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Eurozone Crisis as Historical Legacy

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The Enduring Impact of German Unification, 20 Years On

Mary Elise Sarotte

Summary: For all the success of German reunification, it left behind fateful seeds that sprouted into the current eurozone crisis. To overcome the current downturn, Europe should finish the job started two decades ago and retrofit the European Union with stronger political institutions.

MARY ELISE SAROTTE is Professor of International Relations at the University of Southern California. She is the author, most recently, of 1989: The Struggle to Create Post-Cold War Europe. This publication is a part of CFR’s International Institutions and Global Governance program and has been made possible by the generous support of the Robina Foundation.

As former U.S. Secretary of State James Baker once observed, “Almost every achievement contains within its success the seeds of a future problem.” The eurozone crisis of 2010 provides a trenchant example of this phenomenon. When the long-sought but controversial implementation of a European Monetary Union (EMU) finally began — as part of the bundle of deals that produced German reunification 20 years ago, on October 3 — it represented a significant accomplishment. Though the idea of a single European currency had been around at least since the Werner Report of the 1970s, German reunification provided the necessary catalyst. For all the success of that achievement, however, it left behind fateful seeds, which sprouted into the 2010 crisis.

The eurozone crisis resulted not only from the economic woes of weaker member states but also from flaws in the Maastricht Treaty and from Germany’s long-term declining interest in European cooperation. Since a crisis is a terrible thing to waste, the members of the eurozone should use the sovereign debt debacle of 2010 as a second “1989 moment.” They should retrofit the eurozone with the greater political institutionalization needed in the post-Cold War era — a goal Germany sought but failed to achieve at the end of the Cold War and now no longer prioritizes. In other words, the best way to deal with today’s issues is to finally address two decades of unfinished business.

The Bargain of 1989-90

European integration, and especially monetary integration, has a long history of stop-and-start activity. The 1970 Werner Report was a prime example: it originally called for an EMU within a decade, but each subsequent effort stalled short of implementation. The prospect of denationalizing currency and surrendering control over a fundamental tool of statecraft — currency valuation — was daunting to the member states of the European Community (EC). Politicians knew that they risked running afoul of voters if they surrendered too much sovereignty. West Germans, in particular, felt an extremely strong attachment to their postwar currency, the deutsche mark; for them, it was synonymous with the economic renewal, prosperity, and stability of the Cold War years, following on the trauma of the Weimar and Nazi eras. Beyond political worries, national capitals clashed over the question of independence for a future European Central Bank (ECB): West Germans cherished their independent Bundesbank and felt certain that it should have independence; the French prioritized political control over central bankers and how strict the convergence criteria should be — that is, how much inflation and sovereign debt would be acceptable.

It took the opening of the Berlin Wall on November 9, 1989, and the actions of two decisive leaders — West German Chancellor Helmut Kohl and French President François Mitterrand — to cut through the controversy and make the single currency a reality. The historian David Marsh singles out the bargain that Kohl and Mitterrand negotiated in 1989-90 as “the essential deal that launched Europe on the Maastricht monetary union path.” The deal originated in the work of European Community Commission President Jacques Delors. Heading an eponymous committee, Delors made a fresh effort to map out a path to EMU in an April 1989 report. He found that the critical step, from which all else would follow, would be to convene an intergovernmental conference (IGC) for the purpose of implementing a single currency. However, the Delors Committee Report left deadlines vague, jeopardizing the prospects for its success.

With the collapse of the Berlin Wall, Mitterrand saw an opportunity for rapid convocation of Delors’ IGC. He understood that the wall’s collapse would motivate Kohl to seek German reunification, and he realized that the smart move would be to embed increased German strength in a monetary union as soon as possible. Both Mitterrand and Kohl realized that it would be extremely difficult to reunite Germany if EC members became worried about a threatening resurgence of German nationalism. Kohl always believed strongly in European integration; the opening of the wall did nothing to undermine his trust in Konrad Adenauer’s saying that “German problems can only be solved under a European roof.” Kohl fundamentally agreed with the goal of a common currency, although he had previously indicated that it should be accomplished in future decades. Nevertheless, he understood that West German voters, a majority of whom favored European integration and worried about the costs of rebuilding East Germany, would resist a go-it-alone reunification process that alienated the EC. Given France’s weight in the EC, this meant that Kohl needed Mitterrand’s approval to proceed.

In return, Mitterrand asked that Germany assent to move toward a single currency as soon as possible, with the crucial IGC convening by the end of 1990. Mitterrand further insisted that the opening of the IGC be announced in December 1989 during the French presidency of the European Council. If the French president could preside over a significant declaration about the future of European integration on French soil, Mitterrand would advocate within the EC for German unification. In the interest of success, Mitterrand acceded to German wishes for the full independence of a future ECB. Mitterrand’s offer was well framed — Germany would get a currency union largely on its terms, but Kohl would have to compromise on timing. Kohl agreed to Mitterrand’s bargain.

Consequently, the 1989 Strasbourg summit announced both the opening of the IGC and the EC’s favo-rable attitude toward German unification. The IGC commenced roughly a year later in Rome, on December 15, 1990, and completed its work in December 1991 in Maastricht. In the end, the EC convened two IGCs in December 1990 — one on EMU and another on the political union of the EC’s member states. During this period, the West German officials pushed for integration and hoped to combine the single currency with a matching increase in political-institution building. Mitterrand was willing to consider robust economic governance of the eurozone but was loath to create new political institutions, and he prevailed — Europe would share a currency but not a treasury.

It is surprising and somewhat ironic that Kohl and Mitterrand achieved one of the greatest feats in the history of money. Neither had expertise, or even interest, in economic and monetary matters apart from their political impact. Indeed, the despairing president of the Bundesbank in the 1980s, Karl Otto Pöhl, told the Financial Times — while he and Kohl were both in office — that the chancellor knew nothing about economics. Read the rest of this article.


Written by Theophyle

October 5, 2010 at 12:20 pm

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  2. Eurozone Crisis as Historical Legacy…

    I found your entry interesting do I’ve added a Trackback to it on my weblog :)…

    World Wide News Flash

    October 5, 2010 at 2:15 pm

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