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. Monetary uncertainty and trade wars played a significant role in the radicalization of Germany, especially after the hyper inflation of 1923. 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 opposite policies off set one another having little impact in the overall downturn of the European economy. For example, the tight monetary and fiscal policies of the Germans together with the loose policies of the French had the final effect of stimulating French consumers to buy German goods.

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 agreed around the idea that unemployment and economic growth are only secondary to price stability. This political transformation permitted not only the survival but also 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 policies showed that cooperation was necessary. 2. Introduction in European universities of monetarist ideas. By the mid 1980s Milton Friedman’s ideas were becoming popular amid European policy makers. 3. Germany had set the example of the mark. This currency had followed the low inflation model with great success. 4. With the increase of European economic integration, it grew the exchange risk. This risk was becoming so important that is was deterring economic development and 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.