As 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 RATESthrough 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 14thJanuary 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.

This post originally appeared in http://yanisvaroufakis.eu/ and is reproduced here with permission