Making the European Monetary Union

Making the European Monetary Union

by Harold James, Mario Draghi, Jaime Caruana

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Europe’s financial crisis cannot be blamed on the Euro, Harold James contends in this probing exploration of the whys, whens, whos, and what-ifs of European monetary union. The current crisis goes deeper, to a series of problems that were debated but not resolved at the time of the Euro’s invention.

Since the 1960s, Europeans had been looking for a


Europe’s financial crisis cannot be blamed on the Euro, Harold James contends in this probing exploration of the whys, whens, whos, and what-ifs of European monetary union. The current crisis goes deeper, to a series of problems that were debated but not resolved at the time of the Euro’s invention.

Since the 1960s, Europeans had been looking for a way to address two conundrums simultaneously: the dollar’s privileged position in the international monetary system, and Germany’s persistent current account surpluses in Europe. The Euro was created under a politically independent central bank to meet the primary goal of price stability. But while the monetary side of union was clearly conceived, other prerequisites of stability were beyond the reach of technocratic central bankers. Issues such as fiscal rules and Europe-wide banking supervision and regulation were thoroughly discussed during planning in the late 1980s and 1990s, but remained in the hands of member states. That omission proved to be a cause of crisis decades later.

Here is an account that helps readers understand the European monetary crisis in depth, by tracing behind-the-scenes negotiations using an array of sources unavailable until now, notably from the European Community’s Committee of Central Bank Governors and the Delors Committee of 1988–89, which set out the plan for how Europe could reach its goal of monetary union. As this foundational study makes clear, it was the constant friction between politicians and technocrats that shaped the Euro. And, Euro or no Euro, this clash will continue into the future.

Editorial Reviews

Publishers Weekly
The roots of Europe’s economic meltdown are unearthed in this massive, illuminating study of the institution that was supposed to prevent it. Princeton historian James (The End of Globalization) traces the decades-long process by which the Committee of Governors of Europe’s national central banks incubated and then implemented the idea of a Europe-wide monetary union and common currency—which finally morphed into the European Central Bank. Drawing on extensive archival research, he recaps in dense detail the sharp policy debates between bank chiefs and sets them against the periodic European exchange-rate disruptions that goaded them toward monetary reform. Throughout, James highlights problems that would later precipitate the present-day euro crisis: imbalances between Germany’s trade surpluses and other countries’ deficits; clashes between independent central banks seeking price stability and inflationary government economic policies; the difficulty of imposing fiscal discipline on individual nations; lousy regulatory oversight of a surging European financial industry. James’s scholarly treatment requires some knowledge of banking and macroeconomic policy, but it is quite readable and even manages to convey the humanity of banking officials. The result is a lucid account of the labyrinthine topic of European Union monetary policy and its discontents. (Nov.)

[A] compelling book on the origins of EMU...Using previously secret documentation made available from central banking archives, as well as his own colossal historical insights and experience, James provides a masterful overview of the process of building a common money.
— David Marsh

Michael D. Bordo
Making the European Monetary Union explains why a monetary union was established but not a fiscal union and why the framers couldn't deal with the issues of fiscal transfers, a Euro bond, a lender of last resort, and a Eurowide banking authority. It embeds the longstanding problems of intra-European exchange rate instability and regional imbalances into a global context. The book will be a classic.
Barry Eichengreen
A virtuoso performance. It is hard to think of another author who could have successfully undertaken it.
Niels Thygesen
Harold James provides a highly readable account of the three decades of European central bank cooperation which preceded the move to the Euro. His ability to link the economic and political inspirations for the Euro are invaluable to an understanding of why the steps in a more federal direction now contemplated were not part of the original project.
William Keegan
Harold James is at the peak of his narrative and analytical powers in this outstandingly well-researched work.
MarketWatch - David Marsh
[A] compelling book on the origins of EMU...Using previously secret documentation made available from central banking archives, as well as his own colossal historical insights and experience, James provides a masterful overview of the process of building a common money.
Times Higher Education - Kathleen McNamara
[A] thorough accounting of the technocratic thinking behind the creation of the euro...James offers a careful reconstruction of the path to the EMU, focusing on the role of central-bank and finance officials...His book is a detailed analysis of mounds of documentary evidence made available to him by the [European Central Bank] and [Bank for International Settlements], augmented by a multitude of interviews with participants and observers. No other such a complete narration of the official path of the EMU through the halls of technocracy exists. This means that Making the European Monetary Union will be an invaluable document for future scholars seeking a thoroughly researched work based on primary historical materials.
Wall Street Journal - Raymond Zhong
The value of Making the European Monetary Union is in showing how [the] ideological swerves played out in real meeting rooms, with real finance ministers, central bankers and heads of government. Commissioned by the Bank for International Settlements and the European Central Bank (ECB), the book benefits from unprecedented access to both institutions' archives. James's fly-on-the-wall accounts of committee meetings and central-bank deliberations offer illuminating detail about how the precise wording of important agreements came to be decided...James has produced a valuable companion to today's headlines, a comprehensive primer on how Europe got to its unhappy state...Reading the book is like watching a horror film whose ending you know in advance. At every turn, you want to cry out, Stop!
Financial Times - Tony Barber
James is one of the world's leading authorities on the financial history of modern Europe and of Germany in particular. Making the European Monetary Union is a detailed and authoritative text, whose value added comes from its use of previously sealed archival material at the European Central Bank and the Basel-based Bank for International Settlements...James's history is a timely reminder that the construction of a multinational currency union was an extraordinary feat--but making a success of it is even harder.
Foreign Affairs - Andrew Moravcsik
Most analysts agree that the ongoing financial crisis in Europe stems at least in part from flaws in the design of the euro system and that stabilization will require substantial institutional reform. This raises a vital historical question: Why did the European leaders who designed the European Central Bank and the other eurozone institutions leave out so many crucial elements? ...[Making the European Monetary Union] add[s] pieces to what is likely to be an important historiographical puzzle for some years to come.
Choice - P. K. Kresl
This superb book is a history of the European monetary integration process from the formation of the European Economic Community in 1957 until adoption of the euro in 1999...Throughout, [James] provides a detailed, insightful review of the major personalities and institutions that were involved. A must book for all interested in this subject.
International Affairs - Simon Sweeney
Harold James's richly detailed and meticulously researched exploration of the creation of EMU...offer[s] valuable insight into the origins of the current crisis. While politicians dominated the process during the Maastricht negotiations and in the lead-up to the launch of the euro, the background to the institutional changes accompanying monetary union has received rather less attention. This book attempts to fill the gap through an analysis of the European Community's Committee of Central Bank Governors, which was set up in 1964, and the Delors Committee of 1988-9, which created the blueprint for the transition to monetary union...James's book offers a major contribution to understanding the nature of and the reasons for the current crisis in the eurozone.
Library Journal
Authorized by the European Central Bank (ECB) and the Bank for International Settlements (BIS), James (European studies, Princeton Univ; Krupp: A History of the Legendary German Firm) presents this detailed study of the European Monetary Union's (EMU) creation. The creation of the EMU was an enormous undertaking, and it continues to work toward ensuring European price stability among members by integrating monetary systems and providing a major cross-national currency, the euro. Drawing on newly available archives from the European Community's Committee of Central Bank Governors and the Delors Committee of 1988–89, James shows that, although the EMU is growing and evolving, it has been plagued with problems: its lack of coordination in policymaking, regulation between member states, and complex decision making due to the sheer number of interrelationships between monetary and economic variables. The text is complemented by many appendixes with additional data and documentation. VERDICT James's focus on the EMU's development yields insights about current regional financial crises. This in-depth history will appeal to academic readers looking for extensive details about the EMU from several decades. Recommended.—Caroline Geck, Peshine Ave. Prep. Sch. Lib., Newark, NJ
Kirkus Reviews
Who knew that the run-up to the big-government, one-worldish euro was the darling of the American right wing? Let's unpack that, as James (History/Princeton Univ.) does: The European Central Bank was designed as a nongovernmental (though definitely with a governmental element) institution whose chief purpose was to issue money, "the kind of institution that had basically only been imagined before the 1990s by antistatist liberal economist and philosopher Friedrich Hayek and some of his wilder disciples." Hayek, famed for Austrian austerity, had long advocated some mechanism whereby a fiscal authority could issue money without being beholden to the state; thus free from political pressures, it could respond with sensible monetary policies that addressed money, not power. The result, though, was less a nonstate bank than a network of cross-state banks, and these, like banks in the United States and elsewhere in the world, did what banks did back in the carefree days of the late 20th century--they acquired, grew and spent. The result, by James' long account, was near-failure through exposure to various crises, such as the Asian crisis of 1998, the subprime meltdown of 2007 and the European crisis of 1992. The last was marked by wild speculation, and in reading James, it helps to be versed in monetary policy and tolerant of the language of the discipline--e.g., "On November 19 the Swedish Riksbank raised its marginal lending rate to 20 percent, but the defense was unsuccessful, the speculative attack continued, and the krona was floated and the interest rate reduced to 12.5 percent." Of considerable interest to the economically inclined; a thoroughgoing demonstration of how fragile are monetary unions "without some measure of fiscal union."

Product Details

Publication date:
Edition description:
New Edition
Product dimensions:
5.80(w) x 8.90(h) x 1.60(d)

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Read an Excerpt

From Chapter Two:
The Origins of the Committee

In the 1960s, European economies were growing very quickly, in what proved to be the last phase of the postwar economic miracle. As in the 1860s, the focus of the last chapter, the world was transformed by what might be called a globalization boom. In both cases global integration of capital, goods and labor markets was driven by new technologies of communication and transport. In the 1860s the drivers were the transatlantic telegraph cable and the steamship; in the 1960s, information technology and new approaches to the bulk shipping of commodities. In both cases, the rapid pace of economic change called for institutional adaptation and innovation.

What was later celebrated as the postwar miracle, the Wirtschaftswunder, or the golden era or the trentes glorieuses, may just have been a naturally occurring period of catch-up. After years of destructive nationalism and wrong-headed and counter-productive economic and financial and monetary policies, European business could at last realize the potential inherent in newly developed technologies. But Europe’s politicians inevitably wanted to take credit for the surprising rate of growth, and tried also to harness it for their purposes.

The impressive growth performance in Europe seemed to reflect favourably on the integration mechanism adopted by the six countries, Belgium, France, Germany, Italy, Luxembourg and the Netherlands, which had in 1957 signed the Treaty of Rome and launched the European Economic Community. This treaty should be seen as part of the great and successful global postwar effort at trade liberalization. The initial effect of the EEC was to promote trade within the EEC, although there was also some diversion of non-EEC trade. Globalization surges almost always provoke some kind of backlash. Initially the EEC provoked as a consequence a series of transatlantic trade spats, especially over agricultural issues, with a “chicken war” of 1962–3, when the U.S. imposed retaliatory tariffs in response to European tariffs on imported chicken. Some European countries also began to fear or resent the intrusion of U.S. based multinational corporations, a feeling powerfully expressed in Jan-Jacques Servan-Schreiber’s The American Challenge (Le défi américain), published in 1967. The early years of the EEC were also dominated by the political rhetoric of France’s wartime leader, Charles de Gaulle, who had returned as Prime Minister and then President of the French Republic in 1958. De Gaulle explained how “the purpose of Europe is to avoid domination by the Americans or Russians [.º.º.] Europe is the means by which France can once again become what she has not been since Waterloo, first in the world.”

The feature of the world economy that was obviously dominated by the United States was the international monetary order. Though forty-five countries had been represented at the Bretton Woods conference of 1944 that established the rules of the monetary system, the negotiations had taken place largely on a bilateral, Anglo-American basis; and in practice the power of the United States was so great that the settlement largely reflected American interests. The major reserve currencies were the dollar and the pound, which still played a significant role not just for Britain’s overseas empire but also for many Latin American countries. The Bretton Woods settlement required current account convertibility, in line with the requirements of Article VIII of the International Monetary Fund’s articles of agreement. But in practice the European countries were so weak that they could not afford such a move until 1958 (by coincidence, the year in which the EEC started to operate). Yet almost immediately the Bretton Woods regime started to operate, it seemed to face serious problems.

Meet the Author

Harold James is the Claude and Lore Kelly Professor in European Studies and Professor of History and International Affairs at Princeton University.

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