Pierce Werner was appointed in 1969 to draw up a plan to make the monetary
union possible. Werner was the Prime Minister and finance minister of
Luxembourg. The Werner Report scheduled monetary union to be completed by 1980.
Economic crisis, rising inflation rates, and rising unemployment rates caused
monetary union to be thrown off this schedule. Government officials were more
concerned with their current economic situations, rather than long-term reform.
In 1972 the currency snake was developed. This reduced exchange rate
fluctuations by limiting the swings in bilateral exchange rates to a two and a
quarter percent band (Kenen pg.5). The snake is comprised of several European
currencies, led by the German deutsche mark. The exchange rate was agreed upon,
but the value of the currencies could fluctuate up or down to a ceiling or floor
exchange rate. Several currencies departed from the snake including the pound
sterling, the Italian lira, and the Swedish krona. The system’s inflexibility
led to the demise of the snake, along with the departure of the above listed
currencies. Each member country was responsible for keeping its currency’s value
within the agreed upon relationship to the other members’ currencies. The agreed
upon band was four and a half percent. Problems occurred because the member
countries had different inflation rates, fiscal and monetary policies, and BOP
balances. Thus market pressures pushed currency exchange rates out of the agreed
ranges, and the countries lacked the political will or resources to restore the
agreed exchange rate. Then the currency fell out of the system (Ball pg.165 ).
The snake was abolished in 1973 when the world shifted to floating exchange
rates. It made it more costly for some members to participate. The snake was a
kind of precursor to a stronger union that would come into being in 1979.
European countries prefer fixed currency exchange rated to floating ones. The
European Monetary Union was a step back to fixed rates and was a larger more
improved version of the snake. This union required countries to keep their
currency values within a specified range in relation to one another. The
European Monetary Cooperation Fund was created to support the efforts of member
countries to keep their currency values within the agreed relationship to other
countries. It is comprised of dollars and gold, which have an equivalent to
about thirty-two billion (Ball pg.171). One major difference between the EMS and
the snake is that the exchange rates of the EMS are flexible. If one currency
proves weaker than another does, and the governments cannot or will not take
steps to correct the situation, the EMS exchange rates can be changed. There
have been several rearrangements since 1979. If a snake member couldn’t stay
within the terms, it dropped out and ceased to be a member (Ball pg. 171).
Eight EC countries joined EMU at its onset. Italy was allowed to adopt
a six- percent band, all others remained at two and a quarter percent. Spain,
UK, and Portugal joined in following years at the six- percent band. In 1992
however, Italy and the UK dropped out due to the exchange rates crisis. Over the
years, economic conditions had changed quite a bit from when the Werner Report
was introduced. In 1989, Jacques Delors, then the president of the EC
Commission, was asked to prepare a concrete outline that would lead to European
Monetary Union. This report listed three necessary conditions for monetary
union. They are: the total convertibility of currencies, the complete
liberalization of capital flows and full integration of financial markets, and
an irrevocable locking of exchange rates (Kenen, pg.14). He went on to say that
there would be a need for a common monetary policy. This would have to be
regulated by an institution that would be centralized and make collective
decisions. It would influence the instruments of monetary policy such as money,
credit, and interest rates. This recommendation would serve to form the ESCB or
European System of Central Banks. “It would consist of a central institution and
the national central banks. It would be responsible for formulating and
implementing monetary policy as well as managing the community exchange rate
policy vis a vis third currencies. The national central banks would be entrusted
with the implementation of policies in accordance with the guidelines
established by the council of the ESBC and in accordance with the instructions
from the central institutions. The ESBC would have a fourfold mandate. The
system would be committed to the objective of price stability.
