The last EMU before global union?

Today's Economic and Monetary Union won't be the first but it might prove the most durable
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The Independent Online
THE BRITISH MUSEUM is celebrating the introduction of the euro with an exhibition about earlier monetary unions in the coins and medals department until 10 January. It provides ammunition for both the advocates and the opponents of today's Economic and Monetary Union (EMU).

As the museum says: "From the European century BC to the beginning of the third millennium AD, economic and monetary union has a long history."

Some monetary unions have succeeded, some have failed, but none has lasted. Far from preventing wars, previous monetary unions have broken down because of wars, or sometimes less dramatic disagreements between members.

Three different kinds of monetary union, or common currency, are on show. In earlier times, there were common, rather than single currencies. Before the rise of the nation-state, many different currencies circulated and competed. The one-to-one link between currencies and states became universal only in the 19th century.

John Stuart Mill, the 19th century philosopher and social reformer, denounced the practice: "So much of barbarism, however, still remains in the transactions of the most civilised nations, that almost all independent countries choose to assert their nationality by having, to their own inconvenience and that of their neighbours, a peculiar currency of their own."

Some of the earliest monetary unions took the form of empires imposing their own currency over their area both to symbolise domination and to facilitate trade. In the fifth century BC, Athens collected money from her allies if they could not provide ships. It was housed in the treasury on the island of Delos, and later transferred to Athens. The treasury was in effect the central bank backing the silver drachma which Athens imposed on its empire.

Opponents of monetary union, notably in Britain, cite various emperors as examples to be avoided - Charlemagne, Napoleon and Hitler, for example. Yet none of them found a common currency for purposes of domination. Napoleon imposed the French franc only on Italy, the Netherlands, and Switzerland. Hitler imposed the Reichsmark (literally "imperial mark") only on Austria and Czechoslovakia. The Roman Empire did not impose its coinage on subject territories; they voluntarily adopted it because of its greater value and convenience.

The gut reaction of some British eurosceptics faced with the euro is: "Did we win the war for this?" The implication is that what Germany could not achieve by arms, she is now achieving by money. The europhile answer is that even a united Germany accounts for only just over a quarter of the European Union economy, and its voting power in the various European institutions is much less than that. A Germany integrated into a European framework is less likely to dominate than the independent pre-1945 Germany.

The idea that "Brussels" represents some kind of empire is belied by the fact that only the Council of Ministers of the 15 EU governments can take decisions on proposals by the Commission. In any case the European Central Bank, which has powers independent of governments, is located not in Brussels but in Frankfurt. It has two German directors out of 17.

The second kind of monetary union on show occurs where one nation's coinage becomes the common currency - but not the single currency - of a number of others. Such "trade coinages" are a tangible manifestation of a kind of economic union. They were common in the Middle Ages, and the stamp of a royal mint gave them a more stable value than the underlying value of the metals from which they were minted. English pennies, Florentine florins and Venetian ducats all circulated throughout Europe in this way.

The best example of a common currency was the Maria Theresa silver thaler, originally minted in the Austrian Empire in 1744, which went on being used in the Arabian Gulf until 1990. The British gold sovereign was another example. It even became legal tender in Portugal for a time. After 1945, the US dollar became the world's main common currency for trade and finance. It has partly replaced inflation-prone domestic currencies for short periods in countries such as Argentina and Russia, but political as well as economic objections have imposed limits on "dollarization".

In the late 1980s the UK Treasury proposed that the ecu should be allowed to develop by becoming a common currency for trade and finance, competing alongside national currencies. As well as a free market approach to EMU, this was a way of getting Britain off the hook of having to decide whether to join the European single currency.

The competing ecu could never have worked as a basket currency made up of other currencies. It would have had no central bank, and no guarantee of stability against national currencies. David Folkerts-Landau of the IMF caricatured it as "a currency that floats on gossamer wings".

The D-mark would have had a better chance of outcompeting other European currencies, but that would have raised political objections.

The euro, however, backed by the European Central Bank, looks as if it will quickly become a trade currency for non-members in Europe, such as the UK, and a worldwide currency for finance, eventually rivalling the US dollar.

The third kind of monetary union involves an agreement or a treaty between two or more states. As the British Museum puts it: "The degree of economic and political union that accompanies the monetary union depends on the wording of the agreement" - or, it might have added, subsequent agreements. This is clearly the model for EMU, whose history forms part of the exhibition.

The most obvious precedent is the Latin Monetary Union. It was set up in 1866, after Belgium, Switzerland and Italy had joined France in setting their own francs (the lira in the case of Italy) at par with each other. Ten countries joined the union formally or informally. The exhibition shows similar gold coins of 20 units of French, Swiss and Belgian francs, Italian lire, Greek drachmas, Bulgarian leva, Romanian lei, Serb dinars, Spanish pesetas and Polish zloty. They all had the same value but each had its national symbol on one side. The euro coins, but not the notes, will follow this example.

The Latin Monetary Union, based on silver and gold, was absorbed into the gold standard in 1878. Britain and Germany, which were already on the gold standard, had refused to join, even though the British sovereign would have been almost exactly equal in value to the proposed new French 25-franc gold coin.

The gold standard was not a monetary union. Countries were free to leave and enter, and to change the value of their currency against gold. By abolishing national currencies, EMU makes it difficult and expensive, though not impossible for a member to leave the union and recreate its own currency. Provided that members agree to spread the benefits of the euro among each other, EMU could thus prove more durable than other monetary unions - at least until world monetary union is on the agenda.

Christopher Johnson is UK Adviser to the Association for the Monetary Union of Europe

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