European monetary integration - Chronology 1950 - 1998

19 September 1950

The OEEC countries establish the European Payments Union (EPU) with retroactive effect from 1 July 1950. With the aid of multilateral loans and compensation payments, European currencies are to be made convertible against each other, and trade and integration in Europe are to be promoted. The EPU ceases its activity as of 1 January 1959 after the member states declare the commercial convertibility of their currencies (for non-residents, some also for residents). International capital flows, the freedom of which is necessary for a monetary union, nevertheless remain subject to a large number of different national restrictions.

15 March 1957

Six European countries establish the European Economic Community (EEC; Treaty of Rome) with effect from 1 January 1958. The objective is a common market with free movement of goods, services, capital and persons. However, the EEC initially concentrates on the establishment of a customs union (established on 1 July 1968). There is tentative talk of a coordinated monetary policy and of a liberalisation of capital flows only to the extent that they are necessary for the common market to function.

29 October 1962

As part of its plan of action for the second stage of the customs union, the European Commission proposes an economic and monetary union for the first time (based on the van Campen Report to the European Parliament on 7 April 1962). The plan is not pursued further, however. Ideas on the preparation and structure of the union vary too widely. Moreover, following the D-Mark appreciation of 1961, the Bretton Woods system of fixed exchange rates seems to be sufficiently stable to make the Common Market functionally viable in terms of monetary policy.

1-2 December 1969

In the Hague, the EEC Heads of State or Government envisage the stage-by-stage establishment of an economic and monetary union. The background to this is formed by the changes of government in France (Pompidou) and in Germany (Brandt) as well as the loosening of the Bretton Woods system of fixed exchange rates, which principally threatens the uniform agricultural prices of the EEC. In the working group set up on 6 March 1970 and chaired by Luxembourg’s Prime Minister, Pierre Werner, there are conflicting positions between the “monetarists” (including France; rapid fixing of exchange rates and provision of financial assistance for interventions) and “economists” (including Germany; monetary policy obligations only after harmonisation in economic policy). As a compromise, the Werner Report of 8 October 1970 proposes the “effective parallelism” of economic, monetary and political progress towards integration to be pursued in three stages. In its decision of 22 March 1971, however, the Council of Ministers concentrates on the first stage of integration, the limiting of permissible exchange rate fluctuations, Until the second half of the 1980s, European monetary integration follows the “monetarist” model rather than the “economic” one.

24 April 1972

The European Exchange Rate Arrangement (“snake”) enters into force (Basel Agreement of the EEC central banks of 10 April 1972). The permissible margins of exchange rate fluctuations are limited to ± 2.25%; following the collapse of the Bretton Woods system, some of the countries switch to “block-floating” against the US dollar (19 March 1973). The fixed exchange rates cannot be maintained, however; the differences between the countries’ economic and monetary policies and their inflation rates are too great. The number of countries participating in the snake”fell to six by late 1978.

5 December 1978

The Heads of State or Government of the European Communities take a decision on the establishment of the European Exchange Rate Mechanism (ERM; enters into force on 13 March 1979). Like the “snake”, the ERM is a system of fixed, but changeable, exchange rates and mutual intervention commitments if exchange rates deviate from the permissible fluctuation margins. The expectation was that the system of fixed exchange rates would force a co-movement of national monetary policies. This objective was partly attained as the participating central banks were, to a certain degree, subjected to the stability imperative of the Bundesbank. This success is achieving stability, as well as the desire to eliminate German dominance, finally provide momentum for the planning of a monetary union.

17-28 February 1986

The (now) 12 members of the European Communities (EC) sign the Single European Act (SEA; enters into force on 1 July 1987).  The SEA is the first fundamental reform of the EEC Treaty of 1957. It envisages an economic and monetary union and – going beyond the 1968 customs union – the completion of the European Single Market. In actual fact, by the end of 1992, the movement of goods, services, persons and capital within the EC is largely freed from restrictions.

27-28 June 1988

The European Council (of the Heads of State or Government) appoints a group of experts chaired by Jacques Delors, President of the European Commission, which is make proposals on the stage-by-stage establishment of an Economic and monetary union (EMU). The Delors Report (17 April 1989) provides for the establishment of EMU in three stages, the last of which is linked to certain institutional and economic conditions (stability-oriented and independent central bank, budgetary discipline). The Delors Report thus takes up fundamental ideas from the Werner Report and marked a turning point in monetary integration policy. The Delors Report forms the basis of governmental conferences which finally lead to the Maastricht Treaty.

1 July 1990

The first stage of EMU begins: liberalisation of capital movements in the EU. This increases the pressure on countries with a weaker currency to qualify for monetary union by means of a stability-oriented monetary and economic policy, since they can no longer use restrictions on capital movements to protect themselves against a withdrawal of foreign currency.

9-10 December 1991

Heads of State or Government agree in Maastricht on the Treaty on European Union (signed on 7 February 1992, enters into force on 1 November 1993). The Treaty contains provisions on Stage Two and Stage Three of EMU, on the Statute of the European System of Central Banks (which consists of the European Central Bank and the national central banks of the member states and which is committed to the objective of price stability and is independent of political instructions), and on the convergence criteria to qualify for entering Stage Three: a high degree of price stability, ceilings for budget deficits/government borrowing and long-term interest rates, exchange rate stability for a minimum period of two years.

16 September 1992-2 August 1993

Crises in the ERM. In 1992, investors lose confidence in the stability of the pound sterling, in particular, and then, in 1993, in the French franc, resulting in speculative selling of the pound and franc; in 1992, the United Kingdom and Italy leave the ERM; in 1993, the fluctuations margins around the bilateral central rates are expanded sharply. The Bundesbank with its commitment to price stability had refused to lower interest rates massively. The partner countries are forcibly reminded of their responsibility for their currencies; the process of convergence needed for monetary union is strengthened.

1 January 1994

Stage Two of EMU begins, Stage Three is being prepared: (1)  the convergence of national economic policies is intensified and the legislation (central bank statutes) are adapted to the requirements of Community law in order to fulfil the criteria laid down in Maastricht. (2) the European Monetary Institute (EMI) is set up in Frankfurt am Main. It has no monetary policy powers but is responsible for the technical preparation of the future European Central Bank. The members are the central banks of the 15 EU countries.

15-16 December 1995

In Madrid, the European Council sets 1 January 1999 as the date for the start of Stage Three of EMU at – acting on a German proposal – gives the name “euro” to the new, single currency. The name “ECU” mentioned in the EC Treaty meets with opposition, not least because the value of the basket of goods on which the ERM accounting unit ECU was based had been losing value constantly since 1979.

17 June 1997

Acting on a German proposal, the European Council adopts the Stability and Growth Pact in Amsterdam. The Pact is intended to ensure that the member states’ fiscal policies remain stability-oriented after they have entered monetary union. The member states must have balanced budgets in the medium term; there is a procedure in place to “punish” an infringement of the annual 3% budget deficit ceiling of 3% of GDP. However, this procedure is not automatic; it is instituted with the majority approval of the Council of Ministers.

2 May 1998

In Brussels, the European Council determines the fulfilment of the convergence criteria for 11 EU member states; monetary union is to begin with these countries on 1 January 1999. Sweden and Greece do not yet fulfil the entry criteria. The United Kingdom and Denmark make use of the right of abrogation granted to them in the Maastricht Treaty not to proceed to Stage Three of EMU.

1 June 1998

The European Central Bank (ECB; in Frankfurt am Main) and the European System of Central Banks (ESCB) are established. In the following months, the Governing Council of the ECB lays down the monetary policy strategy, the monetary policy instruments, as well as the terms, conditions and procedures of the single payments system (TARGET) for the future Eurosystem. The stability objective is defined as an annual inflation rate below 2%; the stability risks leading to monetary policy decisions are assessed on the basis of monetary growth and of a broad range of other economic variables (“two-pillar strategy”).

3 December 1998

As a coordinated measure, the national central banks of the future euro area lower their key interest rates to a uniform 3%. If the Governing Council had not made this – necessary – interest rate cut until immediately after the launch of monetary union (1 January 1999), the impression may have arisen that is was pursuing a monetary policy that was more expansionary than that of the national central banks hitherto; it wished to avoid creating this impression.

31 December 1998

The conversion rates between the euro and the legacy currencies of the member states are irrevocably fixed; €1 = DM1.95583. This is the last stage before the start of Stage Three of EMU on 1 January 1999.