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Moving away from state-centered and Marxist approaches to the study of the European monetary integration process, Karl Kaltenthaler offers a new analytical framework to assess the dynamics within and among the participating countries. Using official and unofficial documents as well as interviews with players ranging from presidents of the Bundesbank to functionaries in the trade unions, Kaltenthaler argues that the number of decision makers negotiating policy and their accountability to interest groups, political parties, government ministries, and Germany’s central bank have made Germany’s fluctuations in policy inevitable. Germany and the Politics of Europe’s Money examines twenty years of German policy through an analysis of four key episodes: the creation of the European Monetary System, the creation of the Franco-German Economic and Financial Council, the establishment of policy toward the European Monetary Union, and the institutional transformation of the EMS in the 1990s. It thus brings a new understanding to Germany’s dynamic policies and the political forces behind them.
Product Details
| ISBN-13: | 9780822399261 |
|---|---|
| Publisher: | Duke University Press |
| Publication date: | 08/01/2012 |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 160 |
| File size: | 292 KB |
About the Author
Karl Kaltenthaler is Assistant Professor of International Studies at Rhodes College.
Read an Excerpt
Germany and the Politics of Europe's Money
By Karl Kaltenthaler
Duke University Press
Copyright © 1998 Duke University PressAll rights reserved.
ISBN: 978-0-8223-9926-1
CHAPTER 1
Introduction
The Aachen cathedral that houses Charlemagne's throne could not have been a more symbolic venue for the meeting. On 16 December 1978, German Chancellor Helmut Schmidt and French President Valéry Giscard d'Estaing met in Aachen, the capital of Charlemagne, emperor of both the Germans and the French, to discuss the institutional details of the proposed European Monetary System (EMS). But even as Giscard and Schmidt strode through the ancient cathedral in a show of solidarity, the cracks in the Franco-German condominium that was to create the EMS were beginning to show.
The reason for the tension in Aachen was Schmidt's reversal of his position on how the EMS should be designed. In February 1978, Schmidt had initially proposed the EMS to be a monetary regime in which each member would have equal obligations and privileges. Giscard had agreed to this proposal and the two had sponsored the monetary regime with this understanding of its future form. But at Aachen, a site chosen for its symbolism of Franco-German cooperation, Schmidt announced that he would only accept an EMS design where the country with the strongest currency, of course Germany, would serve in the anchor role and would not have the external monetary policy burdens that the weaker currency countries would have. Schmidt had made a major policy flip-flop.
This example of policy change seems to defy the conventional wisdom on German policy toward European monetary integration. In the literature on the subject Germany is portrayed as a state that consistently demands monetary ventures in Europe that conform to its vision of Bundesbank-like monetary discipline. Yet if one closely examines the record of German policy toward European monetary institutions, it quickly becomes obvious that German policy exhibits a great deal of discontinuity.
On several key issues of European monetary integration, not just policy toward the creation of the EMS, the German government has changed its position, without any obvious explanation. In 1987, the German government proposed a Franco-German Economic and Finance Council to coordinate monetary and economic policy with the French government. Within a year the German government had stripped the council of any policy-making power. When the initiative to create the European Monetary Union (EMU) was launched in 1988, the German government reacted coolly. But within a year that same government had become one of the initiative's most enthusiastic supporters. Only one year after the signing of the Maastricht Treaty, in the summer of 1993, German monetary policy brought about the near-collapse of the European Monetary System (EMS) and the possible derailment of the EMU process. The German government, which had hailed the Maastricht Treaty as "a triumph for Europe," referred to the quasi-collapse of the EMS as "liberation" for German monetary policy, although it could have spelled the end of the EMU plan.
Why do we see this puzzling discontinuity in German government policies regarding European monetary institutions? This study seeks to answer this question. It traces the dynamics of German policy toward European monetary integration to offer a more complete picture of that policy than presently exists. The second goal of the book, and this will be the more important contribution to our understanding of politics, is to develop a framework to explain the factors that account for the dynamics of policies toward international institutions. This framework is used to explain the dynamics of German policy toward European monetary institutions.
I argue that in order to understand the dynamics of state policy toward international institutions it is necessary to comprehend how international institutions affect domestic politics. International institutions are important to domestic politics because they may constrain both international and domestic policy choices for state actors if they choose to abide by those institutions. By constraining policy choices they determine who gets what in the domestic political arena. Current scholarship on European integration points to the domestic distributional ramifications of the process. As Eichengreen and Frieden (1993, 1, 19) point out in reference to European Monetary Union:
EMU is also a political phenomenon in that the decision to create a single currency and central bank is not made by a beneficent social planner weighing the costs and benefits to the participating nations.... Interest groups support or oppose the initiative depending on how it is likely to affect their welfare, not the welfare of the nation or the Community as a whole.... We need a clear picture of the domestic interests at stake and the institutional setting within which they are situated.
Because international institutions can affect distributional outcomes within polities, groups in society and the state will have a vested interest in shaping policy toward the design of international institutions. The policy response that these state and societal organizations can undertake will be shaped by the structure of domestic political institutions. Thus the key to the dynamics of German state positions regarding European monetary institutions lies in how groups within Germany expect European monetary institutions to affect their share of economic or political gains and how domestic political institutions constrain their policy options. Because German policy institutions give so many state and societal organizations a say in the making of policy toward European monetary institutions, that policy has been characterized by a great deal of discontinuity.
Why Germany?
There are several salient reasons to single out German policy toward European monetary institutions for study. First, it is abundantly clear that Germany is pivotal to the process of integration because of its economic power. The sheer size of the German economy means that the relationship of the Federal Republic to European Union (EU) monetary institutions is crucial to the destiny of those institutions. Also, the importance of the deutsche mark as an international currency lends the Federal Republic a central role in European, as well as international, monetary affairs. This importance of the deutsche mark has given the Bundesbank, the highly autonomous German central bank, and the German Finance Ministry an enormous amount of power in the course of European integration.
Germany's economic power has allowed it to have a key role in shaping monetary institutional change within the EU. Although Germany is only one of several European Union member states that played a role in the instances of institutional change examined in this book, no state played as large and important a part in shaping the final institutional outcomes. Germany's frequent policy changes toward European monetary institutions matter. They matter because German policy has largely shaped the course of European monetary integration. One need only look at the process of European monetary integration to see how the dynamics of German policy has left its imprint on the shape of Europe's monetary affairs.
Germany's influence on the final design of the European Monetary System is very evident. German Chancellor Helmut Schmidt, the initiator of the EMS, hoped that the new monetary regime would lend the European Community the exchange rate stability thought necessary for further European economic and political cooperation. He hoped the new monetary regime would increase trade and economic growth, and save the Common Agricultural Policy (CAP) from the ravages of exchange rate fluctuations. Finally, Schmidt hoped that the EMS would be a regime where all member states would share the responsibilities of membership equally. This vision of the EMS attracted the support of other European leaders. But German policy toward the EMS was also crafted by the influence of the Bundesbank, which meant German domestic price stability had to be protected. The EMS that saw light in March 1979 was essentially a deutsche mark zone, with the Bundesbank playing the central role in the regime and thereby dominating the monetary as well as economic policies of the regime's members. Schmidt's initial proposal for the EMSgave way to a more Bundesbank-inspired view of what Europe's monetary institutions should look like. If the European Community wanted a stable exchange rate regime, it had to go along with Germany's demands.
A number of scholars have come to argue that the Bundesbank has been able to maintain a relatively autonomous monetary policy despite its obligations to the EMS (Bofinger 1988; Camen 1986; Mastropasqua et al. 1988; Obstfeld 1983; Rieke 1984). The Bundesbank has been able to maintain its own domestic monetary policy goals while other EMS members, such as France and Italy, have had to substantially tailor their domestic monetary and economic policies to mimic the policies of the Bundesbank in order to stay in the EMS.
What accounts for the Bundesbank's dominant position in EU monetary politics? The institutions, or rules, of the EMS place the Bundesbank in a dominant position because they have put the burden of exchange market intervention and domestic adjustment on those states whose currencies are weak and fall toward their lower band limits. The EMS's institutions do not place adjustment burdens on those currencies which appreciate from the agreed upon central exchange rates. Weak currency countries, that is, those countries whose currencies often come under depreciating pressures (France, Italy, the U.K., etc.) have had to use very large portions of their currency reserves to buy up their own currencies to keep them within the EMS's bands. They are also forced to set their domestic monetary and economic policies to coincide with those of the Bundesbank so as to avoid divergent tensions between their currencies and the deutsche mark. This significantly reduced their policy autonomy, tying their hands in time of recession.
Thus, simply stated, the rules of the EMS have profound implications for the domestic politics of the regime's member states. The distributional consequences of those rules have meant that the members of the EMS have interests to either maintain those rules, alter them, or replace them with a new set of institutions. This situation of Bundesbank dominance in the EMS has essentially meant that some members of the regime, particularly France and Italy, have had the following choices: follow the Bundesbank's monetary policies, and thereby possibly abandon many of their own domestic political-economic priorities; withdraw from the regime and possibly endanger the future of European integration; or try to change the European Community's monetary institutions. Although France and Italy chose the first option in the early 1980s, by the late 1980s they felt that the rules of the EMS, as they existed, conflicted with their economic and political goals.
Between 1987 and 1993, several changes in the European Community's monetary institutions took place, due in large part to dissatisfaction with the German domination of European monetary politics. The first major challenge to Bundesbank dominance in European monetary politics was the Franco-German Economic and Finance Council initiative. The council was formally proposed by the French government in 1987 as an amendment to the Franco-German Friendship Treaty of 1963. Although not a multilateral EU arrangement, the council was meant to coordinate German and French monetary and economic policy in the context of prompting further convergence between the two states and thus deepening the integration process. The council proposal was greeted with enthusiasm from the German government, which saw it as an opportunity to strengthen Franco-German cooperation in monetary affairs. Despite the German government's support of the council, in the end that same government effectively stripped the council treaty of any mention of policy-making power. This effectively robbed the treaty of any real significance.
Frustrated by failed attempts to dismantle Bundesbank dominance by EMS reform, the French government proposed an even more radical venture in monetary institutional change in 1988, the European Monetary Union. The EMU proposal did not mean to reform the existing monetary institutions of the European Community, as did the previously mentioned episode; it aimed at replacing them with an entirely new set of monetary institutions, institutions which would have substantially reduced the sovereignty of the EU member states. At first, the proposal was rejected by the German government, but within a year the German government reversed its position and embraced the EMU project. During the negotiations on the institutional design of EMU, the German government maintained a hard-line stance that it then abandoned at the Maastricht Summit in December 1991.
Not two years after the signing of the Maastricht Treaty, which the German government claimed was a victory for Germany and Europe, the EMS was transformed from a fixed exchange rate regime to a more or less floating system. The transformation, occasioned by an exchange rate crisis brought about by high German interest rates, represented a serious threat to the continued validity of the EMU process. But instead of lamenting the transformation of the EMS, the German government seemed to welcome it.
The above summary of Germany's changes in policy toward European monetary institutions demonstrates how crucial those policy changes have been to the trajectory of European monetary integration. Germany, due to its economic and political power, has pulled, and sometimes dragged, Europe along its desired path of monetary institution building. A dynamic German policy toward European monetary integration has been a significant contributing factor to the unevenness of Europe's attempt to establish its own monetary institutions.
The Need for a New Approach
Germany's importance to European monetary politics is one very good reason to study the dynamics of German policy. But another very important reason to devote attention to this subject is the lack of a sufficient analytical framework for understanding the politics behind Germany's policy dynamics. The literature often neglects the dynamic aspect of policies toward European monetary integration. States are very often treated as unitary actors with unchanging positions toward monetary issues. This vision of stultified policy is largely inaccurate, particularly in the German case. It is particularly important to capture the politics behind the pattern of frequent changes in German policy, as it is so very crucial to the dynamics of the entire European monetary integration process.
Theories of international institutions would be the logical place to look in international relations theory for understanding why a state would frequently change its policies toward international institutions. A literature on international institutions centering on the concept of international regimes developed in the late 1970s (Cohen 1983; Nye and Keohane 1977; Keohane 1983, 1984; Krasner 1983a, 1983b; Ruggie 1975, 1983; Stein 1983; Young 1983, 1988). International regimes have been defined as "principles, norms, rules, and decision-making procedures around which actors' expectations converge in a given issue area" (Krasner 1983b, 5).
Neofunctionalist theories of the emergence of international regimes are the most influential explanations of the creation of international institutions (Nye and Keohane 1977; Keohane 1983, 1984; Young 1983, 1988 ). These theories argue that states create international regimes because they reduce the transaction costs of interactions in the international system. Thus the system-level theories offer plausible answers to why there is a general demand for international institutions, but they cannot explain the dynamics of policy choices toward international institutions. That entails understanding the mechanisms of policy making, and that means moving to the domestic level of analysis. Keohane argues that "policy conceived as if the world consisted of billiard ball states guided by philosopher-kings is not very useful. For international regimes to govern situations of complex interdependence successfully they must be congruent with the interests of powerfully placed domestic groups within major states, as well as with the structure of power among states" (Keohane and Nye 1977, 226).
Haggard and Simmons (1987), in a very influential review article of the international institutions literature, also point out the limitations of system-level analysis for understanding the dynamics of state behavior toward international institutions/regimes: "Current theories of international regimes have ignored domestic political processes, in part because of the lure of parsimonious systemic theory. This neglect has extended to the issue of how regimes actually influence national policy choices.... There are both methodological and theoretical reasons to open the black-box of domestic politics" (Haggard and Simmons 1987, 513). Thus in order to understand why states behave the way they do toward international institutions, one must examine policy making within the states. What is needed is an understanding of how international institutions affect domestic politics and how, in turn, domestic politics will determine state policy toward those institutions.
Increasingly scholars of international relations have heeded the need to take account of how domestic politics affects states' choices toward international institutions (Haggard 1992; Haggard and Simmons 1987; Huelshoff 1992; Keohane and Nye 1977; Simmons 1993; Sobel 1994). These works have examined why domestic political actors want to create or change international institutions or how international institutions can affect domestic political outcomes. A similar vein of research focuses on how the international economy affects various aspects of domestic politics (Garrett and Lange 1996; Gourevitch 1975, 1986; Katzenstein 1988; Keohane and Milner 1996; Rogowski 1989). Students of foreign policy have also taken a close look at how domestic politics conditions state policies in the international realm (Katzenstein 1978; Lamare 1991). These studies are greatly expanding our understanding of the relationship between domestic and international politics and provide a foundation for this study. What is missing from these studies, however, and what this study seeks to provide is a systematic way of explaining how domestic politics shape policy dynamics toward international institutions.
(Continues...)
Excerpted from Germany and the Politics of Europe's Money by Karl Kaltenthaler. Copyright © 1998 Duke University Press. Excerpted by permission of Duke University Press.
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Table of Contents
Contents
Acknowledgments,1 Introduction,
2 The German Monetary Paradigm: Actors, Interests, and Institutions,
3 German Domestic Politics and the Development of the European Monetary System,
4 Challenging Bundesbank Dominance: The Franco-German Economic and Finance Council Initiative,
5 The Ties That Bind: German Policy Toward European Monetary Union,
6 The Price of Change: German Policy and the Transformation of the EMS,
7 Conclusion,
Notes,
Bibliography,
Index,