. It must also be accepted that the Werner Report suffered from various deficiencies, which perhaps undermined its value as a guide to possible future developments. For example, the ultimate structures put in place for the euro are heavily dependent upon the institutional arrangements; the working definition of a monetary union23 demonstrates a similar such dependence. Unfortunately, the Werner Report—with its emphasis on economic policies, exchange rates, and like matters—was too superficial in its consideration of the establishment and the role of the required institutions. In a foretaste of later debates it was acknowledged that monetary union would involve a significant transfer of sovereignty to new institutions, but the Report did not go into depth on the structures required in order to create and sustain such a union.24
The Werner Report was thus in part a victim of changing macro-economic circumstances, and in part a victim of certain inadequacies within the Report itself. But it would be quite wrong to dismiss the Report out of hand, for it was in many respects the first major step towards monetary union, and it may also have influenced some of the further progress which was made in later years. Perhaps the Report’s most important lasting achievement was to highlight both the objectives and value of a monetary union;25 such a union would enable the Community to create ‘an area within which persons, goods, services and capital may move freely and without distortion of competition’. Once again, this serves to emphasize that monetary union—whilst a very important development in itself—is intended to play a supporting, rather than a leading, role in the achievement of overarching EU objectives.
The Werner Report also made it clear that a stable exchange rate environment or a single currency would help to drive economic growth. Despite the adverse conditions of the 1970s, various steps were thus taken both in the monetary field and in the context of the convergence of economic policies. Since these developments may be said to have their origins in the Werner Report,26 it is appropriate to describe them briefly.
First of all, a European Monetary Cooperation Fund (EMCF) began to operate in 1973.27 The stated purpose of the Fund was to facilitate the creation of an economic and monetary union between Member States, whether on the basis of a single currency or through the use of fixed exchange rate parities. Bilateral central rates applied as between each of the currencies within the system, and the Fund was to promote intervention in the foreign exchange markets in an effort to control the margins of fluctuation between the currencies of the respective Member States.28 The system of controlling margins of fluctuation was referred to as the ‘currency snake’ or simply, ‘the snake’.29