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Euro's 10th anniversary: High noon in Paris as tensions flare over EMU build-up

by David Marsh - published on 16/02/09 in Financial News

In the first of a two-part serialisation of his new book, The Euro – The Politics of the New Global Currency, Financial News columnist David Marsh exposes the rivalries that threatened to derail the long journey to a single European currency. Drawing on narrative accounts from the euro’s architects, Marsh looks at how intrigues hatched behind closed doors helped overcome thorny differences between German and French political ideology

A secret meeting in Paris in December 1988 between Jacques de Larosière, Governor of the Banque de France, and President François Mitterrand set the path to Economic and Monetary Union in Europe – 11 months before the fall of the Berlin Wall. The 30-minute exchange in the Elysée Palace enshrined the goal of central banking independence in the mind of de Larosière, a long-time monetary civil servant whose courtly disposition and patrician demeanour hid nerves of steel.

De Larosière realised the issue was a crucial pre-condition for overcoming Germany’s long-standing resistance to EMU. The meeting set the scene for a bruising encounter five months later with Jean-Claude Trichet, then Director of the French Treasury, later to become de Larosière’s successor as France’s central bank Governor – and, in 2003, head of the European Central Bank.

Two decades ago, Trichet was intensely sceptical about independent central banks. Now, as the most powerful man in European money, he enjoys statutory freedom from government interference. The transition shows that, for all the apparent theology over autonomous central banks, the views of the central bankers themselves about their relationship with governments can evolve with startling flexibility.

De Larosière organised his clandestine meeting with Mitterrand to clarify his position on the committee of specialists set up in summer 1988 under the helm of Jacques Delors, the president of the European Commission, to set a route map for EMU. The Banque de France was under the control of the French Ministry of Finance, in line with the dirigiste tone that was a traditional feature of French economic governance.

The Governor knew that Germany would agree EMU only if central banks through out Europe were given the same independent status as the legendary Bundesbank. De Larosière recalls: “This view was not very popular with the Ministry of Finance. So I said to myself, ‘I’m going to have to talk to the President.’”

Mitterrand was studiedly ambiguous about his precise feelings on central banking but made clear to de Larosière that he would not block the stipulation of independence in the Delors deliberations. De Larosière interpreted the President’s sphinx-like tones as tacitly approving the dismantling of central bank’s fidelity to government.

As the Delors Report neared completion, a mood of confrontation developed between the Paris Finance Ministry and the Bundesbank. The Bundesbank raised interest rates in 1988-89, in response to the climbing dollar. Although Mitterrand’s Finance Minister Pierre Bérégovoy had achieved partial victory in his goal to harden the franc, he paid a significant price as tight money depressed a sluggish economy.

At a meeting with the Germans in February 1989, Bérégovoy voiced anxiety that the Bundesbank was about to launch “interest rate escalation”. Bundesbank president Karl Otto Pöhl replied archly that German interest rates were decided not by him, but by the 18-man Central Bank Council. Bérégovoy retorted: “You must be preparing something.”

Meanwhile, Britain’s policies on EMU came under intense scrutiny in Paris. In a secret memorandum, Mitterrand’s adviser, Elisabeth Guigou, warned the President about British Prime Minister Margaret Thatcher: “She does not want Economic and Monetary Union… She is banking on associating the president of the Bundesbank, M Pöhl, with her refusal – and thus dividing France and Germany.”

Guigou’s note recorded Finance Minister Bérégovoy’s deep hostility towards an independent central bank. “A future European central bank, being independent of governments, would be entirely dominated by the Germans.” A month later, Mitterrand revealed his own extreme anxieties, telling the Italian Prime Minister: “The Bundesbank is completely beyond the control of governments… It is dangerous that the Central Bank, in the absence of a political authority, should have sovereign power.

The [European] Monetary System is already a German zone. But the Federal Republic of Germany does not have authority over our economies. With the [European] Central Bank it would have it.”

Mitterrand’s misgivings formed the background to a heated dispute in Paris that remained out of the public eye but reverberated in central banking circles for many years. The pro-independence de Larosière was pitted against Jean-Claude Trichet, destined to succeed him in 1993 at the French central bank and, in 2003, to take over at the ECB after EMU started in 1999. De Larosière’s High Noon came on April 27, 1989, in an encounter of ceremonial severity in an ornate ground-floor conference room of the Louvre Palace, the headquarters of the Finance Ministry since 1871.

The mood was frosty. A week before the Louvre showdown, the Bundesbank had raised its discount rate, confirming the accuracy of Bérégovoy’s premonition of “interest rate escalation”. The French cabinet, meeting on April 26, noted with massive disapproval that the German discount rate increase coincided with a Franco-German summit meeting. “The Bundesbank’s decision to raise interest rates without warning at the same moment as the summit symbolises Germany’s go-it-alone practice.”

The Louvre session had the air of an inquisition. According to de Larosière: “The ministry received the finished report from Jacques Delors. I was summoned to a Finance Ministry conference room. M Bérégovoy and M Trichet sat on one side of the table, with a number of officials. I sat alone on the other side; M Bérégovoy’s manner was very cold. He said that the ministry had been surprised and dissatisfied by the report as it had been elaborated. He gave the floor to the Director of the Treasury.”

Trichet said the Delors Report went “too far” in proposing a degree of independence for the European central bank that went even further than the independence of the Bundesbank, and claimed that the Governor had made “excessive concessions” – a criticism de Larosière then went on strongly to refute. According to de Larosière’s account, Bérégovoy turned to his advisers and stressed that, instead of criticising the Delors Report, the Treasury should be working to put together a political counterweight to the European Central Bank. “There’s going to be a supermonetary power. We need a gouvernement économique (economic government) to balance that.”

The extraordinary tale of the theatrical confrontation between the present and future governors of the Banque de France was later passed on by word-of-mouth within the international central bankers’ circuit. The story explains why, for years, the Bundesbank and Nederlandsche Bank in Amsterdam were sceptical about Trichet’s suitability to head the independent ECB.

The French Government criticism of de Larosière however went beyond mere showmanship. Trichet and Bérégovoy were genuinely angry, because they believed they had been outmanoeuvred by Germany on the overall politics of EMU. Mitterrand’s successor Jacques Chirac, as well as the present incumbent in the Elysée Palace, Nicolas Sarkozy, stick to the same line: in view of the supreme power accorded to the ECB, a gouvernement économique is needed to provide balance. It is an extreme irony that one of the main opponents of such an idea is a man who found himself on the other side of the argument 20 years ago: Jean-Claude Trichet.

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