A Union of Division (WIP)

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There are many analyses of how the EU came to be. The problems that came with the Union have been brought to light by many writers, but visual material is hard to come by. An image says more than a thousand words, they say, so in this article I want to provide graphs and tables so that the reader can really absorb what happened during one of the most disastrous economic projects of our time.

Prehistory

1865 – Latin Monetary Union

1914 – WW1

Germany participates in WW1. To pay for the war, it went deep into debt. Public spending, as a percentage of GDP, rose from 17% in 1914 to over 70% in 1917. Victory would allow Germany to repay these debts from its increased economic capacity.

1918 – End of WW1

Germany loses and faces heavy sanctions on top of its big debt. On top of this, its industrial production dropped by 40% compared to before the war, and the huge spendings of the Goverment had redistributed wealth in favor of producers. Due to worries about the dropping value of German paper money, sanctions were to be paid in foreign currency. Germany started buying lots of foreign currency, which made its paper money drop even faster in value. It became impossible for Germany to pay the sanctions in this way, so it was decided that it would have to pay in goods. When it failed to do this, economically important areas were occupied by France and Belgium. Workers in these areas went on strike, exacerbating the situation. Consequentially Germany saw its famous hyperinflation.

1927 – End of Latin Monetary Union

1929 – Great Depression

1933 – Gold Bloc

1935 – Gold Bloc ends

1939 – WW2

1941 – Hitler’s Economic Community

An European Economic Community with strong resemblence of the one established by the Treaty of Rome in 1957, was proposed 16 years earlier by the Nazi’s during the second world war. Connoly writes:

The key features of the Reich Economics Ministry blueprint were that the Reichsmark would be the leading currency in a German ‘economic area’ and, with the dollar, one of the world’s two reserve currencies. ‘Within the German currency bloc’, fixed exchange rates would be introduced to ‘ease the way later to a currency and customs union’. (…) 

rotten heart, p 231

1945 – End of WW2

Germany was divided and economically dismantled.

1944 – Bretton Woods

The price of gold was fixed to the dollar at $35. European currencies were in turn fixed to the Dollar. In this way a quasi-gold standard was created for European currencies. Central banks would be able to exchange dollars for gold with the Fed, but not european citizens. Because of this, a dollar standard is a more reasonable description of this period.

1948 – Bank Deutscher Länder

Occupied forces in West-Germany created the Bank Deutscher Länder to manage their money matters. They used this bank to issue DEM money, and the central banks of individual West-German states all joined it. In 1951 following the Treaty of Paris the bank was put under German control. However, to limit the power of the German government, the bank was decided to be independent of the West-German government.

1951 – Treaty of Paris and the ECSC

The Treaty of Paris was the first treaty establishing an economic community in Europe. The European Coal and Steel Community was an organization of Germany, the Netherlands, Belgium, Luxembourg, France and Italy.

The necessity for the treaty came from post war tensions. After the war, restrictions had been put on German production to restrict economic growth. At this time, France still occupied parts of Germany, which Germany wanted back. The solution came from Robert Schuman(FR), who proposed a supranational entity which would manage coal and steel production in Europe. France and Germany agreed, and in 1952 the ECSC was born.

1954 – European Defence Community EDC

Following the success of the ECSC, another community was proposed. Many European countries were hestitant to see Germany rearmed, but they were okay with it if it happened in the form of another supranational entity. Unfortunately for the rest, France vetoed the idea and it was binned.

1957 – Treaty of Rome and the EEC

In 1955 another community was proposed. Based on the model of the Benelux, it was proposed that the six ECSC countries unite not just their coal and steel, but their entire economies. The treaty passed on 25 March 1957.

 

1958 – Bundesbank

The Bundesbank (BuBa) took over the function of the Bank Deutscher Länder. The latter was a project by the allied forces. It was intentionally independent from the government, so that the German government could not again use its economic power aggressively. The BuBa would function the same way. It could determine its own interest rates, but it could no longer determine exchange rates. This right was given to the central government.

The economic power of Germany would give the BuBa tremendous political power, which it would use in the future to make the lives of political opponents hard.

European Union

“Stability”

Formally, the path to the European Union starts at 1979. In that year the European Monetary System (EMS) is founded, together with the notorious Exchange Rate Mechanism (ERM) and the predecessor of the Euro, the European Currency Unit (ECU) (coincidentally carrying the same name as the old French coin Écu, and coincidentally referred to as Écu in official documents.).

The period between 13 March 1979 and and 1 January 1999 is full of economic trouble. This should have been a strong signal to any impartial observer that a monetary union was going to be rough. After all, the EMS was supposed to bring price stability, but nothing even closely resembling stability came to be in those twenty years. In that period, there was almost one realignment per year. The composition of the Écu was reconstructed three times. Of the thirteen countries participating in the ERM before 1999, two had to briefly or totally leave the system because they could not take the economic damage any longer. In short, the system was a disaster.

We start ten years before the ERM. It is interesting to see how a prototype of the mechanism was tried, failed, and quickly ignored. This prototype was called the Werner Plan.

Before the European Monetary System

1969 – Werner Plan and Barre Plan

The Werner Plan was the first attempt to give Europe its own currency. The plan was due to Pierre Werner, minister of Finance for Luxembourg at the time. He would later become its prime minster. His plan would have five stages. In the first stage, the fiscal policies of lands would be centrally coördinated. In the last stage, exchange rates would be fixed. The middle stages were never quantified.

About a month later, Raymond Barre would come with his own plan. The plan did not yet contain any provisions for an European reserve currency. Instead, it asked for research into getting member states to work together on coördinating mutual exchange rates.

Germany and the Netherlands were critical of the plans. They saw no need for monetary coördination of this kind. Other banks were critical of this criticism. In their eyes, this was only a customs union, not a monetary of political union. Of course, we know now that German and Dutch criticism was entirely warranted. A customs union makes easier the transition to a monetary union, and finally to a political union.

The Barre Plan was submitted to the European Council on 12 February 1969. The plan called “for increasing integration of Europe’s economies and recognised the need for an alignment of economic policies and monetary cooperation.” The plan contained proposals for a mechanism to assist in keeping bilateral exchange rates within certain fluctuation bands, and had the final goal of abolishing those bands alltogether. All the elements for the ERM were there.

The plan was approved by the commission on 17 July 1969, but economic events prevented it from going into action. In the fall of that same year, the DEM briefly floated in the Bretton Woods system, before it was revalued by +9.3% on 29 September 1969. Just before that happened, the FRF was devalued by -11.1%. These events however solidified desires for stability within Europe.

Version two of the plan was presented on 4 March 1970. The plan was more radical than the first version, in that it demanded a “concerted action in the field of economic policy”. It is said that “From that point on, economic coordination and monetary solidarity were inseparable from each other.” A ten year timeline was determined for the plan to go in effect.

1971 – End of Bretton woods

Germany was first to leave the system. The result was a loss of strength for the Dollar. The German economy bloomed which caused other European countries to follow suite. At one point, European countries demanded large quantities of gold from the Fed. Switzerland demanded $50 mln in gold back, and France sent a war ship to New York to take home over $190 mln in gold. Nixon responded by taking the dollar off the gold standard. The result was another drop in Dollar strength.

1971 – Smithsonian Agreement

European countries still felt the need to coördinate their exchange rates. They adopted bands around the dollar of +-2.25% in which their exchange rates could move. The price of gold was fixed again at $38

1972 – Basel Agreement (Snake in the Tunnel)

On 24 April 1972, EEC CB governors concluded the Basel Agreement. The band defined in the Smithsonian agreement allowed European currencies to fluctuate +-4.5% with respect to eachother. If one currency started at the top of its band, and another at the bottom, this allowed a massive +-9% fluctuation. To prevent this, mutual +-2.25% bands were also determined by the Basel Agreement.

The system was called the Snake in the Tunnel.

1971 – The Power of the Bundesbank

Because of the stability of the German Mark, the European zone quickly became a de facto DEM-zone. Instead of keeping track of many individual rates, each currency maintained its exchange rate to the Mark. This made the BuBa the leading economic entity in Europe.

1973 – End of Smithsonian Agreement

During the oil crisis of 1973, the market price for gold skyrocketed and the Dollar could not maintain its $38 peg. It devalued, and Japan left its band around the dollar. France, the UK and Italy followed. This was the end of the Smithsonian Agreement, and also of the Basel Agreement, as the Snake fell apart.

What remained in Europe was an economic split. One basket of currencies retained its floating peg to the Mark, while others floated. The countries that retained their Mark-band decided to reduce fluctuations to between +-0.75%.

The European Monetary System

Exchange rates between currencies are as natural a phenomenon as prices are. In fact, any price is an exchange rate. If a loaf of bread costs 1 euro, one euro also costs one loaf of bread. Historically, exchange rates between currencies were easy to determine since coins were minted from the same precious metals. If a dollar contained 1 gram of gold, and a euro contained .5 grams, then a dollar exchanged for approximately two euros. This changes with fiat (paper) money. With hard money, the value of the currency depends on the medium. In a fiat system, the value of the currency is independent of the medium.

In the 20th century there were many attempts to fix the value of paper money to some physical medium, such as gold. All attempts failed, because while the amount of paper currency that can be in existence is virtually limitless, the amount of gold is not. Since governments almost by design are inflationary in nature, and since our current banking system is too, the amount of paper money will surely increase faster than the amount of gold. The result then follows from the law of supply and demand.

Since the value of paper money cannot be fixed to some other good, it becomes a good in its own right, with its own supply and demand dynamics. All sorts of interesting phenomena result from this. If more paper money a is produced in country A relative to its neighbours, ceteris paribus, the value of the currency a drops relative to that of its neighbours. As a result, its neighbours people gain relative purchasing power, and are able to import cheap goods from country A. The money the exporters in country A receive from these transactions finds its way to the banks in country A, who exchange it with neighbouring banks for their own currency a. In effect, they sell the foreign currency back, buying a in the market, bidding its price back up. The exchange rate between a and other currencies settles on some new rate lower than the old one.

This natural phenomenon is the bane of politicians around the world, and it has been since antiquity. It puts a limit on the amount of money a government can print. If you print too much, your population gets poorer and you might be voted out. But if all countries coördinated their money production to be in line, forming a cartel of sorts, the effects of inflation would be harder to spot. All economic superpowers would have to play along, of course. But in Germany, memories of hyperinflation were still vivid. For that reason their Bundesbank, independent of the government, kept a tight watch on the money supply. In fact, M3, a measure of the money supply, was the only indicator that the BuBa used for their monetary policy.

By giving Germany an independent central bank, and by that central bank choosing the money supply as their only indicator, and by Germany quickly regaining their status as the economic heart of Europe in the years after WW2, the allied forces had got themselves into a bit of a problem. In particular France wanted to create money to its heart’s content, but every time it did, everyone would know through the FRF/DEM exchange rate.

So those rates needed to be fixed in order to hide those effects. The idea would work in theory, if the only movement of international funds happened between central banks. But the world had become a highly decentralized place, with lots of free capital movement. Exchange rates could be fixed, temporarily. But if some fundamental thing changed that put pressure on either side of the rate, that would become apparent sooner or later. The story of the Exchange Rate Mechanism of 1979 is that exchange rates were fixed in 1979 until the introduction of the euro in 1999. The reality of the situation can be seen in the table below. Actual changes in exchange rates were frequent in the period between 1979 and 1999. The forceful attempts to fix rates may even have intensified the amplitude of re- and devaluations when they eventually happened, much like an arrow flies further the longer the string is drawn.

Was the ERM succesful? Verifiably not. The goal was to provide economic stability, and it failed. That the ERM would fail was clear from the outset. What is surprising is how long the system was kept alive, how the evidence of the failure of the system was denied and how goalposts were moved constantly. The experiment with the ERM shows us only this: that all the evidence in the world, and even constitutional law, is not enough to stop political will.

1979 – The European Monetary System and the Exchange Rate Mechanism (EMS and ERM)

Helmut Schmidt did not like the divided Europe of the Smithsonian Agreement. He wanted a united Europe. This political union was to be achieved by economic means. But why would other countries want to be under Germany’s economic thumb again? A new economic coöperation could only work if Germany could assure other countries that the BuBa was under control.

The EMS as proposed by Schmidt(DE) would make this possible. Schmidt held a secret meeting with Giscard(FR). It was important that the BuBa was left in the dark, as it still had the power to make Schmidt’s life tough. In 1978 the proposal for the EMS was finalized and presented to the European Council in Copenhagen and on 13 March 1979 the ERM went into effect.

The ERM worked as follows. Participating countries committed to keeping their exchange rates within a +-2.25% band around a baseline determined at the start of the mechanism. This grid of bilateral exchange rates is called the parity grid. If two currencies found themselves about to violate the band (if one currency was at the top of the band, the other must be at the bottom of the band) both countries’ central banks committed to taking action. The first measure usually taken was the large scale buying (if at the bottom of the band) or selling (if at the top of the band) of their respective currencies.

The system was designed to be symmetrical in this way. However, it is easy for a central bank to sell unlimited quantities of its own currency. But a central bank can only buy limited quantities. The reason is simple. The bank can print and sell its own currency, but to buy its own currency it has to offer something else in exchange, usually foreign currency. The system was actually asymmetrical.

If, for whatever reason, banks were unable to keep their currencies within the bands, it was possible within the ERM to ask for a realignment. A new center for the band would be determined and the participating currencies could try again. Such a realignment meant an (effective) devaluation of currencies at the bottom of their bands, and an (effective) revaluation of the currencies at the top of their bands.

It was later revealed that Otmar Emminger(BuBa) had insured the BuBa against excessive interventions before agreeing to join the ERM. In the so-called “Emminger Letter”, he writes:

In such a case the Federal Government will safeguard the bundesbank from such a dilemma either by an exchange rate correction in the EMS or, if necessary, also by a temporary release from its intervention obligation.

Intermezzo: Realignments

The possibility of a realignment of exchange rates was part of the ERM only as a last resort. It was expected that member banks would sort any sort of bilateral conflict out between themselves. Each realignment is therefore an admission that the system had failed. Later it would be claimed that realignments were an essential part of the system:

The EMS is a system of fixed bu adjustable exchange rates, which requires timely adjustments in response to trend divergence (…)

Even later, the bands in which the currencies were allowed to move were widened to such an extent that the system was effectively abandoned.

So it was the the system really failed in its first year. Just two months after launch, emergency measures had to be taken and we saw our first realignment.

1979 – Realignment no. 1 : Danish Krone and Belgian Franc

The first oil crisis, in 1973, had put a definite end to an already dying Bretton Woods. Now, in 1979, the second oil crisis hits. Not a great start for the ERM. Would it survive?

From May 1979 it was clear that the DKK and BEF were in trouble. In Denmark there was a “widening current account deficit and deficient capital inflow”. In Belgium there was a “continued lack of confidence”. The central banks of both countries committed to measures that aimed at increasing the strength of their currencies. The Danish central bank raised the discount rate from 6 to 9 percent, and the Belgian CB raised the discount rate from 8 to 9 percent. A raise in the discount rate means money for banks becomes more expensive, which restricts loans. Ceteris paribus, this strengthens the currency.

24 September 1979 the first realignment happens. The DKK is devalued by -3%, the DEM was revalued by 2% and the BEF was left alone. Importantly, this did not mean that Belgium had managed to solve their problems. In fact, “Capital inflows induced by earlier increases in nominal interest rates dry out in both countries.” So why was the BEF not devalued? It was devalued. A revaluation of the DEM, the strongest currency in the block, is really a tricky way to devalue every other currency in the block. So really, every currency was devalued, and the DKK most of all.

1979 – Realignment no. 2 : Danish Krone

Problems remain in Denmark. Elections concluded in October. Not much changed, except the progressives lost some seats and the conservatives gained some. The majority party remained the majority party. After the elections, Prime Minister Anker Jorgensen gave Denmark its first Energy Minister, who would supervise oil and gas winning activities in Denmark. Rumours of nationalization did the rounds, which the market does not like. Moreover, the Ministry of Energy promised large subsidies to the energy sector for investments in windmills. Whatever the cause, Denmark was in trouble before the realignment, and was now in trouble still.

30 November 1979 the second realignment happens. This time, the DKK is the sole devaluee. It is devalued by -5% against all other currencies in the ERM. The DKK had now devalued by almost -8% before the year was over.

1981 – Realignment no. 3 : Italian Lira

In 1980 we have a year of the promised stability. Although Denmark is still struggling, it manages to stay in the band by raising its discount rate from 11 to 13 percent. Belgium still struggles with its current account deficit, but it too raises its discount rate from 10 to 14 percent and manages to stay inside the lines. During this year, the US economy soared under Reagan, and Germany became relatively less interesting for investments. At the same time, the Britisch economy was doing well under Thatcher, which had a similar effect. The recession this caused in Germany cost Schmidt (DE) the election. He was replaced by Kohl, who will play a big role later.

Germany was, for a while, a little less productive, and this allowed higher inflation currencies to camp happily at the top of their bands. For a while. That changed in 1981. the ITL dropped in value fast. It enjoyed the wide +-6% bands of the ERM, but it almost touched them. Decicive action was necessary, and on 23 March 1981, ITL was devalued by -6%. Italy also raised its discount rate from 16.5 to 19 percent. Belgium also raised its discount rate from 12 to 16 percent, as it was having trouble too. These interventions rudely awoke those dreamers who thought it was smooth sailing from here.

1981 – Realignment no. 4 : French Frank and Italian Lira

In fact, there was rough water ahead. Mitterand(FR) was to win the elections in France and replace Giscard. Mitterand had made clear that he was not a fan of capitalism. Thus capital was not a fan of him, and it quickly started leaving the country after his win. Mitterand nationalized big companies, shortened the working week and increased wages all around. These measures decreased Frances productivity relative to other countries, and it showed. The FRF was dropping and the French CB had to sell off lots of its reserves to keep it within the bands.

A devaluation of the FRF was to be postponed as long as possible. Mitterand did not want that blemish at the start of his election. If a devaluation happened later, he could blame it on those predatory speculators that always had it out for him.

On 5 October 1981 there could be no more waiting. The biggest devaluation thus far happened. FRF and ITL were devalued by -3% and DEM and NLG were revalued by 5.5% for an absolute realignment of 8.5% between both. It is worth noting that that was all for FRF. No interest rate hike for France. Another remarkable fact is that this devaluation did not go through the usual route. That is, Delors(FR) spoke to Germany directly and arranged the devaluation without the other countries consent. This was in breach of the Beneluxtreaty of 1947. Any decision with respect to exchange rates was to be discussed between all parties, but the Netherlands was not consulted. For all practical purposes, the Beneluxtreaty was dissolved.

France and Germany make the rules in Europe, and the other countries have to play by them.

1982 – Realignment no. 5 : Belgian Franc and Danish Krona

Right after realignment four, in November of 1981, Belgium has some trouble forming a government. The drop in confidence this causes has an effect on the parity of the BEF. The Belgian CB raises the discount rate from 13 to 15 percent in hopes of restoring confidence. It works for a while, after which discount rates are once again dropped. But in February of 1982, the Belgian CB has to perform the same trick again. It raises the discount rate again from 13 to 15 percent. It is clear that this “diminishing confidence in the future performance of the Belgian economy” isn’t going away by itself.

So in that same month, on 22 February 1982, a huge devaluation of -8.5% is arranged for BEF and LUF. Those currencies are traditionally pegged. DKK gets a devaluation of -3% at the same time because it was struggling too, so this seemed as good a time as any.

1982 – Realignment no. 6 : Italian Lira, French Franc, Spanish Peseta

The next month, March of 1982, the Franc is doing bad. Due to the policies of Mitterand(FR) inflation in the country was rising. The government had to intervene in order for things not to spiral out of control. The government tightened its monetary policy and budgets, and the CB bought FRF in the open market to bump the price.

At this point, the market started catching on to how the game works. If it put pressure on a currency, say the FRF, for long enough, a realignment would happen. Conversely, if the rumor started going around that the FRF would get a realignment, then the market would start selling to find the new price point before it was announced. In the first place, this happened because investors who may be holding FRF did not want the losses associated with a devaluation. On the other hand, speculators were looking for some low risk quick money. This sort of feedback loop of selling, then rumors, then more selling, until a realignment happened, started plagueing the ERM. It is no wonder that the IMF lists as one of the reasons for realignment no. 6 “persistant realignment rumors”, indicating that it is no longer the fundamentals that matter.

It is 14 June 1982, time for realignment no. 6 and time for another record. The FRF is devalued by -5.75% and the ITL by -2.75%. The DEM is revalued by 4.25%, as is the NLG. That means a relative realignment of -10% for the FRF with respect to the DEM.

1983 – Realignment no. 7 : French Franc, Irish Pound, Italian Lira

Inflation continues in France, and therefore downward pressure on the FRF. Rumors of a realignment start doing the rounds again, which intensifies selling. This period must have been a great time to be a forex trader. Just wait for the rumors, start selling and bingo. There was substantial intervention by central banks of the system in support of the BEF and FRF, and all this money went straight into the pockets of speculators. Belgium, the Netherlands and Germany all adjusted interest rates, but nothing worked.

On 21 March 1983, realignment seven happened. The losers were the FRF and ITL with a devaluation of -2.5% and the IEP with a devaluation of -3.5%. The DEM was revalued 5.5%, but this time the NLG was only revalued 3.5%. Also noteworthy is the revaluation of the BEF by 1.5% and the DKK by 2.5%. These last two currencies were by no means doing much better at this point. In fact, it badly needed a devaluation, not a revaluation. So what happened here? Just some bookkeeping magic. Since the DEM is the de facto peg for the ERM, any revaluation lower than the revaluation in the DEM is an effective devaluation. So actually, the BEF was effectively devalued by -4%, and the DKK by -3%. The FRF was effectively devalued by -8%, but that looks much worse than a -2.5% devaluation and a 5.5% revaluation somewhere else. Anything to help the French save face.

After this devaluation, the FRF had devalued by almost -30% against the DEM in a little over a year. But that doesn’t show in the ERM graph. There it seems like France is within the bounds the whole time. This scheme allows for the illusion of stability, but the system was everything but stable. In fact, the FRF was to devalue by well over -30% before the end of the system. Other currencies, like the ESP, would lose over -40%. Not one currency kept its parity with the DEM or appreciated. Not even the NLG, which was historically pegged to the DEM.

1984 – Écu redefined

On 5 December 1978 the composition of the Écu is revised. The basket of currencies becomes a little lighter in DEM and a little heavier in all other currencies. The GRD is also added to the basket. Greece thereby enters the EMS, but not yet the ERM.

1985 – Realignment no. 8 : Italian Lira

Over a year of economic peace was ended in March of 1985 with new of economic trouble from Italy. The ITL had cruised from its comfortable position at the top of its band at the start of the year all the way down to the bottom of its band by the middle of the year. (reason??)

So on 22 July 1985 the ITL was devalued -6% while all other currencies were revalued by 2%, for an effective devaluation of -8% for the Lira.

1986 – Single European Act

Intermission between realignments. We have our first major amendment to the EEC treaty. The Single European Act was mostly symbolic, but the symbolism was important. The amendment adds references to the EMS and the Écu to the treaty. It also included the specific goal of monetary union. Rene Smits writes:

“It led to the insertion of a clause on European Monetary Union in the Treaty of Rome, which was declaratory rather than prescriptive in character.” The year 1992 was also mentioned as the final date for achieving “a truly internal market”.

This would later be the year of the Maastricht Treaty.

1986 – Realignment no. 9 : French Franc, and everyone else.

Although big, the realignment of 1985 did not have the desired effect. The Italian and Belgian economy again perform weakly, and investors are losing confidence once again. There is an increase in Belgian and Irish interest rates and tightening monetary policy in Italy. But rumors of a realignment are already out, and those rumors are hard to kill.

Chirac(FR) wins the elections on 16 March 1986 and becomes Prime Minister. His program included a list of deregulations and modernizations for the French financial markets. He wanted to introduce privatization and cut tax rates. His policy resembled that of Thatcher and Reagan. But Chirac was in a bad spot. He was aiming at the presidency, and elections were only two years away. He had no time to absorb the temporary decrease in productivity and increase in unemployment that Thatcher and Reagan saw in their early years. To stay competitive and mitigate the risk of job losses, he needed a devaluation.

And on 7 April 1986, het got it. The FRF devalued by -3%, while the DEM and NLG revalued by 3%. The IEP and ITL stayed put, and the BEF, DKK and LUF were revalued by 1%. The blame for this devaluation Chirac put on “a loss of competitiveness built up over the three years since the last devaluation”.

1986 – Realignment no. 10 : Irish Pound

Ireland briefly takes the spotlight away from France in August of 1986. A depreciation of the USD and the GBP against ERM currencies causes a decrease in productivity for Ireland. It was really never a good idea for Ireland to be part of the ERM, while the UK was not. It makes about as much sense as the Netherlands leaving the ERM, but Germany staying in. The IEP and GBP are effectively pegged, so any kind of fluctuation in the GBP is introduced into the ERM through the IEP.

On 4 August 1986, a devaluation of the IEP of -8% was arranged.

1987 – Realignment no. 11 : French Franc

As part of his programme, Chirac(FR) modernized and deregulated French financial markets. What this meant for the ERM was that any measures taken by the government would have a much more immediate effect in the FRF exchange rates. It happened in this time that the USD lost strength, which meant the DEM gained relative strength. The modern French financial markets allowed cash to flow more freely than before, and it flowed from France to Germany. Other countries also lost capital to Germany, and they were all slipping to the lower end of their DEM parity band.

On 12 January 1987, the DEM was revalued by 3%, along with the NLG. The BEF and LUF were revalued by 2%, as they did not need a big revaluation. The reader should by now understand that the terms revaluation/devaluation are effectively meaningless. A revaluation of 10% of the DEM and 5% of the FRF is the same as a revaluation of 5% of the DEM and devaluation of -5% of the FRF. But the former sounds very positive! This is by design, of course, as realignment number 7 showed when the BEF and DKK were revalued even though they were in bad shape.

1987 – Louvre Accord

Chirac attempted to repair his political image in February 1987 at the G-7. His Louvre Accord showed everyone that he was working had to stabilize the weak dollar, which he blamed for the devaluation. The BuBa was not happy with the Louvre Accord. The Accord was, maybe intentionally, vague in its formulation, asking for a commitment to stabilizing the dollar exchange rate against the DEM. It thereby allowed countries to get around the ERM if circumstances allowed and if the rest of the ERM participants could be convinced.

1987 – Basle/Nyborg

The European Commission (??) had had enough. All these realignments were putting the ERM in a bad light. On 12 September 1987 at Nyborg  it was agreed that there should be better surveillance of the indicators to better predict currency movements. Furthermore, realignments were to be “less frequent and smaller”. More emphasis on the use of interest rate differentials, instead of realignments, was supposed to make this happen. Germans felt that the agreement went too far, and could lead to excessive creation of liquidity. Other participating countries felt that the agreement didn’t go far enough.

1987 – End of the Louvre Accord

For the first time since 1981 the BuBa raised its discount rate. The Fed was quick to condemn this action as an egotistical attack on the recovery of the world economy. This open conflict between two monetary superpowers had its effect on Wall Street. On 19 October the market crashes. The Fed immediately turns on its printers and pumps dollars into the market. Many European countries intervened in order to keep the USD value stable, but there was no saving it. The Louvre Accord was binned.

After the crash capital flows from the US to Germany. This put heavy pressure on the other ERM currencies. Immediately the Basle-Nyborg agreement was put to the test. The IMF writes:

The monetary authorities of France and Germany reacted swiftly by undertaking massive intramarginal invervention, financed to the maximum set in the Basle/Nyborg agreement and by an additional bilateral credit from the BuBa to the Bank of France. At the same time, the FRF was allowed to depreciate within the band against the DEM. This action was combined with coordinated interest moves. (…) and it was succesful. The market accepted that the existing ERM central rates would be maintained, and soon the speculative movements ain expectation of a realignment were reversed.

But their victory came at a great price. Germany had had to print a lot of DEM to fund this maneuvre. The result was rising inflation, which put the BuBa in a tough spot in 1990.

1988 – Proposal for an European Central Bank (ECB)

France proposes the idea for the ECB, with the goal of coördinating monetary policy of the EEC. The BuBa would get a seat in this bank, just like each country’s central bank would. The BuBa did not think this plan had a chance of becoming reality, since it felt that a monetary union would necessarily be a political union, to which France would not agree out of nationalistic principles.

But Delors (FR) was happy to set aside its principles if it meant a better position in the global economy. Delors was good friends with Kohl(DE), and together they saw monetary union as an opportunity to create European industrial superpowers that could rival those of the US and Japan.

1988 – Delors committee

The Delors committee of 1988 consisted of Delors himself and some “independent experts”. They were to explore possibilities for a monetary union.

The BuBa did not show any resistance at this time. Instead, it chose to go along with the project, but by making demands that it thought Delors(FR) would not agree to. One of these was that the ECB could not be used to save member states from financial troubles. Another was to free central banks from the government before the economic union was to be completed.

Delors(FR) used these strict demands to convince the other central banks to play along.

1989

In 1989 German reunification was on the table. Mitterand(FR) did not like this prospect, but Kohl(DE) assured him that this would be a step in the direction of monetary union. Kohl also instructed the BuBa that there could not be a revaluation between the FRF and the DEM in this important period. The BuBa made these instructions public knowledge.

In November parts of the Berlin wall were opened, with immediate economic consequences for Germany. The market expected the Mark to strengthen because of the massive new supply of labor. Kohl needed to keep the East-Germans in East-Germany to prevent this.

1989 – Spain enters the ERM

On 19 June 1989, Spain enters the ERM. It adopts the wide +-6% bands.

1989 – Écu revised

On 21 September 1989 the composition of the Écu is revised. Again, a little bit of DEM is taken out of the basket to make room for the ESP and the PTE.

1990 – Realignment no. 12 : Italian Lira

On anticipation of German reunification, the market expected a real appreciation of the DEM and thus the DEM strengthened significantly in the markets. This had a particularly big effect on the ITL, which dropped sharply against the DEM.

On 8 January 1990, a revaluation of -3.7% was deemed necessary for the ITL. The ITL was also placed in the narrow +-2.25% bands instead of its +-6% wide band.

German Reunification

1990 – German Monetary Union

In februari of 1990 Kohl(DE) announced that the Mark would become the currency of East-Germany. The BuBa found this idea unrealistic, because it would make the whole of East-Germany uncompetitive. The plan could only work with big subsidies for East-German industry and workers. The suddenly richer East-Germans would then increase demand for all kinds of goods in Germany, but the productivity of Germany would decline at the same time. This would put inflationary pressure on the Mark.

If this were to happen the Mark had to devalue, but Kohl(DE) had instructed the BuBa that this could not happen. This put the BuBa in a political stalemate. If the Bank went against the government, that would signal to the public that the BuBa was against reunification. They would lose public support. The bank could only downplay the risk of inflation to mitigate the damage as much as possible, and wait.

In the middle of 1990 the EMS was a mess. Spain and Italy, two countries with “bad” monetary policy, had the strongest currencies in the system. The ERM was supposed to export the stability of the Mark to its participants, but the Mark was now unstable itself. Confidence in the DEM was starting to drop. One would think that this would be bad for the system, but confidence in the DEM was actually one of the threats to the system itself. Even though the system was, in a way, built on the strength of the DEM, a confident german people would not give up their strong DEM. But with that confidence dropping, Germans might be willing to give up their Mark for the good of the system.

Inflation in Germany had been rising since 1987. It was already high in 1990, so the BuBa was rightly worried about this indicator.

When Kohl was reelected in December 1990, it was finally time to look at the damage. The damage report was fairly simple, but there were many things blocking a speedy repair. Due to the reunification, there was a real increase in the value of the Mark. Normally this meant a revaluation, but Kohl(DE) would not allow this. It would be seen as an attack on the system by the BuBa. A global revaluation was also out of the question. Another option was increased inflation, but that would make the BuBa look terrible. Inflation was already high, so the BuBa wanted to decrease inflation. The only option left was to decrease inflation elsewhere, so there could be relative inflation of the Mark. This meant France now had to prove its commitment to monetary union by playing along in this complex game.

At the end of 1990, the FRF was very weak in the ERM. The only currencies weaker than the FRF were the NLG (which followed the DEM) and the PTE. The strongest currency was the ESP, followed by the ITL. This was a problem, because while France was playing according to the rules, Spain and Italy had high inflation and a big national debt. A French devaluation was still not politically possible. The only option then was to play around with interest rates. A relative decrease of spanish interest rates was to be arranged so the Peseta could be weakened. Germany sided with France on this and a reluctant Spain decreased its interest rates.

In sum, 1990 was a bad year for the ERM. The system was supposed to bring stability, but it prevented a necessary revaluation of the Mark, which caused economic problems throughout the community. Nobody could reasonably claim that the goal of the ERM was to provide stability anymore.

European Monetary Union

Stage 1 – Objective: Survive

Just before stage 1 of EMU, the ERM was shaky. As we discussed before, the class clowns of the ERM were getting really good grades, while the teacher’s pets were getting fat F’s. People started to wonder if the grading system might be wrong. But the Council persisted. The ERM was perfect. We just needed a little more time and then we would have the promised stability.

A big blow to the ERM came because of German reunification. The reunification, and the consecutive special situation with German money, sent out economic shockwaves that were passed through the ERM to all participating economies. But the reunification also provided a golden opportunity for those who wanted EMU. The whole world was watching Europe, and the vibe was peace, love and unity. If monetary union could be presented as a way to unite Europe even further, it might be possible to get to the EMU goal even if the ERM fails and the goal of economic stability had to be abandoned.

And that is exactly what happened. After the events of Black Wednesday in 1992, when the UK and Italy left the ERM,

It did not take long (…) for the defenders of the ERM to switch from insisting that membership brought untold benefits to every member country to insisting that countries that left the mechanism were gaining and unfair competitive advantage. (rotten, 174)

During 1993, the whole ERM has to be suspended. Economic stability was no longer the way to push for EMU. But the EEC treaty had since been ratified to provide for all kinds of political instruments. The council pushes, just months after the suspension of the ERM, for the establishment of the EMI (later to become the ECB), and makes the European Union legal fact. The next year, in 1994, monetary policy is no longer coordinated between CB governors, but centrally from the EMI. The European Investment Fund (EIF) is also founded.

Bernard Connolly notes that:

The monetary Committee had evident difficulty even in deciding what the system was. In [one section, the report explained that]: ‘The EMS is a system of fixed bu adjustable exchange rates, which requires timely adjustments in response to trend divergence but the system must not be allowed to develop into a “crawling peg system”.’ (…)

You can look up the definition of a “crawling peg system” yourself, or you can take my word that the description of the ERM above would do fine as a definition for a “crawling peg system” in any economics textbook. Connolly continues:

(…) the report went on to deny the arguments of all the (…) supporters of the system. After ten years of rhetoric according to which [the ERM was supposed to provide economic stability], the Monetary Committee now concluded that the ‘hard-currency option’ had ‘limitations as an anti-inflationary strategy’ and was ‘a substitute neither for appropriate adjustment in other policies nor for moderation in domestic costs’.

So in this 1992 report we see that the Commission had actually learned the same as us! That the ERM can not provide so called economic stability at all. They admit the very fact. But we have to wait a little longer for the admission that yes, the EMS is only a political tool for ensuring EMU.

1990 – First Stage

On 1 July 1990 the first stage of EMU went officially into effect. It involved “implementation of the decisions on multilateral surveillance and on strengthening the task and role of the Committee of Central Bank Governors”. Spain, Greece, Ireland and Portugal didn’t play for keeps until the end of 1992 or 1995 at the latest. At this time the UK also enters the ERM.

1991 – Maastricht Treaty

1991 was a big year for the ERM. The existing community treaties were revised with “the special objective of setting up and independent European Central Bank (ECB) that will issue a single currency, the ECU (…)”. The first stage of EMU was already underway. The second stage would allow for the establishment of a European Monetary Institutet (EMI) “responsible for strengthening monetary policy coordination with a view to ensuring price stability” and responsible for making sure the third stage really happens. The third stage, with irrevocable fixing of exchange rates was to be reached by establishing “very strict economic convergence criteria” that participating countries had to meet. Those criteria involved price stability, public finances, participation in the ERM and long-term interest rates.

Exchange controls were also abolished in the treaty. This will become important later.

Interestingly, the treaty includes that “if the date for the beginning of the third stage has not been set by 1997, the third stage will begin on 1 january 1999”, effectively stating that EMU would happen no matter what, and at the latest in 1999.

There are two ways to look at monetary union. As depending on coordinated economic policy, or as a requirement for coordinated economic policy. Much like a living body can be seen as dependent on food, or as a requirement for needing food. Germany and the Netherlands saw coordination of economic policies as necessary before a monetary union could happen. Other countries, like France and Italy, saw monetary union as a means to achieve that coordination. To keep all parties happy, the treaty included a little bit of everything. A set date for monetary union AND a conversion of monetary policy beforehand. It was not decided what would happen if countries had not converged their monetary policies at the date of monetary union.

So called convergence plays developed in the market. Speculators were betting on countries joining the union by buying their bonds. The way they saw it, those high interest countries they invested in had to lower their interest rates in order to participate in the union, which would increase the value of those bonds. The market was betting on the union happening.

1992 –  Denmark Says No

On 2 June 1992 Denmark held a referendum on the Maastricht Treaty. This was required by law. The referendum was held and resulted in a NO from the Danes. The government wanted the Euro, but not the people.

The market blew up. While speculators were betting on the EMU earlier in the year, they were now betting against it. Or at least, they were hedging their bets. Either way, convergence plays were reversed, and the high inflation countries benefiting from increased bond prices were now punished. Money poured out of high interest countries like Spain and Italy. And just when these countries needed lower interest rates to stop these outflows, the BuBa raised its own interest rates, effectively preventing these countries from doing so. This exacerbated the outflow of capital.

Italy decided that instead it had to bluff. It joined Germany and raised its interest rates in a display of (working together). But the markets called Italy’s bluff. They determined that Italy could not do this for long. It had to roll over its big national debt shortly, and it could not do this with the new higher rates. Selling continued and all Italy could do now was buy large amounts of Lira in the market to stay within the ERM bands, and hope the BuBa would drop its rates again.

1992 – Realignment no. 13: Italian Lira (Sweetheart Deal)

The situation was looking bad, and the future of the ERM once again depended on BuBa action. Schlesinger(BuBa) was of the opinion that he had fulfilled the obligation of the BuBa, and now felt like a realignment was in order. A realignment at this time would look bad for the ERM, but the BuBa still had the “Emminger Letter”, which forced the government to either negotiate a realignment, or release the BuBa of its intervention obligation.

So on 12 September 1992 Tietmeyer(DE) flew to Paris to meet with Trichet(FR) for a secret meeting. This is where the so called Sweetheart Deal was made. France would agree to a realignment of the ITL, but only in exchange for a secret commitment of the BuBa to provide unlimited support to the FRF, outside of formal ERM rules, in case things went wrong. The BuBa also had to cut its interest rates again.

On 13 September 1992 the ITL was to devalue by -7% against all other currencies.

1992 – Black Wednesday, UK leaves ERM

After some initial optimism following the realignment, the ITL fell again. The -7% devaluation was not enough. Many large investment funds panicked, and reversed their convergence plays at any price. The ITL passed through the center of its band without any intervention by the Italian CB, which caused the market to believe that it had ran out of reserves. The ESP also slid down its band.

A rumor spread. Schlesinger was purported to have told an interviewer that the thirteenth realignment was not enough, and that other currencies should have been devalued as well. This caused problems for the GBP in the New York markets, outside ERM jurisdiction. Still the Bank of England intervened there to prevent arbitrage on the European markets the next day. But the interventions were not enough to prevent a big price drop, and the next day the bank was presented with cheap GBP to buy. \

The Bank of England hiked minimum lending rates to 12%, with no response from the GBP. Later that day, the Bank announced another hike, to 15%. It was clear that the Bank was in a bad spot. Selling did not even decrease. The market knew it was game over.

On 16 September 1992 it was announced that the GBP would leave the ERM.

1992 – Italy leaves the ERM

While the realignment pushed the ITL back into its band, it was still at the bottom and threatening to break out again. Italy, out of cash and unable to fight, decided on 17 September 1992 to suspend its foreign-exchange interventions for a while, effectively stepping out of the ERM.

Italy’s finance minister Giovanni Goria was actually glad to be out of the ERM. On 22 September 1992, Italy announced that it would not be seeing immediate re-entry into the ERM. After this statement, the BuBa made clear that if Italy were to see re-entry, it would be at the BuBa’s terms. The damage done to Italy’s economy during its ERM participation was severe. There was a big debt to the BuBa that needed to be paid back. Italy had to cut its budget by 6-7% of GDP just to keep its budget deficit and public debt ratio in check. (rotten heart)

 

1992 – Realignment no. 14: Spanish Peseta

17 September 1992 the ESP got devalued by -5% so it could stay within its bands without having to raise interest rates. But it would shortly need help again.

Intermezzo: Italy

The departure of Italy from the ERM did not come as a shock to many economists. Bernard Connolly writes:

By mid 1991, it was becoming clear that drastic and painful measures would have to bei mposed in the budget if Italy’s EMU candidacy were to be taken seriously by its partners. The years of relatively strong growth had seen a slackening of adjustment efforts. Rising tax revenues and falling unemployment outlays reduced the deficit as long as the growth persisted, but the underlying deficit was actually getting worse. The return to only sluggish economic growth in 1991 meant that the budget shortfall started to balloon alarmingly.

In other words, even though Italy saw relatively strong economic growth in the 1980s, Italy failed to use that growth to balance its budget. Why was this? Because in Italy, the government had always had almost full control of the central bank. Until the 1980s, its central bank was obliged to buy any Bonds that the government could not sell on the market, at interest rates set by the government. In 1981, that obligation was removed, but the government retained the right to determine interest rates and thus influence exchange rates.

A country in Italy’s position in 1981 would usually enter a recession. That recession would force the economy of the country to “cut the fat”, and would punish politicians who caused the recession in the first place. But Italy found another option. Instead of dealing with the trouble of economic and political reform from the inside, if it could make the cut for EMU, external budget rules coming from that EMU would provide the discipline the government needed. Much like a fat man who can’t stop eating, instead of changing himself by diet and exercise, Italy opted for the gastric bypass.

In the short term, expectation of Italy entering the EMU would also alleviate some of the economic trouble Italy was going through. In fact this did happen in the 1980s, and is part of what spurred economic growth during that time. And since the date of the gastric bypass was on the horizon, the government thought it might as well gorge on cake while it still could. Italy expected that the budgetary measures would come after the EMU, and at Maastricht was shocked to find that it had to actually lose weight before the procedure could take place.

Italy expected that a certain date would come on which EMU would happen, and certain budgetary measures would be forced on it from the outside, providing external discipline. What it got was a list of budgetary measures to take right now in order for EMU to happen at all. Moreover, in the run up to EMU, the Italian central bank had to be set free.

The Italian government depended on low interest rates to be able to roll over its big debt. This meant that it could not raise interest rates too much at any time, not even to save the ITL from crossing the ERM band. Since it entered the ERM Italy had walked the thin line between paying its debt and keeping its parity. Between 1988 and 1990, this became a little easier, as EMU expectation driven convergence plays increased demand for Italian debt. But due to other causes, like Italy’s relatively high inflation, Italy’s competitive position deteriorated. This problem was hidden by the global economic growth of 1988-1990, but when that growth slowed down, Italian industry began to struggle.

We continue our quote:

(…) If taxes have to rise, or welfare payments be cut, so that Italians in the streets have less [to spend], or if the Italian government itself is forced to spend less on goods and services, then output and employment fall. To prevent this, Italians must [buy more Italian goods than foreign ones, and vice versa]. These switches in spending patterns will not take place, unless Italian goods and services become cheaper relative to foreign goods and services. In other words, competitiveness would have to improve. (…)

Thus, by mid-1991, one could predict with almost absolute certainty that a large devaluation of the lira had to happen. So how could [no one in the Monetary Committee], the Committee of Governers [of Central Banks or] the top levels of the Commission [see this]? As we have seen before, convergence in the Community institutions was further advanced in a refusal to accept reality than in any aspect of the economic performance of the members’ economies.

1992 – Spain Breaks the Rules

On 23 September 1992 the Spanish CB had enough of speculators. It wanted to “burn” people with short positions on the ESP, and reintroduced tough exchange controls, buying up loads of ESP in the market. This was in breach of the community rules laid down in Maastricht eight months earlier. The Commission investigated the matter, but a report of the investigation never surfaced. Spain was not punished, once again showing that the rules were mainly show.

1992 – Realignment no. 15: Spanish Peseta

Italy and Spain were wise to leave early. Just two months had passed since they did and the ESP was in trouble again. This time, it was not alone. The PTE was also in trouble. With the ITL gone, the two weakest currencies were now the ESP and the PTE. It seemed like speculators were singling out the weakest currencies, and putting the pressure on them. Hard.

On 22 November 1992, the ESP and PTE were devalued by -6%.

1992 – The German Constitution

It is worth noting that the Maastricht Treaty went against the German constitution. A case was brought to the German Constitutional Court in 1992 by Prof. Karl Albrecht Schachtschneider. The court decided that the Maastricht treaty was in fact constitutional, as long as the single currency proved to be stable. On 21 December 1992, Politicians amended the German Constitution  to make this nuisance go away. The old article 88 stated:

The Federation establishes a note-issuing and currency bank as the Federal bank.

Now article 88 states:

The Federation shall establish a note-issuing and currency bank as the Federal Bank. Within the framework of the European Union, its responsibilities and powers may be transferred to the European Central Bank, which is independent and committed to the overriding goal of assuring price stability.

This was not the first time that the German constitution was ammended to allow for less autonomy and more European influence. On 23 August 1976, article 45 was revoked. The article read:

(1) The Bundestag shall appoint a Standing Committee which shall safeguard the rights of the Bundestag vis-à-vis the Federal Government in the interval between two electoral periods. The Standing Committee shall also have the rights of an investigating committee.
(2) Wider powers, in particular the right to legislate, to elect the Federal Chancellor and to impeach the Federal President, shall not be within the province of the Standing Committee.

In 1992, this article was also ammended, to state:

The Bundestag shall appoint a Committee on European Union Affairs. It may authorise the committee to exercise the rights of the Bundestag under Article 23 vis-à-vis the Federal Government. It may also empower it to exercise the rights granted to the Bundestag under the contractual foundations of the European Union.

1993 – Denmark gets a Pass

On 4 January 1993 at Edinburgh it was decided, with no legal standing (Kohl, Financial Times, 4 jan 1993), that Denmark could participate in the community without the euro and without European citizenship. Knowing that Denmark would probably take the deal, the market relaxed a bit on the DKK.

1993 – The Market Attacks

On 4 January 1993, the first trading day of the year, the market launches a vicious attack on the FRF. The French CB had to pull out all stops in order to fend off the attack, including asking the BuBa for help. The FRF/DEM band was not yet breached, so there was no obligation for the BuBa to act. But it acted to defend the FRF. The BuBa was still under control of Kohl, and the Sweetheart deal was still in place. At the end of the day, the attack on the FRF seemed unsuccesful.

Part of the reason why Schlesinger (BuBa) went along with the Sweatheart Deal must have been that he knew it was futile. Each time France had to defend the FRF, the economy took a big hit. Unemployment levels in France were gettin high and in an attempt to keep the internal economic situation under control the government had to reach deep into its pockets, undoing years of hard work to restore the public finances from France’s experiments with Socialism.

1993 – Lost in Translation

On 7 January 19993, Bertie Ahern, Irish Minister of Finance, spoke to the press about the situation of the IEP. It was a thursday, and in the interview he made clear that “The IEP was not going to devalue today or tomorrow“. Apparently this is an Irish way to say not ever, but I didn’t know that and neither did the markets. They interpreted the words to mean a devaluation was coming next week. Once the rumor was out it was impossible to kill. The selling of IEP commenced.

The CB of Ireland had recently abolished its exchange controls, so it could now only intervene through more exotic instruments. One of which was to raise interest rates on short term loans in order to make it harder for speculators to borrow IEP to sell. Ireland raised its overnight rates to 100%. It stands to reason rates like these cannot persist for very long.

1993 – Big Loans

On 18 January 1993, the Council of the EU approves a loan of 8 billion ECU for Italy, in order to help the country overcome its balance-of-payments difficulties caused by the disaster of 1992. But hold on. Didn’t the BuBa in 1988 demand that the ECB could not be used to save countries in financial trouble. They did, and the Council wiped their behind with that promise. If EMU were to happen, Italy had to be included. And EMU was to happen, no matter what. So to hell with promises, they must have thought. The BuBa had to fall in line for the greater good.

1993 – Realignment no. 16: Irish Pound

With the ESP and the PTE back above the middle of the band, the IEP was now at the back of the herd. The wolves smelled weakness and attacked, dragging the IEP all the way down to outside the bottom of its band. The new government did not want a devaluation and asked the BuBa for help, but while the BuBa commended the Irish CB for its 100% overnight rates measure, it did not act right away. It stalled as matters got worse and worse. Until Ireland was forced to act.

On 30 January 1993, the IEP was devalued by -10%. Only a decade or so back, realignments of over 5% were considered bad optics, and everything was done to make a 7% realignment look like a 3.5% revaluation here and a -3.5% devaluation there. Even three realignments ago, the -7% realignment of the ITL was presented just like this. But now that ITL and GBP had left the ERM, the jig was up. No need to keep up the act. Speculators smelled desperation.

1993 – No Socialism in France

On 23 March 1993, the Socialists in French government are punished by the people. Under Bérégovoy they lost over 200 seats, which were won by the right-wing parties headed by Chirac and Giscard d’Estaing.

On the arrival of this right-wing majority, speculators decided not to renew their short positions on the FRF. In order to short sell, one has to borrow an amount of FRF equivalent to the amount to be sold. Accordingly, interest must be paid on that loan, and with the expectation that the FRF would gain strength under this new government, or at least not lose any significant strength, speculators decided that the premium was not worth the potential upside. So money started to flow back into France as the loans were repaid with interest.

With a little money in its pockets, the new French government announced that it would start working on reducing its interest rate differential with the BuBa. It would succeed in doing this, and by May its interest rate differential was even slightly negative.

1993 – Realignment no. 17: Spanish Peseta and Portuguese Escudo

The IEP was back up, and the ESP and PTE were heading back down. Before the speculators could really sink their teeth in again, a quick realignment was arranged.

On 14 May 1993, the ESP was devalued by -8% and the PTE by -6.5% against all other currencies in the ERM.

1993 – The Soros Letter

Back in 1992 George Soros played a major role in the GBP dropping out of the ERM. The billionaire investor had, by his own words, a short position worth around GBP 10 billion. He would later reveal that he was planning to build this position even bigger. When the UK withdrew from the ERM, Soros profited over GBP 1 billion from the trade.

Now he was back for more. On 9 June 1993 the Times published an open letter from Soros in which he said that he expected the DEM to fall against all major currencies. The strategy employed here by Soros is undoubtedly the one he explains in his book “the Alchemy of Finance”, and it worked. Nothing had changed fundamentally, but the market panic sold the DEM.

(rotten heart p. 302)

1993 – The Big Joke

On 25 June 1993, a routine meeting was to take place between French and German finance ministers. A day before the meeting, Edmond Alphandéry, was interviewed on French radio. In the interview, he stated that “the hope of reducing unemployment in France rested on cuts in German interest rates.” It has been recorded that one official in Brussels stood looking at the financial news screens as this was said, to which he said out loud “That’s it, the system is fucked”.

Why was this comment so significant? He admitted that through the ERM, French unemployment was linked to short-term interest rates in Germany. With this comment he made clear that the Germany was still the boss of the system. France could not cut its rates unless Germany went first. In the same interview he also made the impression that it was he who was calling the BuBa over to tell it what to do. This made it impossible to act in France’s interest, however much it may have wanted to, since its public image depended on its independence of government.

By the next day it was announced that the meeting was postponed indefinitely because the German finance minister was “too busy”.

But the BuBa did, a few days later, announce a cut in its discount rate by .5%. France did not miss a beat and immediately cut its own equivalent of the discount-rate by .25%

1993 – Collapse

On 5 July 1993, France was shocked to find that the interest rate cut did not have the desired effect. France had cut its rates by just .25%, which was a relative increase of .25% with respect to Germany’s cut. This meant the FRF should appreciate against the DEM, but it didn’t. It started falling. The next day the movement accelerated. At the worst time, news came about French economic performance, and the news was bad. It was estimated that GDP would fall by 1.2% in 1993. This meant that France needed more interest rate cuts, but the market knew that these could not happen unless France were prepared to abandon its ERM-band. Speculators shorted the FRF, increasing the pressure even more.

Market players knew the ERM was about to collapse. They knew that the survival of the FRF depended on the BuBa cutting interest rates so that France could cut theirs. But if the BuBa did that, the strength of the whole ERM block would fall against currencies outside it. In anticipation, money started flowing into “safe” currencies like the USD, the GBP and the Yen. If the BuBa did not cut rates, ERM currencies would all fall against the DEM and the NLG. So within the ERM, money flowed out from everywhere and into the DEM and the NLG.

On 16 July 1993, France invokes the Sweetheart Deal one more time: the BuBa had to commit to unlimited intervention in favour of the FRF. But the FRF was still slipping. At the same time, interest rates were rising to a point where French industry could be seriously impaired. This drove Mitterand(FR) to make his first public statement on the monetary situation in months. In it he emphasized that the FRF/DEM link is important, but should be balanced with the domestic demand in France. That speech had little effect. Not because it had little substance, but because the world’s eyes were now on Denmark.

Denmark had high and rising unemployment. For that reason it was hit especially hard by the market when currencies were sold off for safer ones. The Danish and Dutch CBs had to intervene several times. While France’s 3-month rates were now at the critical level of 7-8%, Danish 3-month rates had risen to almost 10%. The malaise of the system improved speculator confidence that the BuBa would cut rates. They started buying German bonds and stocks, pushing up bond prices and pushing down long-term interest rates as a result.

On 17 July 1993 the DKK hit its intervention limit for the second time. The DKK rate was defended by all the ERM countries. The NLG was at the top of its band with the DKK, so it cut its interest rates by .1% in order to reduce the spread. When this made the NLG dip, the IEP was briefly the currency with the widest DKK gap. The market immediately started buying IEP with the expectation that the Irish too would have to cut interest rates. These IEP then went into Irish bonds, which would rise in value should interest rates be cut. This important moment proved Schlesinger right when he said that the ERM only served to enrich speculators.

On 21 July, the BuBa announced some important numbers. Their money-supply figures showed a 7.1% increase of M3, which was outside their 4.5-6.5% range. The BuBa considers M3 to be its primary target, so missing this range was a big deal. The logical thing to do would be to raise interest rates, or at least not raise them. This made it harder for the BuBa to cut rates to save the ERM.

The market responded by hedging their bets. Selling of weaker ERM currencies intensified again, this time mostly against the DEM. The result was a spreading disease. Now all the weak ERM currencies were in trouble. The ERM was still barely alive, but it could crash at any time. Everything depended on the Bundesbank Council meeting on 29 July 1993.

On 29 July 1993, the BuBa met and decided not to cut the discount rate. That was the starting shot for the market to get off their hands and start selling again. The FRF immediately hit the bottom of its band against the DEM, despive massive intervention. For Delors(FR), this was a declaration of war. France stopped its interventions the next day, which allowed the FRF to drop well outside the band. This forced Germany into obligatory invertention measures.

The BuBa fulfilled all its formal obligations to intervene, but it knew that this would become real expensive real quick. There was a last attempt by the BuBa to find a Franco-German solution on 31 July 1993. Schlesinger(DE) and Waigel(DE) flew to the CB in Paris tot talk in person, where they tried to explain that the German people now clearly saw that all Schlesinger’s warnings about the ERM had come true. It was impossible for the BuBa to cut rates without losing credibility forever. The only way out, as they saw it, was to suspend the ERM. But the French were unmoved. They wanted the BuBa to meet its formal obligations or leave the system.

On 1 August 1993 in Brussels the finance ministers of the EMS countries gathered to find a solution to their ERM troubles. The meeting had been called by Germany, which hoped to find some kind of solution before the financial markets opened on monday. Bernard Connolly gives a good account of the meeting:

The Germans went to bet first, with Gerd Haller, the State Secretary at the Finance Ministry taking a strike. Haller (…) proposed a widening of the ERM bands to 6% for all members. (…) The French representatives (…) flatly rejected the idea. Instead, they brazenly threw down the gauntlet to their main antagonists. The Bundesbank must respect its obligations under the ERM rules to the letter. On the Monday morning, it must announce to the markets that it was cutting its rates, that it would intervene without any limit to buy francs, and — most outragous of all — that it would purchase those francs outright, taking them into its balance sheet, rather than merely lending DM to the Banque de France (…)

At this point in the meeting, Trichet(FR) as chairman sums up the three demands laid down by France. Tietmeyer(DE) interrupts:

“Haven’t you forgotten a fourth demand?”, [Tietmeyer] growled at Trichet. The Chairman looked perplexed, as did others around the table. (…) “The fourth demand, Chairman, is that Germany must immediately abandon its monetary sovereignty”.

If Germany gave in to French demands, it would not only lose credibility, but the unlimited buying of FRF would also make the DEM entirely FRF backed. It was clear that Tietmeyer would agree to this proposal under no condition. What French made clear was that there would be no negotiating. At least, not in front of the others. The finance ministers were asked to convene again the next day. France and Germany would meet in secret that evening.

The next day Trichet(FR) proposes a plan, proposed by the French and accepted by the Germans: Germany would temporarily leave the ERM until it had solved its “post-reunification problems”. The plan was described by commentators as the solar system without the sun. Undoubtedly, the other ERM countries saw this problem too.

Of course, the NLG is essentially linked to the DEM, so it was natural that the Netherlands would leave the ERM with Germany. Trichet had realized this, and had accepted this result. But when he announced the plan to the other finance ministers, Luxembourg spoke up, saying if the Netherlands leaves, then so do we. They were even prepared to break their link with the BEF. But Belgium did not like that at all. If Luxembourg leaves, Belgium leaves too. Denmark and Ireland joined in. They were leaving too.

That left France, Spain and Portugal. Not much of an ERM, France must have thought. Even more, the countries that were threatening to leave could easily form their own, stronger, economic zone that resembled the DM-zone before EMS. Almost twenty years of hard political struggle would have been for nothing. France was once again reminded that it was not the favorite in the system. That was Germany. Wim Duisberg commented later: “At the end of the day, the French had to admit that the discount rate is decided upon in one place only: Frankfurt.”.

Tietmeyer, meanwhile, issued a warning to all ERM members:

Do not think you can use the dissolution of the ERM, the widening of the bands or whatever other loosening of the ERM constraints comes out of the meeting of minsters and governors; in particular, do not dare to implement sharp cuts in interest rates to levels below those prevailing before the crisis blew up.

Tietmeyer had to find a way to keep the ERM alive, so that EMU could succeed, while also assuring the BuBa would be top dog in the ECB. His warning, which had no legal backing, went uncontested. In two days he had wiped France’s demands all the way off the table, and commanded all central bankers to do as he says. And they listened. Top dog position was assured. Now he had to find a way to end the ERM practically but not formally.

So on 2 August 1993, the Ministers and CB governors of the countries participating in the ERM decided to widen, “temporarily”, the ERM bands to +-15%. This decision effectively caused all currencies in the ERM to float. The official reason: speculators had thrown a wrench in the harmonious works of the ERM. In any case, the ERM was effectively, but not formally, over.

1993 – Inevitability

If you thought the end of the ERM would be the end for EMU, you are wrong. The game was still on, the playing field just changed. After the effective abandonment of the ERM, the focus for the Commission switched from converging exchange rates to the convergence criteria for EMU. Countries wanting to participate in the union had to conform to some criteria in order to qualify. But it was clear that many countries would never qualify. After the float, currencies were dropping across the board, and Tietmeyer had been succesful in scaring everyone into leaving their interest rates alone.

1993 – Tietmeyer becomes BuBa President

In October 1993, Schlesinger(DE) retires and Tietmeyer(DE) becomes BuBa president. His goal was for the BuBa to be the central bank of Europe. But now there is talk from the Committee of Central Bank Governors, soon to be EMI, that they would be fine with the BuBa as leader if it decided to target the ERM-wide money supply instead of just the German one. Tietmeyer was vocal about his disdain for these “schemes coming out of Brussels”. He wants to be the CB President of Europe, but not on those terms.

Instead, his plan involves a gradual reduction of interest rates, each individual reduction small enough, and justified by market indicators, so as not to get charged with competitive devaluation by foreign countries, or to be seen as giving in to the market by the German people. Unfortunately, this created a bubble in the European bond market, which popped in February of 1994. German banks, the biggest buyers of European bonds, saw heavy losses.

But the German people saw heavy gains. During they bubble, they got credit at incredibly low and fixed rates. They started spending it. In the meantime, US and Asian economies were also picking up, and orders started coming in for German goods. Germany saw what looked like an economic recovery. Other European countries saw what looked like economic growth, too. These developments kept the ERM currencies fairly close together.

Stage 2 – No Nation Left Behind

Long Term Interest Rates converging from 1995 to 1999.

Stage two of EMU is characterized by the convergence to certain economic criteria. Countries wishing to participate in EMU had to satisfy the following criteria by 1997. In fact, the criteria were not satisfied, and the date for EMU was moved to 1999, giving all countries a second chance. The criteria were as follows:

  1. Price inflation rates had to be under a limit set by the average of the three countries with the lowest inflation rates +1.5%,
  2. Public deficits had to be not higher than 3% of GDP,
  3. Total public debt had to be not over 60% of GDP,
  4. Long term interest rates had to be under a limit established by the average of the three governments paying the lowest interest rates +2%,
  5. Countries had to join the EMS for at least two years and could not devalue its currency during this period.

We now know that:

  1. In 1997, one country (Greece) did not meet its inflation criteria. In 1999, the inflation criteria were met by all countries.
  2. In 1997, four countries (Greece, Portugal, Spain, France) did not meet their deficit criteria. In 1999, two countries (Greece, Portugal) did not.
  3. In 1997, ten countries (Belgium, Italy, Greece, Sweden, the Netherlands, Ireland, Austria, Denmark, Spain, France) did not meet their Debt/GDP-ratio criteria. In 1999, eight countries (Belgium, Italy, Greece, Austria, Sweden, Netherlands, France, Spain) did not meet their criteria.
  4. In 1997, only Italy did not meet its long term interest rate criteria. In 1999, all countries had met their criteria.
  5. All countries trivially meet this criterium.
Debt/GDP ratios barely converging between 1995 and 1999. Note the cluster of countries at the 60% mark in 1999 that “made it”.

It is clear that in 1997, the convergence criteria were not met at all by most countries. But in 1999, although most countries satisfied criteria 1,2,4 and 5, criterium 3 was still not met by eight countries, a majority. These countries had all missed their target of 60% Debt/GDP. Three of these countries, the Netherlands, Spain and France, came within two percent of reaching the goal. Even Germany only just stayed under 60% Debt/GDP in 1999.

Many countries had to do some creative accounting in order to make the criteria. For example, Italy levied a one time “Eurotax” on its people to decrease its deficit. France performed a trick with France Telecom that aimed to reduce its deficit by .5% of GDP. Germany performed a similar trick and in many countries there was an attempt to revaluate gold reserves. It stands to reason that tricks like these do not impact the country’s long term economic stability, for which these convergence criteria were designed to test. Any impartial judge would have disqualified these measures, but the Council more than welcomed them.

Another factor important in making convergence criteria was the market. Convergence plays similar to those we saw in 1991 developed, which helped countries make their criteria by pushing down interest in the period before EMU, which helped many countries more easily pay their debts and reduce their Debt/GDP-ratio. In the same vein, capital inflow to these countries helped boost their GDP, which was beneficial for their Debt/GDP-ratio and their public debt and inflation statistics. For example, Italy paid around EUR 110 billion in interest on its debts in 1996, but only around EUR 79 billion in 1999.

(tragedy 47)

So even with help from the market and creative bookkeeping, a majority of countries could not make all convergence criteria. Still, EMU did come to pass in 1999, showing definitively that the goal of EMU was political, not economic, in nature.

If you are still not convinced of this, the following may help. Waigel(DE) proposed in 1995 the Stability and Growth Pact (SGP) meant to impose sanctions on countries that breached the convergence criteria while in EMU. Before the pact was signed in 1997 it was nutured severely by the other members. Waigel wanted stricter limits than the criteria from Maastricht, with automatic sanctions the proceeds of which would be distributed among union members. In the end, the Pact was accepted with sanctions that were not automatic, the proceeds of which would go to the EU.

The Commission of the EU would be responsible for monitoring the SGP, and sanctioning violators of the pact. But the referee didn’t really care about the rules. Commission members called the SGP “stupid”, even. (Tragedy of the Euro, p 37) Furthermore, in the event of a violation, there would have to be a two-thirds majority necessary for sanctions. That meant violating countries could easily band together to block sanctions. And even if we got to sanctions, like in November 2003 when sanctions were recommended by the Commission against France and Germany, the EcoFin can simply waive them, which they did.

In March of 2005 the SGP was made even more easy to cheat by adding several circumstances that justified violations of the 3% deficit limit. These included natural disasters, a falling GDP, recessions, expenditures for innovation and research, public investments, expenditures for international solidarity and European politics and pension reforms. The reader is asked to think of something that does not fit into any of these categories.

1994 – EMI

Stage two of EMU is kicked off on 1 Januari 1994 with the establishment of the EMI in Frankfurt, just a five minute walk from the BuBa main office. The Committee of Governers is thereby dissolved, and from now on CB leaders convene in the EMI building under its president who is not to be a member of any CB of any state.

On 1 May 1994 the European Investment Fund (EIF) is launched. The Council decides  on 6 June 1994 that it will participate in the EIF as a member in its own right.

1995 – Realignment no. 18 : Spanish Peseta and Portuguese Escudo

Although the bands were now very wide, the ESP still threatened to fall out.

On 6 March 1995 the ESP and PTE were devalued by -7% and -3.6% respectively.

1996 – The Euro

On 15 December 1995, the name “Euro” is decided on by the European Council.

1996 – Not yet

On 11 November 1996, the Council decides that there is not yet a majority of member states meeting the convergence criteria, so EMU will not begin in 1997 and will be postponed.

1996 – Italy returns

On 24 November 1996, Italy rejoins the ERM with +-15% bands.

1998 – Realignment no. 19 : Irish Pound

On 15 March 1998 the IEP is devalued by -3% against all currencies in the ERM.

1998 – Greece Joins ERM

On 15 March 1998 the GRD joins the ERM.

1998 – Sustainable Convergence

On 25 March 1998, the Commission decides that the 11 member states Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland have achieved a “high degree of sustainable convergence”. Denmark and the UK decide not to participate in EMU.

p68

https://ec.europa.eu/economy_finance/publications/pages/publication974_en.pdf

What “sustainable convergence” means is up to you. For the Commission, it meant something like “close enough”.

On 30 April 1998, the European Parliament decides that the third stage of EMU with these 11 member states will begin on 1 January 1999.

1998 – The European Central Bank

On 1 June 1998 the European Central Bank (ECB) is established in Frankfurt, a short drive’s distance from the BuBa. The bank replaces the EMI entirely. The official goal of the ECB is “price stability”, which apparently means rising prices. The ECB aims at 0-2% price inflation per year. But there is a caveat. The ECB is also supposed to support the general economic policies in the Community.

What does this vague second statement mean? It means that politicians can set economic goals for the Community. The ECB is then obliged to work to achieve those economic goals. If a goal asks for inflation at a certain rate, and the actual rate is lower, the ECB is asked to turn on its printers by politicians. This gives the EU a degree of political control over the ECB.

This is a problem, since the ECB is officially supposed to be an independent body, which in fact worried many Europoliticians. On 2 April 1998, the European Parliament:

Stresses the fact that the independence of the future ECB will go further than that of any other central bank (…)

These politicians should have listened more closely to Mitterand(FR), when he stated that:

One hears it said that the ECB will be the master of the decisions. It’s not true! Economic policy belongs to the European Council and the application of monetary policy is the task of the [ECB], in the framework of the decisions of the European Council(…)

(Rotten Heart p.142)

The ECB has an arsenal of indicators at its disposal to let the political will be done. Unlike the BuBa, which operated based on a single indicator: M3, the ECB operates on a plethora of indicators ranging from exchange rates and interest rates to wage rates, consumer confidence polls and price indexes. Name something you want done, and the ECB can find you an indicator to base an economic case on.

Profits the ECB made would be distributed among participating national banks at the end of the year. The way the ECB determines what share each participating bank gets is based on the size of each bank’s account at the ECB. Some commentators have called attention to some asymmetry in this system. For example, Philip Baggus states that:

The [BuBa] produced more base money in relation to its population and GDP than France, basically because the [DEM] was an international reserve currency and was used in international transactions. The BuBa held more interest generating assets in relation to its population and GDP than France did. Consequently, the BuBa remitted relatively more interest revenues to the ECB than France, which were then redistributed to central banks based on population and GDP figures. While this scheme was disadvantageous for Germany, Austria, Spain and the Netherlands, it was beneficiial to France. (…) In the ten years before [the euro] the BuBa obtained EUR 68.5 billion in profits. In the first ten years of the euro [those] profits fell to EUR 47.5 billion.

(tragedy, p46)

So the bank seems to have some problem assigning weights to members. Not only in their contributions, but also in their voting power. In fact, each member of the ECB has the same voting power. That means that Germany (17% of ECB capital) has the same formal voting power as Malta (.06% of ECB capital). It is easy to see that this spells trouble for Germany and other low inflation countries. They can be counted on one hand: Germany, the Netherlands, Denmark, Austria. Meanwhile France, Spain, Portugal, Italy, Greece, Ireland, Belgium and Luxembourg quite enjoy high inflation rates. The frustration with this position caused Axel Weber to step down as BuBa President after his repeated criticism of the ECB’s inflationary policies went unheard.

Stage 3: the End

On 1 January 1999, the euro becomes a currency on the international market. EMU is complete, as 11 countries adopt the euro as their currency. The ECB now directs economic matters in Europe, drastically increasing the economic power of European politica, and bringing economic malaise in one part of the EU to all its parts.

Since the introduction of the euro, competitiveness in the least competitive areas of the EU has gone down due to higher standards of employment and production imported from countries like Germany and the Netherlands. At the same time, Germany’s competitiveness has stagnated.

The trade surplus of the EU can almost entirely be attributed to Germany and the Netherlands. Due to increasing exports from Germany to other parts of the EU, we can even see an increase in the German trade surplus combined with increasing trade deficits in other parts of Europe. This makes it easy to see that EMU acts as a window for capital to pass to higher inflation countries.

When compared to the US, France and the UK, Germany’s retail sales have stagnated since at least 1996. Those in the UK and France have gone up by almost 50% in the same period. In Southern European countries, similar growth can be seen.

All of this is terrible for the German people, but not so much for the German industrial and political “elite”. The political elite got rid of the BuBa, which was an ever present threat. The BuBa had, more than once, created a recession to get rid of a politician it did not like. Moreover, the BuBa tended towards deflation, which limited the spending power of politicians. In stark contrast, the French CB was under complete control of French politicians, who got unlimited funds from it. Even better, with the ECB any negative economic result could be blamed on one of those other countries.

The decreased productivity in other areas of Europe was good for German producers. Less competition is always better. They could charge higher prices, and did not have to deal with a crowded market. At the same time, German exporters benefited since the euro provided a fixed price between EU countries. Normally, increased exports increase the strength of your currency, which then depresses exports again. Now exports could increase without these economic consequences.

Conclusion

Monetary union in Europe is an old idea, and one that was usually paired with political union. Unfortunately, it seems like a (fiat) monetary union requires a political union in order to succeed.  Without a political union, different parties will spar over the use of the printing press. Moreover, fundamental asymmetries in the system will cause pricing problems, causing problems of malinvestment throughout the system.

In fact, we have a great example of this. Greece entered the EMU a year late, in 2001. The reason for this was their lack of convergence, and even at the time of entry their exchange rate was very high. Its high exchange rate and high wages (due to the power of its unions) made Greece uncompetitive within the EU. Many southern European countries have similar problems. When wages become inflexible in one direction, the result is unemployment, which must be subsidised, in turn creating a bigger debt load for the government.

When Greece entered the union, these debts were now implicitly backed by the ECB. Of course the BuBa had demanded that the ECB could not be used to bail out individual countries, but the market knew the ECB had done this once before and they were confident it would do this again. So since confidence in Greek debt increased, the price of Greek bonds went up and their interest rate down. These low interest rates falsely signalled to the market that Greece had savings ready to be invested. The country was in bad shape, but it was signalling to the market, through its interest rates, that it was doing great. In 2009, Greece woke from this dream to find that its deficits had grown out of control, triggering the European Sovereign Debt Crisis.

During that crisis the good people of Europe paid a heavy price for malinvestment in Southern European countries. Not only because they were forced to participate in huge bailouts, but also because the euro took a dive in the markets. That 1.60 EUR/USD rate from 2009 was never seen again. In fact, at the time of writing, we are sitting at 1.12 EUR/USD, lower than that 1.17 EUR/USD rate on 1 January 1999 when the euro went official.

It is also worth mentioning that price stability is neither a realistic nor a noble goal. Price stability is one of those things that sounds good on paper, but really isn’t. Sure it sucks for you if a price goes up, or if your wage goes down. But these are important, natural supply/demand signals. On the other hand, if a price goes down, or if your wage goes up, that’s great for you. Suddenly, you don’t want stability at all. When cars were first invented, they cost a fortune, which people were willing to pay. These prices drew in new producers who had to bid down the prices in order to make a sale. A couple years later everyone has a car.

Price stability also implies there exists something like a “fair” price, but what makes today’s price more special from yesterday’s? Fixing a price on one you deem “fair” now can be disastrous. Just look at the many housing crises in big cities around the world. Did fixing rent prices solve the supply issue? The idea of a “fair” price is at least as old as the Romans, who tried to fix the price of wheat, killing their economy and facilitating the fall of Rome. In reality, a “fair” price is one two voluntary parties are willing to trade for, and can never be fixed.

 

To Add:

Bribes by Delors (tragedy, 49)

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