European Economic Integration

After the end of the Second World War it was absolutely necessary to establish a stable European monetary system that allowed for the economic reconstruction of the continent. After 1923, monetary uncertainty and trade wars played a significant role in the radicalization of Germany. There was the consensus that such instability could not be afforded. The Bretton Woods system gave for 15 years the monetary stability that Europe and the world needed for the reconstruction; however, the Europeans were left by themselves in 1971 when Richard Nixon decided to finish the system.

The end of Bretton Woods came at a bad time. Only two years later, the first oil shock happened. It created a terrible combination of inflation and stagnant economy known as stagflation. The politically diverse Europe responded with very different policies to this crisis. The Germans remained faithful to the strong mark and did not lower interest rates. The French did exactly the opposite decreasing interest rates and running fiscal deficits so as to stimulate the economy. These policies had very little success.

The first half of the 1980’s was a period of transition for the European community. The European Monetary System (EMS) was created in 1979 and around it the idea of low inflation and foreign exchange stability gained ground. Little by little, radical, socialist and right wing politicians agree around the idea that unemployment and economic growth are only secondary to monetary policy. This political transformation permits not only the survival but the success of the EMS.

There are several reasons on why the Europeans decided to create a monetary union:

1. The failure of the 1970's showed that cooperation was necessary. 2. Adoption by European intellectuals of monetarist ideas that supported low inflation. 3. The example of Germany that had followed a policy of hard currency with great success. 4. Europe was composed by so many currencies, and the exchange rate risk was so important that it was deterring economic integration. 5. The movements of capital were becoming so important that it was increasingly difficult (almost impossible) to maintain fixed exchange rates.

In the 1st of January 1999 the euro is introduced as the common currency for the European Union. In its ten years of existence it has enjoyed great success.

Works Used

McNamara, Kathleen R. The Currency of Ideas: Monetary Politics in the European Union. Ithaca: Cornell University Press, 1998. Ch 1.