The euro’s first inkling – a piece in lieu of Best Wishes for 2015

26/12/2014 by

Sphere made of numbers on white backgroundAs 2015 is approaching, seemingly pregnant with crucial challenges for Europe, the euro and all those who have to live with it, I could not think of a better seasonal offering for readers of this blog than a suitable extract from my next book. I chose a piece that narrates, and interprets, the story of the first time the euro was proposed in the highest echelons of European decision making. Hope you enjoy it.

With wishes for a 2015 worth remembering fondly.

An Indecent Proposal

Kurt Schmücker was a man not given to strong emotions. But on the morning of March 23rd 1964 he could hardly trust his ears and only barely managed to contain his astonishment.

As Germany’s Minister of the Economy,[i] Herr Schmücker was used to meeting, regularly, with his French counterpart, Valerie Giscard d’ Estaign, President Charles De Gaulle’s finance minister and a man who would, ten years later, become President of France himself. So, when Giscard dropped by his Bonn office, for a two-hour chat, Minister Schmücker was relaxed, anticipating another anodyne meeting, like all previous get-togethers whose real purpose was to put on a show of European unity between the two erstwhile foes shouldering the burden of constructing a European Union at the early stages of its development.[ii]

Schmücker and Giscard normally exchanged polite views on how each saw the economic policies of the other, on how the two countries dealt with movements of money across their borders, on interest rates and trade balances, on their attitudes toward taxing business and, of course, on their joint efforts at cementing a European Union still in its infancy. Occasionally they would also swap tales of woe on their tense relations with their own central bankers, the Bundesbank and the Banque de France. Nothing, in other words, that might have prepared Herr Schmücker for what he was about to hear. But, that morning, once the obligatory niceties had been dispensed with, Giscard came out with a shocking proposal: France and Germany should create a common currency, inviting the other four members of the European Union to join in when and if they were ready.

It took Schmücker a few moments to recover his composure. What on earth was the aristocratic Frenchman saying? Germany and France sharing the same banknotes, the same coins, the same Central Bank? Which one? The Bundesbank? For heavens sake!, he is certain to have cried out inside his own head. Outwards, he put on a face of somber iciness, pretending not to have been taken aback. Indeed, the record shows that he responded as if he had not heard the earth-shattering proposition. Why not be more modest, he countered? Why don’t we just try to stabilize our exchange rates through our central banks and on the basis of (a conservative German’s wet-dream) “strict discipline” and “contractual rules”?[iii]

Giscard was having none of it: “Why choose this system which works only as long as everybody goes along?”, he reposted energetically, adding that his proposal was coming from the very top – from President Charles De Gaulle himself. Flabbergasted, Schmücker tried to alert France’s Minister of France to the deeper meaning of what De Gaulle was proposing: France was proposing to forfeit its national sovereignty! Was Paris serious about that? Giscard neither confirmed nor denied Schmücker’s obvious point. He bypassed it by urging quick action so that a common Franco-German currency be created forthwith, leaving it open to other European Union members to join in.

And so it was that a common European currency was first tabled, briefly discussed, and spectacularly… ignored. Schmücker knew that this was not an issue he had any authority to get seriously involved with. So he dutifully passed De Gaulle’s proposal on to Ludwig Erhard, his Chancellor.

Upon reading Schmücker’s brief, Dr Erhard smelled a rat. France could not possibly be giving up so light-heartedly its power to set taxes, to spend public funds, to set interest rates, to pursue its beloved “planification”. De Gaulle must have been up to something, again, thought Erhard. After all, the only reason Ludwig Erhard had risen to the highest office in Germany, a few short months earlier, was because of his role in frustrating President De Gaulle’s designs.[iv] This outrageous common currency proposal, thought Erhard, could only be made sense of as a continuation of those same designs.

Unwilling to enter into an official, public confrontation with France, Chancellor Erhard dutifully… “misplaced” Schmücker’s brief and pretended never to have received it. Nevertheless, when in 1966 he was forced out of the Chancellery, amongst the very few papers that Erhard took with him into retirement was that brief – a memento of the euro’s first official inkling.[v]

Valerie Giscard d’ Estaign was never De Gaulle’s stooge. Indeed, De Gaulle fired him from the Ministry of Finance in 1966 and Giscard had to wait for three years until a new President, Georges Pompidou, entered the Elysée Palace to reclaim the Finance Ministry – from where, in 1974, he rose to the Presidency of the French Republic. Of course, back then, in 1964, Giscard strove loyally to serve De Gaulle, often against his better judgment regarding some of the former General’s fixations.[vi] However, on that occasion, on March 23rd 1964, the “indecent proposal” he brought to Bonn was fully in tune with his very own thinking.

Giscard shared with De Gaulle one crucial judgment. They agreed that the hegemon was reaching for the Moon. Literally and metaphorically. The Americans were starting wars in Indochina. They were announcing grand, expensive social programs at home. Their corporations bought up venerable European companies and treated them disgracefully.[vii] “And how did they pay for all this? By printing dollars which, once off the presses, flooded Europe’s economies forcing Europeans to foot America’s largesse through higher inflation. The fact that France was more susceptible than other countries to these inflationary forces also weighed heavily upon De Gaulle’s and Giscard’s thinking.

From Giscard’s own perspective, Americans were forcing Europeans to lend them the money with which they bought up Europe and destabilized global finance. Giscard encapsulated this verdict famously in a two-word phrase: “exorbitant privilege”; an inordinate advantage enjoyed by the United States, and its currency, which America squanders; an advantage that ought to be done away with before world capitalism is destabilized for good and the opponents of the ruling bourgeoisie, especially in France, gained the upper hand.

“Exorbitant privilege” became a signifier of American financial might ever since Giscard coined it, and remains so to this day.[viii] But what could be done to curb it? From Giscard’s early 1964 perspective it was possible to imagine that the only way of ending America’s imprudent monetary supremacy was for France and Germany, Europe’s predominant nations, to get together, to forge a common currency, and thus to overcome their monetary dependence on a wayward United States. But would that not jeopardize, as Schmücker warned, France’s sovereignty? Of course it would. But that was a price that Giscard, a firm believer in a United States of Europe, did not mind much.

Giscard may not have minded the loss of French national sovereignty. But his boss, President De Gaulle, certainly did. Europe was important for De Gaulle, as it was for Giscard. It had to be “won”. But not at any price, as far as de Gaulle was concerned. And certainly not at the price of “losing” France in the process. So why did De Gaulle send his finance minister to Berlin with a proposal that, if accepted, would dismantle Paris’ levers of economic power? A common currency with Germany would rob Paris of control over France’s economy. But a proposal for a common currency was not the same thing as a… common currency!

De Gaulle was, lest we forget, a military tactician par excellence. Proposals for treaties and common currencies, just like maneuvers on the battlefield, were moves on a chessboard, packed with diversionary intent. A United Europe began to appeal to De Gaulle quite late in the piece (around 1958) and only when he started seeing it as a new vista of grandeur for his nation-state; in sharp contrast to Germany’s first two Chancellors, Konrad Adenauer and Ludwig Erhard, for whom the European Union was an escape route from their nation-state.

January 1963 was a month of political fire and brimstone, with Paris at its center. On 14th January President De Gaulle gave a press conference that amounted to a declaration of hostilities against the Anglosphere. Countering Washington’s express wishes, he announced that France was vetoing Britain’s entry into the European Union. And as if that were not enough, in the same breath, he turned down an American offer for nuclear cooperation with France within a multilateral force.

Eight days later, on 22nd January, the German Chancellor, Konrad Adenauer, went to Paris. In the splendor of the Elyseé Palace, amidst considerable pomp and ceremony, Adenauer and De Gaulle put their signature on the Elyseé Treaty; a treaty that was presented to the world as the cornerstone of French-German rapprochement, testimony to the permanent cessation of hostilities between Europe’s predominant nations, and the beginning of a “beautiful friendship”. Washington was incensed. George Ball, Under-Secretary in the State Department, later wrote: “I can hardly overestimate the shock produced in Washington by this action or the speculation that followed, particularly in the intelligence community.”[ix]

Washington’s ire had nothing to do with opposition to France and Germany burying the hatchet, getting closer, and reinforcing European Unity. The United States’ government fretted that De Gaulle was “up to something”; “something” aimed at America’s overall post-war Global Plan. More precisely, they were concerned that De Gaulle was attempting to lure Adenauer into a strategic alliance with a two-fold aim: At the level of international finance, to undermine the dollar-centered Bretton Woods system while, at the level of geopolitics, to bypass NATO in offering Moscow a non-aggression pact, cutting the United States out of the deal.

De Gaulle’s strongest hand was his grand vision of a Europe spanning “from the Atlantic to the Urals”. It appealed to a plurality of Europeans keen to remove the nuclear threat that hovered over their continent (especially after the Cuban Missile crisis of the previous October) and hopeful of raising the Iron Curtain which dissected it so brutally. For Germans in particular an “Atlantic-to-the-Urals” Europe packed added significance, as it hinted at Germany’s reunification. Washington was convinced that De Gaulle was ensnaring Adenauer into an alliance that would end America’s predominance in Europe. These fears were heightened by the fact that the German Chancellor was a Catholic Anglophobe with a long history of seeking unity with France.[x]

A day before the Elyseé Treaty was signed, an American diplomat[xi] enlisted the only member of Adenauer’s cabinet with the power to, and an interest in, opposing Adenauer’s drift into De Gaulle’s embrace: Ludwig Erhard, Adenauer’s respected finance minister who had overseen Germany’s economic “miracle” from 1949 to that day. Erhard did not act rashly. He bided his time. When Adenauer convened the Federal cabinet in Bonn on January 25th to discuss the Elyseé Treaty, Erhard kept quiet. Four days later, however, Erhard gave a forceful speech critical of French foreign policy, taking the unprecedented step of predicting that, even the though the Elyseé Treaty would be ratified, it would never be implemented.

In the following Cabinet meeting, in Bonn, on January 30th, Erhard went wild, speaking against “De Gaulle’s French dictatorship”, even comparing the French President with Hitler. In an article published in Die Zeit on February 5th, Erhard warned his compatriots that Germany “cannot run with hare and hunt with the hounds”, signaling clearly his allegiance to Washington and throwing down the gauntlet at Adenauer for having been become too close to De Gaulle for comfort. On that same day, President Kennedy signaled that Germany had a clear “choice between working with the French or working for us”.[xii] Erhard led the opposition to Adenauer shifting the German cabinet’s choice America’s way.

By April 1963, Erhard’s decisive intervention had diminished Adenauer’s position within the ruling Christian Democrats who proclaimed as the party’s sole candidate for replacing the ageing Chancellor. On May 16th, after a great deal of backroom dealing, Erhard and his allies succeeded in passing through the Federal Parliament an amendment to the Elyseé Treaty, in the form of a Preamble, that ended De Gaulle’s dream of a Franco-German alliance in opposition to America.[xiii] Meanwhile, secure in the thought that De Gaulle had been “seen off”, the US State Department re-calibrated its European strategy, avoiding further confrontations with De Gaulle and focusing instead on cultivating stronger ties with Bonn. And so it was that, in October 1963, Ludwig Erhard moved to the Chancellery, bequeathing the economics ministry to Kurt Schmücker.

Having his embrace shunned so spectacularly, it was quite remarkable that President De Gaulle bore no grudges against Germany’s new Chancellor. Even being compared with Hitler washed over him like water off a duck’s back. When Erhard was made Chancellor, he made a point of visiting Paris immediately to re-affirm the “great new friendship between the two nations” and… their leaders. President De Gaulle welcomed him with open arms, as he would a long lost friend. But six months later, he dispatched his finance minister, the charming Valerie Giscard d’ Estaign, to Bonn to astound Herr Schmücker with his proposal for an instant Franco-German monetary union.

Was De Gaulle not “getting” it that Germany was averse to another of his asphyxiating embraces? Whatever else was going on in the General’s mind, one thing is for sure: He was under no illusion. The notion that De Gaulle expected Erhard to agree to a Franco-German common currency is as absurd as the alternative notion, namely that De Gaulle wanted such a currency. The shared money proposal had two tactical features that attracted France’s strategizing President: the element of surprise, and a capacity (even if the proposal were ignored or rejected) to rope Germany into a relationship with France sufficiently close to afford De Gaulle more degrees of freedom in his opposition to the United States.

The element of surprise was, undoubtedly, there. Erhard and Schmücker had every reason to expect that, after Adenauer’s “departure”, De Gaulle would have left them alone. A common currency proposal was the last thing they expected. As Schmücker told Giscard, nothing in Paris’ demeanor signaled a willingness to forfeit national sovereignty or even to defer important decisions on France’s economy to supra national, institutions. He was right. France, and in particular De Gaulle, was guarding its economic levers jealously and had no interest in letting go of them. For well over a decade[xiv] De Gaulle had stood alone amongst conservative European politicians in dogged opposition to the new French-German economic relationship that America’s New Dealers were keen to turn into the emergent European Union’s backbone.[xv]

Unlike many of his deluded compatriots, who took great pride in the European integration project and waxed lyrical about it as a great achievement of the European spirit, De Gaulle had recognized the European Union project as an “American design” that privileged German industry in order to cement American dominance globally. The common European market and the process of European integration was, in his eyes, part of an American Global Plan that De Gaulle deemed ill-founded, unsustainable and, therefore, detrimental to both France and Europe.[xvi]

Eventually, by 1958, De Gaulle had softened his opposition to the European Union, after repeated American pledges in the 1950s that France would remain Europe’s administrative center. But he only embraced it so long as, in his own words to a visiting journalist, the European Union would resemble “…a horse and carriage: Germany [being] the horse and France…the coachman.”[xvii]

Alas, by 1963 it was clear that the “horse” was developing a mind of its own and the “coachman” was losing his grip. France’s accelerating trade deficit with Germany meant that Paris would be forced into a perpetual Sophie’s choice: Regularly go cap in hand to the IMF for permission to devalue the franc, admitting to permanent “national weakness”. Or rely forever on the Bundesbank to print Deutsch marks with which to buy francs, conceding to an unending dependency upon the old enemy. Either way, France’s aspirations for political and diplomatic domination of the European Union were unraveling.

It was a nightmare for De Gaulle but also for the French establishment, which saw in the General a fearless champion of their interests and ambition, domestically as well as across Europe. De Gaulle’s brashness sometimes clashed with polite society’s sense of decorum but, when it came to addressing German politicians, American officials, and Anglo-Saxon financiers, the French elite liked their President’s inherent suspiciousness, his readiness to speak out, as well as his commitment to “hard money” – to a stable, non-inflationary currency that would revive France’s image, bolster its banking sector and, importantly, weaken the recalcitrant French trades unions.[xviii]

De Gaulle was always cagey about an ever-closer union with Germany. He saw unity across the Rhine as a fine sentiment fraught with danger, whatever its merits for France. Even after 1958, when he embraced the idea of a European Union erected along the Franco-German axis, De Gaulle remained guarded about it. When Henry Kissinger once asked him how France would prevent German dominance of the European Union, the French President replied: “Par la guerre!”[xix] France’s war hero was not joking. Indeed, his indecent proposal for a common currency with Germany, that Giscard conveyed to a gob smacked Schmücker, was a form of war by other means.

Chancellor Erhard knew this. At the first glance of De Gaulle’s common currency proposal he recognized it as a ploy to smother his country, neuter the Bundesbank, and drive a wedge between Germany and Washington.[xx] Erhard had undermined Adenauer and risked everything to help his country wriggle out of De Gaulle’s first embrace. He was not going to submit to this second one. Unwilling publically to push back against De Gaulle’s clasp for a second time in a year, Erhard pretended never to have received Schmücker’s note.

And so it was that, in early March 1964, the idea of the euro lit up Europe’s skies ever so briefly and unseen by most Europeans. It was only when Europe was jettisoned in toto from the “dollar zone”[xxi] that it resurfaced.


[i] Kurt Schmücker was not atypical of the Christian Democrats that ruled W. Germany uninterruptedly from 1949 until 1969. At the tender age of 18, in 1937, he joined the Nazi party and, three years later, went to war, serving in the Wehrmacht till the bitter end. A year after the war had ended, he joined the Christian Democrats and became the party’s youngest member of Federal Parliament in the 1949 elections. In 1963, after Ludwig Erhard (an accomplished economist who had been Minister of Finance since 1949 and had overseen Germany’s most impressive economic reconstruction, 1949-1963) became Germany’s Chancellor, Schmücker took over the Ministry of Economics. Having only completed a publishing course, Schmücker nursed much anxiety about his capacity to take over Erhard’s role. As it turned out, both men (Erhard and Schmücker) were booted out of government in 1966, as a result of Germany’s first post-war recession which was, arguably, engineered for political purposes by the nation’s Central Bank – the fierce Bundesbank – see below.

[ii] At the time, the European Union was called the European Economic Community (EEC) and comprised six members, the signatories of the Treaty of Rome (signed on March 25th 1957): Germany, France, the Netherlands, Luxemburg, Belgium and Italy. The EEC was renamed European Union in the Treaty of Maastricht, November, 1st, 1993 – at the same time that the rules governing the common currency, the euro, were agreed to. In this book I shall be referring to the EEC as the European Union, for purposes of continuity.

[iii] Their conversation began with Schmücker addressing Giscard’s concerns that free trade within the European Union would create trade imbalances that would destabilize the exchange rate between the franc and the Deutsch mark. He suggested that EU (or EEC as it was then called) members should sign a formal contract and abide by agreed rules of contact regarding government fiscal and monetary policies so that the system could be stable. Giscard had other thoughts: (The dialogue below is quoted in Schoenborn, 2014):

Giscard: This is too little! We have not yet talked about it in the government, but de Gaulle has told me that dangerous developments as we are now experiencing cannot be avoided or overcome without a common currency of the EEC countries. We need a single currency for the EEC! [N.b. emphasis added]

Schmücker: In order to achieve the same effect, the currencies can also be maintained nominally while the monetary policies of the individual Member States are put under strict discipline through contractual rules.

Giscard: Why choose this system, which works only as long as everybody goes along?

Schmücker: I am just looking for a successful method without obliging France to renounce her sovereignty. A single EEC currency would be a supranational matter. So far France has been speaking out against any kind of supranational arrangement.

Giscard: De Gaulle has told me explicitly that he deems a single EEC currency necessary. He takes the view that no other way remains. If one state repeatedly pushes another into inflation, the only ones to benefit are the Socialists.

Schmücker: What do we do, if the other four will not join in? The creation of a monetary union is a decisive political step forward. Once the monetary union is accomplished, further political consequences will automatically ensue. Erhard’s attempts to advance the political union have not produced the desired response from all governments. Hence we can expect that the proposal will be skeptically received. Or do you imagine that France and Germany should forge ahead?

Giscard: An agreement between France and Germany should be considered only if the others do not participate. In this case the agreement must be drafted in such a way that others will have the option, both legally and practically, to join in at any time

[iv] See below for a full account of De Gaulle’s “designs” that Erhard frustrated, and thus became Germany’s Chancellor.

[v] See Schoenborn, 2014.

[vi] Giscard was a committed Keynesian who had little time for De Gaulle’s conservative views on how an economy should be managed. In particular, he harbored considerable contempt for Jacques Rueff, an economist who believed strongly in the Gold Standard and whom De Gaulle considered his economic guru. As a result, Giscard’s time as finance minister in De Gaulle’s cabinet was a precarious tenure.

[vii] To give one such example, in 1962 General Motors fired French autoworkers without consulting with the French government. A year later, in 1963, it purchased French auto-maker Simca and immediately proceeded to fire a segment of its workforce. Meanwhile, General Electric was “eyeing” a number of plants that Paris viewed as of strategic importance for France.

[viii] The phrase “exorbitant privilege” is frequently, and mistakenly, attributed to De Gaulle. Its rightful procreator was Giscard. Here is how Jacques Rueff, the French economist whose economic theories Giscard rejected (but with whom he had to work, since De Gaulle considered Rueff to be his favorite economic intellect), explained what Giscard had meant by “exorbitant privilege”:

“…[W]hen a country with a key currency runs a balance-of-payment deficit – that

is to say, the United States, for example – it pays the creditor country dollars,

which end up with the latter’s central bank. But the dollars are of no use in Bonn

or in Tokyo or in Paris. The very same day, they are re-loaned to the New York

money market, so that they return to the place or origin. Thus the debtor country

does not lose what the creditor country has gained. So the key-currency country

never feels the effect of a deficit in its balance of payments. And the main

consequence is that there is no reason whatever for the deficit to disappear,

because it does not appear.” Rueff (1971) p.78

[ix] See Ball, 1982, p. 271

[x] Konrad Adenauer made his mark in German politics well before the Second World War, serving as Cologne’s Mayor from 1917 to 1933. A devout Catholic and a committed opponent of Prussia’s dominance of Germany, he used his office to argue for a new Rhinish state, within the Weimar Republic, liberated from Berlin’s iron rule. When his efforts led nowhere, he initiated talks with French officials with a view to establishing an autonomous Rhineland within the context of a grand Central European design that would bring forth German-French reconciliation. While he was later acquiescent to the rising Nazi party, which he tried to accommodate within City Hall, the Nazis considered Adenauer an “unsafe” patriot (for having come so close to the French in the 1920s). At war’s end, a bombed out Cologne found itself in the British Zone and Adenauer was asked to serve again as the city’s Mayor. He agreed but then, in December 1945, suffered the humiliation of being dismissed by a British Army general for “incompetence” – when, in reality, his dismissal was due to his public statements condemning his city’s unrestrained war-time bombing by the RAF. Adenauer never forgave the British for this humiliation.

[xi] John Wills Tuthill, at the time US Ambassador to the European Economic Community.

[xii] See NSC Meeting Memo, 5th February 1963, 4.30 pm, FRUS, 1961–1963, vol. 13, 175–9; Memorandum of Conversation, Carstens and Rusk, 5 February 1963, 6 p.m., ibid., 186; NSC Meeting, 31 January 1963, ibid., 162, Kennedy Library

[xiii] The Preamble emphasized “the supreme importance of transatlantic cooperation” and was first thought of as a “solution” of the Elysee Treaty “problem” by American officials, who lost no time in letting Erhard’s office know that it should be considered. The Preamble, in essence, annulled the Treaty’s spirit of creating a Franco-German Alliance independently of the United States. According to Erhard’s presentation of the Preamble to Bonn parliamentarians, the Preamble was essential in order “to liberate the Elysee Treaty from any wrong interpretation of German policy”.

[xiv] From 1945 to 1958.

[xv] So fierce was De Gaulle’s opposition to the idea of an American-designed European Economic Community (that emerged formally in 1950 as the European Coal and Steel Community) that he went into the political wilderness until 1958, when the Fourth Republic’s collapse gave him an opportunity to re-fashion the French constitution, and France’s politics, in his image.

[xvi] American readers ought to take note that De Gaulle’s sharp criticism of the US post-war Global Plan was one that significant American policy makers shared. For example, George F. Kennan (a diplomat whose Long Telegram from Moscow begat the logic of “containing” the USSR) and Robert Taft (the Senate Republican leader who opposed President’s Roosevelt’s New Deal) also deplored the prospect of a world divided into an American and a Soviet sphere, in opposition to each other. Their difference from De Gaulle was that the French President had the means and the determination to make the American “bloc” unmanageable.

[xvii] See Connolly (1993), p.7.

[xviii] Their thinking was simple: If the French state forfeited the right to print money (either by reverting to the Gold standard or by adopting the Deutsch mark, prices would stop rising and the trades unions would lose all bargaining power over employers: with the government unable to boost overall demand, especially during a slump, the trades unions would have a choice between accepting high unemployment (that would destroy their power base) and accepting low wages. In short, by forfeiting the printing presses the French state would ensure that organized labor becomes less militant, more “German”. And if this also meant a greater propensity to recession, it was considered a small price to pay. Today, with France in permanent stagnation under the euro, France’s elites are simultaneously unapologetic, regarding that choice of theirs, and concerned about the rising tide of discontent and anti-European, racist, ultra-nationalism.

[xix] By war! See Connolly (1993), p.7.

[xx] Erhard’s rebellion against Adenuaer should be placed in the context of many Germans’ fear of an American withdrawal. Paul Volcker is quoted by his official biographer to say that he “…recalled JFK’s threat… to cut off military aid to Europe unless Europeans promised not to attack the dollar as the world’s currency.” See Silber (2012), p.55

[xxi] Recall the previous chapter.

Cookies help us deliver our services. By using our services, you agree to our use of cookies. More Information