liberalism?
On this reading, Hayek’s scenario could well reverse out into its opposite—let us say, the prospect drawn by Wynne Godley. As the Treaty neared ratification, he observed:
The incredible lacuna in the Maastricht programme is that while it contains a blueprint for the establishment and modus operandi of an independent central bank, there is no blueprint whatever of the analogue, in Community terms, of a central government. Yet there would simply have to be a system of institutions which fulfils all those functions at a Community level which are at present exercised by the central governments of the individual member countries.32
Perhaps because he feared just such arguments, Hayek himself had changed his mind by the seventies. Influenced by German fears of inflation if the D-mark was absorbed in a monetary union (by then he was based in Freiburg), he decided that a single European currency was not only a utopian but a dangerous prescription.33 Certainly, it was more than ever necessary to take the control of money out of the hands of national governments subject to electoral pressures. But the remedy, he now saw, was not to move it upwards to a supranational public authority; rather, it was to displace it downwards to competing private banks, issuing rival currencies in the market-place.
Even on the principled right there have been few takers for this solution—which Padoa-Schioppa, perhaps with a grain of malice, commends as the only coherent alternative to his own.34 But misgivings about what the kind of single currency envisaged by the Treaty of Maastricht might mean for socio-economic stability are widely shared, even among central bankers. With nearly twenty million people currently out of work in the Union, what is to prevent huge permanent pools of unemployment in depressed regions? It is the governor of the Bank of England who now warns that, once devaluations are ruled out, the only mechanisms of adjustment are sharp wage reductions or mass out-migration; while the head of the European Monetary Institute itself, the Belgian-Hungarian banker (and distinguished economist) Alexandre Lamfalussy, in charge of the technical preparations for the single currency, pointedly noted—in an appendix to the report of the Delors Committee, of which he was a member—that if ‘the only global macroeconomic tool available within the EMU would be the common monetary policy implemented by the European central banking system’, the outcome ‘would be an unappealing prospect’.35 If monetary union was to work, he explained, a common fiscal policy was essential.
But since budgets remain the central battleground of domestic politics, how could there be fiscal coordination without electoral determination? The ‘system of institutions’ on whose necessity Godley insists is only conceivable on one foundation: it would perforce have to be based on a genuine supranational democracy at Union level, embodying for the first time a real popular sovereignty in a truly effective and accountable European Parliament. It is enough to spell out this condition to see how unprepared either official discourse or public opinion in the member-states are for the scale of the choices before them.
What, secondly, will be the position of Germany in the Europe envisaged at Maastricht? The accelerator towards monetary union was pressed not merely by the hopes or fears of bankers and economists. Ultimately more important was the political desire of the French government to fold the newly enlarged German state into a tighter European structure in which interest rates would no longer be regulated solely by the Bundesbank. In Paris the creation of a single currency under supranational control was conceived as a critical safeguard against the reemergence of German national hegemony in Europe. At the same time, even sections of the German political class and public opinion, somewhat in the spirit of Odysseus tying himself to the mast to protect himself from temptation, were inclined—at any rate declaratively—to share this view. On both sides, the assumption behind it was that a European monetary authority would mean a reduction in the power of the nation-state that was economically strongest, namely the Federal Republic.
No sooner was the Treaty signed, however, than exactly the opposite prognosis took shape, as German interest rates at levels not seen since the twenties inflicted a deep recession on neighbouring countries, and German diplomatic initiatives in the Balkans—once again, as in the early years of the century, shadowing Austrian manoeuvres—stirred uneasy memories. Conor Cruise O’Brien has expressed the alternative view most trenchantly. Commenting on the Yugoslav crisis, in which Bonn claimed to be moved only by the principle of national self-determination—not so applicable, of course, to lesser breeds: Chechens, Kurds or Macedonians—he wrote:
Germany was in favour of the recognition of [Croatia and Slovenia]. The rest of the Community was against, and the United States strongly so. Faced with such an apparently powerful ‘Western consensus’, on any such matter, the old pre-1990 Bundesrepublik would have respectfully backed away. The new united Germany simply ignored the United States, and turned the Community around. Germany recognized the independence of Croatia and Slovenia, and the rest of the Community followed suit within a few days. The reversal of the Community position was particularly humbling for the French . . . The two new republics are now part of a vast German sphere of influence to the east . . . German economic hegemony in Europe is now a fact of life, to which the rest of us Europeans must adjust as best we can. To press ahead with federal union, under these conditions, would not ‘rein in’ the mighty power of united Germany. It would subject the rest of us to German hegemony in its plenitude.36
Just this fear, of course, was the mobilizing theme of the campaign against ratification of Maastricht in the French referendum a few months later. The French electorate split down the middle on the issue of whether a single currency would reduce or enhance the power of the strongest nation-state on the continent. The majority of the political elite, led by Mitterrand and Giscard, in effect argued that the only way to neutralize German predominance was monetary union. Their opponents, led by Séguin and De Villiers, retorted that this was the surest way to bring it about. The dispute was fought out against the background of the first monetary tempest set off by the raising of the German discount rate in June, which ejected the lira and the pound from the Exchange Rate Mechanism in the final week of the campaign. A year later it was the turn of the franc to capsize in waves of speculation whipped to storm-height by the line of the Bundesbank.
We now have a vivid inside account of these events in Bernard Connolly’s book The Rotten Heart of Europe. The coarseness of its title and cover is misleading: a sign more of the self-conscious encanaillement of smart publishing than of authorial quality. The book suffers from an occasional lapse of taste, and liking for melodrama. But for the most part it is a highly literate and professional study. Indeed, piquantly so. A crypto-Thatcherite at the highest levels of the Community’s financial apparatus in Brussels, Connolly is at the antipodes of Thatcher’s bemusement in the field of European politics. His book displays an unrivalled mastery of the nexus between banking and balloting in virtually every member-state of the EC: not just France, Germany, Italy or the UK, but also Belgium, Denmark, Portugal and Ireland are covered with dash and detail. (The only significant exception is the Netherlands, whose ambivalence between liberal economics and federal politics is consigned to an exasperated footnote). Chauvinist convictions have produced a cosmopolitan tour de force.
Connolly’s standpoint is based on a principled hostility, not merely to a single currency, but to fixed exchange rates between different currencies—in his eyes, a dangerous and futile attempt to bridle the operation of financial markets, which can only stifle the economic freedom on which the vitality of a disorderly economic system depends. ‘Western capitalism contained is Western capitalism destroyed’, as he pithily puts it.37 Describing the dogfights of 1992–3 inside the ERM, his sympathies are with the most adamant German opponents of concessions to their neighbours’ concerns over interest rates, above all the crusty figure of Helmut Schlesinger, then chairman of the Bundesbank. But the sympathy is strictly tactical—Schlesinger is applauded for an intransigence whose effect was to undermine any prospect of stability in the ERM, so exposing in advance the unviability of EMU. It involves no idealization of the Bundesbank, the myth of whose ‘independence’ of political influence Connolly punctures effectively—its policies corresponding with remarkable regularity to the needs of the CDU/CSU in the electoral arena.
Today the German political class, in which nationalist reflexes are no longer so dormant, is having second thoughts