The Euro: The Politics of the New Global Currency

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"David Marsh gives the first comprehensive account of the Euro's long, complex journey from vision to reality - a process in which Britain and the US, as well as Germany and France, have played key parts. Drawing on exclusive narrative accounts from all the pivotal players in the drama as well as hundreds of confidential documents, Marsh tells the extraordinary story of the rivalries and intrigues that formed a currency now reaching out far beyond Europe's borders. Analysing the achievements and shortcomings of its first decade, he argues that the Euro has overcome many hurdles, but that political and economic differences among member states are becoming wider, and harder to bridge." This is the authoritative guide to the new and compelling force shaping the future of world money.
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Editorial Reviews


Chosen as an Outstanding Academic Title for 2009 by Choice Magazine

George Soros
"An amazingly detailed and thoroughly readable account of the long march to the Euro. This is the stuff of a political thriller: the deal-making behind a currency constructed not just as a financial instrument but also as a way of overcoming centuries of conflict. Anyone interested in European politics and economics, as well as Europe's place in the wider world, would enjoy it."—George Soros
Chosen as an Outstanding Academic Title for 2009 by Choice Magazine
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Product Details

  • ISBN-13: 9780300127300
  • Publisher: Yale University Press
  • Publication date: 5/5/2009
  • Pages: 352
  • Product dimensions: 6.40 (w) x 9.30 (h) x 1.20 (d)

Meet the Author

David Marsh is chairman of SCCO International and co-chairman of Official Monetary and Financial Institutions Forum. He is a frequent contributor to German and British publications, and he lectures widely on political, economic, and business issues. He lives in London.

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Copyright © 2009 David Marsh
All right reserved.

ISBN: 978-0-300-12730-0

Chapter One


A continental currency, with a dual metallic and fiduciary base, resting on all Europe as its capital and driven by the activity of 200 million men: this one currency would replace and bring down all the absurd varieties of money that exist today, with their effigies of princes, those symbols of misery. Victor Hugo, 1855

A currency for Europe is a design long in its pedigree, enrapturing in its endeavour. The dream of a common unit of money to invigorate and unify disparate peoples, and imbue national economies with wealth and dynamism, has sporadically captured attention throughout centuries of political thought. Because European monetary union attempts to fuse a potentially highly unstable combination of politics and economics, realising it has been an elusive aim. But because its accomplishment is believed to bring such rich rewards, the would-be builders of the single currency have proved extraordinarily persistent.

Over the ages, monetary and political union have been constant bedfellows. The borders of money and state are normally synonymous. In the past a reordering of currencies formed the natural sequelto the redrawing of national boundaries. The examples are wide-ranging: the unification of the Netherlands, Italy and Germany in the nineteenth century; the collapse of the Russian, Ottoman, Austrian and German empires during and after the First World War; the demise of the Soviet Union in 1991 (which saw the rise of 15 separate currencies in newly-independent states after the break-up of the rouble area).

Evidently, some areas of political or military dominion have been too large, diverse or unstable to accommodate a standard currency. The Persian Empire in the time before Christ had no uniform coinage. It took centuries for a uniform currency to spread across the Roman Empire. In more recent times geographical constraints determined that the pound sterling was not in issue throughout the British Empire. Had Germany finished victorious in the Second World War, the Third Reich's monetary planners advocated that conquered states' individual currencies would have continued in existence, at least for a transitional period, although they would eventually have been part of a monetary union beneath the dominant Reichsmark.

As such examples demonstrate, not all political unions automatically involve a monetary union, but uniform money has generally been the hallmark of political homogeneity. Karl Helfferich, the German economist and later finance minister, described the essential interaction:

The right of minting coins was, from the earliest days, so closely connected in the public mind with the power of the State that it was always regarded as an essential attribute of sovereignty, and the history of this exercise of power reflects the general lines of development of State authority itself ... After the conquest of Italy by the Romans, the provincial States were only allowed to coin money of small denominations; large denominations were coined exclusively by Rome. In Germany, so long as under the Franks a strong central power existed, the King alone had the right of coinage.

The greatest of the Frankish kings, and the ancestor of the rulers who gave rise to modern France and Germany, was Charlemagne. He established a new currency standard in the eighth century, the livre carolinienne, based upon a pound of silver. In tenth century England the Anglo-Saxon King Athelstan decreed, 'There is to be one coinage over all the king's dominion.' The Byzantine Empire, successor to the Romans from the fourth to the tenth centuries, introduced uniform gold coinage that was accepted across the known world, from Britain and Scandinavia through to China and India. The succession of political and monetary linkages continued into modern times. The US became a fully-fledged monetary union only after its Civil War.

The search for the monetary equivalent of the Holy Grail has frequently been tinged with idealistic fervour, often co-existing with a strong dose of political and economic self-interest. George Podiebrad, a fifteenth-century king of Bohemia, suggested a European Federation that would issue a common currency to be used by a European armed force raised to fight the Turks. Napoleon I advocated a common European money to advance trade - under French leadership. Nineteenth-century philosopher and political economist John Stuart Mill believed that the march of human progress through 'political improvement' would eventually encourage the adoption of one world currency. French poet and dramatist Victor Hugo bracketed together a single European currency with his vision of a United States of Europe in benevolent co-existence with the United States of America. These two 'immense groupings' would 'extend each other the hand across the seas, exchanging their products, their commerce, their industry, their arts, their genius, opening up the globe, colonising the deserts, improving creation under the gaze of the Creator.'

The concept of a united Europe was close to the hearts of the rebuilders of Europe after the devastation of the Second World War. Winston Churchill, in a 1946 speech propounding a 'United States of Europe', supplied a thread of rhetoric subsequently woven by European politicians into a multiplicity of benevolent but often misguided aspirations. The speech was frequently misunderstood, for Churchill had no intention that his own country should join the club. Nor, in the course of time, did any other front-line European statesman sign up seriously to the concept of a political union for Europe akin to that of the US. After the Second World War, Jacques Rueff, a onetime wartime Banque de France official who became a distinguished adviser to President Charles de Gaulle, famously said money would pave the way for European integration: 'L'Europe se fera par la monnaie ou ne se fera pas' - 'Europe shall be made through the currency, or it shall not be made'. Rueff 's declaration demonstrated support for common principles of monetary stability rather than early advocacy of a single currency - but as a rallying cry it was destined to echo down subsequent decades.

Legacy of the Gold Standard

Maastricht and the monetary unification of Europe build on the residues of the nineteenth-century Gold Standard, first put into operation by Britain in 1821. The Gold Standard underpinned economic and social stability by setting fixed currency conversion rates for world trade and investment, linked to the strength and solidity of gold. Notes and coins were backed by and convertible into specific weights of the precious metal. John Maynard Keynes, although renowned for declaring gold as a 'barbarous relic', described the metal's age-old appeal as an instrument of stability and trust: 'Dr [Sigmund] Freud relates that there are peculiar reasons, deep in our sub-consciousness, why gold in particular should satisfy strong instincts and serve as a symbol. The magical properties, with which Egyptian priestcraft anciently imbued the yellow metal, it has never altogether lost.'

The Gold Standard built on that magic. Linking the separate currencies of the great trading nations of the world - led by Britain, France, Germany and the US - the gold bloc worked as a common currency system. As world trade and investment grew following the Industrial Revolution, the Age of Gold was a period of stable prices, liberalised international trade and technological and industrial innovation. By demanding uniform orthodox policies, it imposed a political as well as a monetary order. The system was operated by central banks which cooperated across national boundaries and were in many cases privately-owned institutions. Although imbued with the trappings of internationalism, they were subject to strong elements of state authority; they were jealously protective of their national policies, their inbred cultures and their independence: less often from their governments, more frequently from each other.

Gold was the world's arbiter, bringing in automatic adjustment for countries which over-extended themselves by importing more than they exported and thus suffering balance of payments deficits. When that happened, gold left the deficit country to finance the payments imbalance against nations with surpluses. The money supply in the deficit country fell, causing deflation and lowering domestic demand. This eventually restored trade competitiveness and rectified the gold outflow problem. The opposite happened in surplus countries. Here, imports of bullion increased the money supply, stoked up demand, generated inflation, lowered competitiveness and thus, over time, eliminated the cause of the inflows. The rules of the Gold Standard required deficit countries to take monetary policy action to induce investors to forgo the attractiveness of holding gold, and instead maintain balances in currency. In a response to a gold shortage, central banks raised their discount rates - the rate of interest charged to member banks in the domestic money system. This achieved the dual result of attracting foreign liquid funds and damping domestic demand - thus strengthening international competitiveness and redressing the problem that led to the gold outflow. As a corollary, the Gold Standard required that countries with payment surpluses should reduce interest rates to stave off an inflow of gold, resulting in a renewed supply of the metal flowing back towards the deficit countries.

Co-existing for a while with the Gold Standard were several experiments aimed at building a comprehensive monetary union and containing elements of political as well as economic harmonisation. An ambitious scheme with potentially wide international repercussions, Latin Monetary Union, comprising France, Italy, Belgium, Switzerland and (later) Greece, started in 1865 and lasted until 1927. This was a bimetallic scheme, based initially on silver and then also on gold, allowing interchangeable, common silver and gold coins to circulate in all member countries, based on a fixed conversion price of 15 to 1 between the two metals. Latin Monetary Union made members' currencies legal tender across national boundaries, with the aim of 'remedying the disadvantages resulting from the diversity of their currencies for communications and transactions between the populations of member states'. Latin Monetary Union was regarded by many, including its originator, a bombastic French parliamentarian, as the first step towards World Union. The system relied on coordination among member nations' central banks. However, it petered out when the political will to support it ebbed away. Central banks abandoned common rules and instead followed go-it-alone monetary policies. The coup de grace came when impecunious governments in France and Italy resorted to issuing paper money that was not convertible to gold or silver.

Another example of a union that ultimately unravelled because of the lack of common monetary and political instruments was the Scandinavian monetary union linking Denmark, Sweden and Norway. Built around the three countries' different forms of taler currency, it lasted from 1873 to 1920, after members abandoned unity and gave priority to their own monetary policies.

Like the diverse monetary unions that it helped to spawn, the Gold Standard generated an aura of enduring stability - but it turned out to be an illusion. The Gold Standard maintained monetary equilibrium among its members. But the adjustment mechanism demanded a high price, in the form of sometimes rapid fluctuations in output and employment. At times of crisis, the requirement to obey international monetary rules was always likely to take second place to governmental self-interest.

The Maastricht conference brought to a head a long search for a common denominator for European money that would be less arbitrary and more secure than gold. The bond sealed at Maastricht was however essentially political rather than monetary, and it was between Germany and France. These two countries lie at the heart of the reconstruction of Europe. Yet theirs is a delicate and fraught relationship, caused by centuries of rivalries, altercations and conflicts. Long-standing French anxieties about German dominance have their genesis in a nineteenth-century war that established Germany not only as a mighty military foe but also, for the first time, as a repository of financial power. In contrast to Britain and France, which had developed into unitary states hundreds of years earlier, Germany was a latecomer to nationhood.

For hundreds of years up to 1871, Germany had been a confusion of weak, factionalised states sprawled across the political, cultural and military fault-lines of the Holy Roman Empire and then, from 1815, the German Confederation. The fusion of these diverse subcomponents of a nation-state, and the development of modern German money and banking, took place at the same time. The first significant steps towards constructing German union out of the previous fragmentation came with the creation of the Zollverein (Customs Union) in 1834. Under Prussian leadership, this removed all internal tariffs and created a single market among its eighteen member states. The Zollverein created a loose form of unified currency, the Vereinstaler, in 1838 - bringing together an assortment of currencies that formed the dowry of the German Empire. In the mid-nineteenth century, Germany displayed a monetary muddle of the most chaotic kind. Ludwig Bamberger, a leading member of the German Reichstag (parliament) and an expert on finance and economics, led the quest for a new German currency as part of the momentum towards national unity. In 1870 he described to the Reichstag the bewildering proliferation of coins collected from the pockets of peasants in one small Rhenish town.

The sum of 15,834 guilders consisted of double talers, crown talers, pieces of 2 1/2 gulden, of 2 gulden, 1 gulden, 1/2 gulden, 1/3, 1/6 and 1/12 Imperial taler, 5 franc pieces, 2 franc pieces, 1 franc pieces; then we have gold coins such as pistoles, double and single Friedrichsdor, half-sovereigns, Russian Imperials, dollars, Napoleons, Dutch Wilhelmsdor, Austrian and Württemberg ducats, Hessian 10-guilder pieces and last of all a piece of Danish gold.

The Franco-Prussian War, the catalyst for Germany's political and monetary unification, was sparked by the stratagems of Prussian prime minister Otto von Bismarck, combined with a foolhardy over-estimation of France's military strength by the French parliament and army. France unwisely declared war on Prussia in July 1870 over a symbolic dispute concerning the Spanish succession. After a lightning campaign by the Prussian army, French forces were besieged at Metz and defeated at Sedan in Eastern France in September. Emperor Louis Napoleon and 100,000 soldiers were taken prisoner. France's fate was sealed when a revolutionary government gained power in Paris, ruling out any question that a foreign government would send military assistance.

In the wake of the triumph, Bismarck orchestrated agreement by the previously recalcitrant southern German states for the King of Prussia to become German Emperor. With near-caricatural disregard for French sensitivities, Bismarck organised the proclamation in January 1871 at Louis XIV's gilded Palace of Versailles. On the fields outside sprawled the camp of the German army laying siege to Paris. Soon afterwards, Bismarck started negotiations on war reparations with Louis-Adolphe Thiers, the conservative Republican who became president of France under the still-provisional Third Republic. In a forerunner to manifold Franco-German monetary disagreements a century later, Thiers declared that German demands were an 'indignity'. Bismarck replied archly, 'The tribute, so burdensome in appearance, will be paid by you without you being aware of it.' Gerson von Bleichröder, Bismarck's assiduous and many-sided banking adviser, was at Versailles to assist with the financial technicalities. He wrote to Prussian Crown Prince Friedrich-Wilhelm: 'Count Bismarck would seem to have conducted himself during the negotiations with monstrous brusquerie and intentional rudeness.'

These tactics had the desired effect. Thiers agreed to pay an indemnity of FFr5 billion and to cede Alsace and Lorraine. The funds were to be transferred in three large tranches up to March 1874. The payments had the flavour of a ransom. Only when France paid the debt would Germany withdraw its troops from Eastern France. Germany's feat in masterminding a large pay-off from its brief conflict did not endear it to the rest of Europe. The London Economist proclaimed: 'To extract huge sums of money as the consequence of victory suggests a belief that money may next time be the object as well as the accidental reward of battle.' The reparations - although settled with alacrity and skill by the French authorities - became one more festering wound in the resentment-ridden matrix of Franco-German politics.


Excerpted from THE EURO by DAVID MARSH Copyright © 2009 by David Marsh. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

List of Illustrations

Introduction The Story of the Euro 1

Ch. 1 Blood and Gold 13

Ch. 2 At the Epicentre 31

Ch. 3 Tyranny of the Mark 68

Ch. 4 The Coming Trial 93

Ch. 5 Shock Waves 132

Ch. 6 Europe's Destiny 176

Ch. 7 Coping with Imbalance 206

Ch. 8 The Reckoning 236

Notes 262

Sources and bibliography 322

Index 332

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