Download 1. Introduction

The Influence of International Capital
Mobility on the French Road to EMU
Master Thesis written by:
Thomas Friis
Aalborg University, April 3 - 2008
Supervisor:
Poul Thøis Madsen
Aalborg University April 2008
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Contents
1. Introduction ...................................................................................................................................... 4
1.1 The process of increasing international capital mobility ........................................................... 5
1.2 The French EMU process .......................................................................................................... 7
1.3 Conceptualizing the field of examination .................................................................................. 8
1.4 Narrowing the scope ................................................................................................................ 10
1.5 Problem formulation ................................................................................................................ 11
2. Some important methodological considerations ............................................................................ 12
3. The theoretical framework ............................................................................................................. 17
3.1 Introduction .............................................................................................................................. 17
3.2 Integrating structure and agency .............................................................................................. 17
3.3 The theories which constitute the framework .......................................................................... 19
3.4 The Capital Mobility Hypothesis ............................................................................................. 24
3.4.1 Introduction ....................................................................................................................... 24
3.4.2 Important assumptions ...................................................................................................... 25
3.4.3 The CMH .......................................................................................................................... 26
3.5 The power of ideas ................................................................................................................... 30
3.6 The dynamics of ideas.............................................................................................................. 33
3.6.1 Introduction ....................................................................................................................... 33
3.6.2 The ideational life-cycle.................................................................................................... 33
3.6.3 The ideational equilibrium ................................................................................................ 34
3.6.4 The ending of the ideational equilibrium .......................................................................... 36
3.6.5 New ideas become embedded ........................................................................................... 38
4. Analysis of the French economic tradition in 1970s...................................................................... 39
4.1 Introduction .............................................................................................................................. 39
4.2 The French economic and monetary policy development in 1970s......................................... 39
4.3 How to understand the French economic and monetary policy development in the 1970s..... 42
5. Analysis of the French conversion ................................................................................................. 45
5.1 Introduction .............................................................................................................................. 45
5.2 Everything seems normal ......................................................................................................... 46
5.3 The failure of the recovery program ........................................................................................ 48
5.4 The ideational crisis ................................................................................................................. 51
5.5 Ideational conversion process .................................................................................................. 56
5.6 The repercussions of the introduction of the politique de rigueur ........................................... 60
6. Analysis of the asymmetry ............................................................................................................. 64
6.1 Introduction .............................................................................................................................. 64
6.2 The asymmetrical structure of the EMS in the 1980s .............................................................. 65
6.3 The interpretation of the asymmetry in general ....................................................................... 69
6.4 The interpretation of the asymmetry prior to the co-habitation ............................................... 70
6.4.1 Delors’ and Bérégovoy’s interpretation ............................................................................ 70
6.4.2 Mitterrand’s interpretation ................................................................................................ 72
6.5 The interpretation of the asymmetry during the cohabitation .................................................. 76
6.5.1 Introduction ....................................................................................................................... 76
6.5.2 The neo-Gaullist interpretation of the asymmetry ............................................................ 78
6.5.3 Demanding EMS reforms ................................................................................................. 79
6.5.4 Basle-Nyborg agreement................................................................................................... 83
6.5.5 French disappointment ...................................................................................................... 84
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7. Analysis of the choice of the EMU design .................................................................................... 87
7.1 Introduction .............................................................................................................................. 87
7.2 Two positions on the design of the EMU ................................................................................ 88
7.3 The economic context the French were faced with in the period 1988-91 .............................. 89
7.4 The French reaction and interpretation of the economic context............................................. 90
7.5 The German attempt to expand their power position ............................................................... 92
8. Conclusion ..................................................................................................................................... 95
9. References ...................................................................................................................................... 99
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1. Introduction
Of all the changes of international political economy since the end of the Second World War
(WWII), few have been as radical as the renaissance of globalization of the financial markets. Every
financier tells the same story about an international capital market that has been transformed over
the last decades. Someone who started as a junior financier in the 1960s and is now approaching
retirement will have witnessed radical changes in the financial system and structure on several
fields. Modern globalized financial structure brings memories about the early 20th century where
international flows of capital flourished with few restrictions.
The general theme of this thesis is how financial globalization has influenced the European
integration process with a particular focus on the French Republic. The objective is to understand
the French involvement in the EMU in the light of the exponentially increased capital mobility over
the recent decades. The study concerns the period between the early 1970s to the signing of the
Maastricht Treaty in December 1991. The puzzle is conceptualized as a relationship between two
processes or to be more concrete; how the process of increasing international capital mobility has
influenced the process of the French involvement in the EMU.
Why this separate analytical focus on the French Republic? In short, it is because France matters for
the European integration process. France, together with Germany, has since the ending of WWII
been at the center of the regional integration process. No one could imagine any major step in the
European integration without French participation and without a clear French fingerprint. Hence, in
order to understand the European integration process in general, it seems reasonable to focus on
France.
Yet, one event in particular triggered my curiosity for France in the European integration process:
an event that appears to be an important turning point for the European integration process. This is
what in this thesis is termed ‘the French conversion’ and it is event that started in 1981 and lasted
only about twenty months. During this short period most of the traditional French economic way of
thinking and the political and economic strategies and priorities were radically transformed. Prior to
the conversion the French strategies and priorities were centered on ensuring growth and
modernization. Most French governments employed expansive credit policies to finance growth
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which together with low employment were the number one priorities. In practice, nearly all other
objectives were subordinated to this. Several devaluations counteracted the effects of inflation on
the price competitiveness of French companies. One might say that inflation and devaluation were
staples of French economic policy (Sandholtz, 1993, p. 6).
After the conversion, this economic policy changed radically in that the focus was now primarily on
disinflation and general economic and monetary austerity and the franc had to be stable regardless
of nearly all other priorities and consequences. It was an important turning point, among other
things because this new French way of thinking meant that the French and German economic
philosophies no longer in contrasted to each other, which to a large degree was the case prior the
French conversion. Hence, the conversion can be seen as an event which removed one of the
discrepancies between the two EC-member states, thus enhancing the possibility for further
monetary and economic integration. Having read a lot of the literature on this subject, it crossed my
mind that it would be interesting to analyze how and to what extent the conversion was related to
the process of increasing international capital mobility which achieved momentum in the years prior,
during, and after the conversion. Hence, the time frame of the study is centered on this event - from
the early 1970s to the early 1990s.
1.1 The process of increasing international capital mobility
The subsequent section is a short review of what is here termed the process of the reappearance of
international capital mobility. The section depicts a process where the level of international capital
mobility increased dramatically over a period of thirty years starting from a relative low level
(compared to the early 20th century level) in the decades after the ending of WWII.
To begin with, global financial markets flourished in the late 19th and early 20th centuries. The
period is termed the ‘classical gold standard era’ and is typically considered the longest period of
high international capital mobility and lasted roughly from 1870 to 1914. (IMF, 1997, p. 234).
Some scholars even argue that the classical gold standard era had relatively higher levels of
international capital movements than contemporary eras, see e.g. Taylor (1996) and Turner (1991).
The period between the end of the classical gold standard era and the ending of WWII was
characterized by a fluctuating degree of capital mobility. During World War I, capital mobility was
restricted by control and in the period from 1919 to 1930, the world witnessed a relatively high
level of capital mobility which was ended by the Great Depression (IMF, 1997, pp. 234-238).
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In the years after the negotiation of the Bretton Woods Agreement in 1944 there was a widespread
skepticism towards the financial international liberal order which had prevailed in decades before. It
was a skepticism which was growing in strength and dissemination in the early post-war period. It
stemmed from the perceived experience of the interwar period, when speculative flows of capital
had severely disrupted international trade and exchange rates stability (Helleiner, 1994, pp, 1-50).
The Bretton Woods Agreement marked the beginning of a period with historical low capital
mobility in comparison to the eras prior to Bretton Woods (the classical gold standard era in
particular) and the later periods during the monetary regimes of the Snake and the EMS.
Mainstream policy-makers and economists believed that capital mobility was unnecessary - and
even undesirable. The Western European governments implemented capital control to prevent flows
of speculative capital which many believed could disrupt the already tenuous economic situation in
many countries. The control mechanisms became a central part of a new and more interventionist
economic policy in the early post-war years (McNamara, 1998, pp. 72-93).
However, things started to change in the early 1960s which brought memories of the classical gold
standard era. As Cohen argues in a rather poetic phrase: “Like a phoenix risen from the ashes,
global finance took flight and soared to new heights of power and influences in the affairs of
nations” (Cohen, 1996, p. 268). According to Cohen, investment and private lending gradually
started to gather momentum, producing an exceptional growth of cross-border capital flows and an
increasingly close integration of domestic financial markets (Cohen, 1996, p. 268). It was a
development which was a consequence of a remarkable confluence of events. Events which
includes the demise of the Bretton Woods fixed exchange rate system was impelled by the increase
of foreign exchange markets; the balance of payments crises caused by the OPEC oil shocks; the
development and use of new financial instruments; technological innovations; and the gradual
elimination of capital controls (McNamara, 1998, pp. 50-52).
Unfortunately, the exact scale and nature of this phoenix risen is difficult to estimate precisely. As
Cohen states; “comprehensive statistics on global currency circulation do not exist” (Cohen 1999,
p. 449). However, there are some surveys that give us insights into the reappearance of globalized
finance. One indicator of this development is the tremendous increase of the daily turnover on the
worlds exchange markets. In 1973 $3 billion were converted into European currencies in one day.
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Later in this decade, the daily turnover was about $10 billion and at the end of the 1980s that figure
had reached $65billion (Goodman & Pauly, p. 57, 1993). Another indicator is a survey by Thygesen,
et al. Using data from a range of sources, Thygesen et al. worked out what they term global
financial wealth; the world’s total portfolio of private international investments. From just over $1
trillion in 1981, aggregate cross-border holdings quadrupled to over $4.5 trillion by 1993. What is
particular interesting here is the fact that this increases much faster than that of world output or
trade in goods and services (Thygesen et al. 1995)
According to Cohen, this reappearance of globalized finance fostered two characteristics in
particular: Firstly, the scale of cross-border currency use is extensive as well as growing rapidly,
reflecting both the scope and intensity of market-driven competition. Monetary circulation actually
is no longer confined to the territories of issuing countries. Strict autarky in currency relations is
indeed a special case. Secondly, while the number of money in reality used for either international
or foreign-domestic reasons tends to be rather small, the number of those routinely facing rivalry at
home from currencies abroad emerges to be significant large (Cohen, 1999, p. 450).
From the point of view of this author, the degree of international capital mobility is a fundamental
attribute of the terrain within both domestic and international economic politics unfold. When the
level of this capital mobility is altered, the terrain is altered. As McNamara points out; “At the
international level, capital mobility plays a critical role in determining the conditions under which
international monetary agreements can be sustained” (McNamara 1998, p. 4). The point is: When
an increased level of cross-border flows of capital boost the financial integration among states,
ceteris paribus, monetary authorities and policy-makers find it more difficult to conduct their
independent economic policy. Likewise, Thygesen argues that when international economy is
characterized by a high level of capital mobility, the financial markets will react to even minor
differences between the economic and monetary condition among states and thereby put pressures
on the exchange rates which otherwise were well-founded (Interview: Thygesen). Hence, it seems
reasonable to argue that the phoenix risen is important as it is a profound alteration of the context in
which the French road to EMU was to unfold.
1.2 The French EMU process
The process of the French involvement in the EMU is here perceived as two related issues; the
French role in the political and economic process that led to the EMU and the French decision to
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become a member of this new economic and monetary regime. This section conceptualizes in a few
words what this in general means. Yet, it is important to notice that the exact presentation of the
content of this process is beyond the scope of this section as it is the purpose of the later analysis.
The process is understood as:
The development of the French attitudes towards EMU, i.e. the French perception and ideas about
the usefulness of the EMU and how the French perceived their self-interest in the creation of the
EMU and how both these aspects changed over time.
The process also involves which objectives, means, and strategies the French had towards the
creation of the EMU and how they evolved.
The process is also about power and how power developed, i.e. to what extent the French was able
to influence the timetable and design of the EMU and the extent to which the French had to
compromise on this. In other words, this is about the relative power position in the EMU process
(relative in relation to other actors in the EMU process). This process is in the following also
referred to as the French EMU process.
I have chosen to conceptualize the field of examination as processes because the French road to the
EMU probably was caused by a sequence of events and factors that seems, in some way, to be
interrelated. Moreover, as Andersen argues, the use of the concept of process enable us to
understand human behavior as not only based on conscious or well-considered reflections, but often
as a result of uncertainties and mixed motivations. The point is that things happen in the social
world not because of plans or intentions, but as a result of complicated and unpredictable social
processes in which unexpected events prove to be decisive (Andersen, 1990, pp. 80-81).
1.3 Conceptualizing the field of examination
From the outset it cannot be excluded that the process of increasing international capital mobility
has influenced the French EMU process in several ways and that the influence has changed
throughout the 20 year period which is the focus of this thesis. E.g. one can imagine that the
influence has varied in intensity, manner, and direction. To cover this complexity it is therefore
necessary to analyze simultaneously several aspects of the relationship between this reappearance of
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international capital mobility and the French EMU process; aspects which are presented later in the
problem formulation.
This study is based on one central assumption; that there exists some kind of causal relationship
between the two above mentioned processes. It is thus implicitly assumed that international capital
mobility has influenced the French road to the EMU in one way or another and the overall purpose
is implicitly to confirm or disconfirm this general causality. Beside this overall purpose, the
objective of this study is to increase our understandings of the nature of the causality between the
process of increasing international capital mobility and the French EMU process. The study is based
on the normal informal and everyday understanding of the concept of causality; a directional
relationship between one event (termed cause) and another event (termed effect) which is the
consequence or result of the first. At the outset, the process of international capital mobility can be
seen as the cause whereas the French EMU process can be seen as the effect.
As the concept of causality is an essential part of the present study, it is appropriate briefly to
discuss the nature and character of the concept. Yet, it is only a short discussion based on the
everyday understanding of the concept as an in-depth philosophical discussion of the concept is
beyond the scope of the study. (for further discussion of the concept see for instance: Harre (1972),
Sosa (1974), Mackie (1986) and Strawson (1996). In general, the concept is defined as the
relationship between cause and effect or more specifically as the relating of causes to the effects
they produce. The concept is based on the notion that in principle, all events have adequate causes.
We can say that discussions of causality concern various ideas about the nature of the relations of
cause and effect. If the relationship between cause and effect is high, one could argue that the
causality is distinct and vice versa. For example, there is probably a high causality between having
smoked in ones entire lifetime and developing lung cancer. However, there is nothing certain about
this relationship between cause and effect within social science. In fact, the notion of causality can
be seen as just a theory itself as it is - strictly speaking - impossible to understand or determine
definitely what causes what in human life. A neutral or universal definition is notoriously difficult
to formulate since every aspect of causation can be subject to substantial debate.
Hence, this study is about mapping, understanding, capturing and identifying the causality between
a changing international economy, in which cross border flows of capital has increased and the
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French EMU process.
1.4 Narrowing the scope
Analyzing the nature of the causality between the two above mentioned processes can be seen as the
overall scope of the present study. Yet, in order to obtain adequate insight into the processes it has
been necessary to both emphasize certain aspects of the causality and to deselect other.
Most of all, the study emphasizes the complicated relationship between structural and ideational
aspects of the French EMU process. Key aspects in the subsequent sections of analysis is the
interaction between the structural change of the reappearance of global economy and the French
policy-making process, particularly the development of ideas and beliefs on macroeconomic
strategies and priorities. That is to say, the study emphasizes the tension between structural and
functional aspects of international and national politics such as capital mobility and the ideational
aspect such as the development of political and economic ideas and beliefs. Both changes in the
structure of the international economy and the ideational factors that produce policy-makers,
leading economists and monetary authorities’ reactions to structural changes are fundamental to the
understanding of the French EMU process.
Moreover, the scope of the present study is on causalities on one specific level of the European
monetary integration. There is focus on what can be termed as the elite level within the integration
process, i.e. the analysis of this study direct our attention to what Marcussen (2000, pp. 11-12)
characterizes as the elites within the European macro-economic organization field, e.g. government
civil servants, politicians, representatives of interests groups, supranational functionaries, etc. who
mainly deal with macro-economic issues. Consequently, the study will seek to understand
causalities involving the above-mentioned actors.
The focus on the political and economic elite level is based on a conscious choice. It is not only a
necessary limitation due to a limited time frame and the limited extent of the thesis. The elite is in
focus due to an expectation that an analysis on this will produce important insight into the
understanding of how international capital mobility has influenced the French EMU process. Yet,
the emphasis on one particular segment of French society has the consequence that potential
important parts of the French EMU process are left out of the analysis. From my perspective, it
might have been appropriate to balance an analysis emphasizing the elite level with a focus on the
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French population; a population which has influenced the French EMU process in a direct manner
several times in terms of for example the re-election of Mitterrand as President in 1988 and the
French referendum on the Maastricht Treaty in 1992. However, that is not to say that the French
population is completely disregarded in this study, but the population is integrated in the analysis
only seen from the point of view of the elite. There is not a separate analysis of how voters’
attitudes towards the EMU changed during the period, which is in focus in this thesis, and how this
was influenced by the international capital mobility. It is a deselection that is done in order to make
an in-depth analysis possible knowing full well that such an analytical priority has consequences.
Consequently, it might be stipulated that the analysis of the French road to EMU is incomplete as
important aspects are disregarded. On basis the analysis of this study, it is thus only possible to
conclude something about certain aspects of how the French EMU process was influenced by
international capital mobility.
1.5 Problem formulation
The purpose of this thesis is in short to increase our understanding of the causality that is expected
to exist between the process of increasing international capital mobility and the French EMU
process, i.e. the purpose is to disentangle some essential consequences of international capital
mobility for the French EMU process.
The puzzle of the thesis is:
How, when, why, and to what extent international capital mobility has influenced the French
EMU process in the period 1970 to 1991.
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2. Some important methodological considerations
The analysis of the causality between the process of increasing international capital mobility and the
French EMU process has a number of selected theoretical tenets and insights. The theoretical
framework of this study offers a particular way of considering, a certain analytical vocabulary, with
deliberate focus on some aspects of two processes whereas other aspects are deliberately
disregarded.
In relation to this it is important to be aware of the definition and role of theory: What it is and how
it can be used. Social scientists have long debated this important issue and one way of
demonstrating the different views is to consider the relationship between the positivist and
interpretivist methodologies.
Positivists argue that social phenomena are best captured by objective observations or
measurements that create empirical verifiable results. Positivist methodology has a tendency to
consider theory as a set of propositions that explain and predict the relationships among observed
phenomena. The theoretical concepts and hypotheses are developed prior to analysis of the
empirical phenomena. The rationale of theorizing is to develop universal laws of human behavior
and societal functioning. Proponents of the interpretivist methodology often criticize this deductive
approach and present an alternative inductive approach where the research discovers concepts and
hypotheses through continuous comparative analysis. The interpretivist methodology advocates
theory invention through discovery (Glesne & Peshkin, 1992, p.19).
The relationship between the two methodologies illustrates the importance of the awareness that
any researcher must have in deciding the definition and role of theory. Glesne & Peshkin point to
the fact that much research differentiate by the level of abstraction (Glesne & Peshkin, 1992, p. 19).
As they argue: “Theory is formulated at different levels of abstraction: One researcher may refer to
sets of propositions as theory, while another regards theory as a conceptual framework for
reaching understanding” (Glesne & Peshkin, 1992, p. 20).
This study seizes the middle ground in terms of the level of abstraction. The role and understanding
of theory are in this thesis neither pre-formulated theoretical causal models which is the subject of
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empirical testing procedures nor vague formulated concepts formulated during the analysis which
provide base for generating questions and guidelines.
From my perspective, the general problem with many deductive methodologies is that they do not
generate much new knowledge. There is risk that deductive based research is ‘trapped’ in existing
theoretical knowledge structures and hence is not open to new empirical insights. As Hydén argues:
“Många forskare fastnar i och låter sig förblindas av stora och övergripanda teorier och ser
därmed ingenting i det som de studerer – mer än möjligtvis det som de och alla andra redan visste”
(Hydén 1990, cited in Lyngbye 2000, p. 35).
On the other hand, any researcher will to some extent have a preconceived perception about the
phenomenon he or she is about to research. It is simply impossible for humans to ‘empty their
heads’ and perform research which is not based on some general notions about the social world.
There is a risk that research based on a purely inductive methodology will be guided by the
researcher’s unconscious perceptions. A purely inductive approach is therefore not relevant for this
study.
The methodological approach of this study is based on the notion that research and analysis are
inseparable from theory and theorizing. The basis of the analysis is the concepts, aspects and
mechanisms which will be presented in the theoretical framework.
As a point of departure the theoretical approach influences the structure of the analysis, yet there is
an ongoing interaction between theory and analysis. The analysis is supplemented with new and
alternative theoretical insights when needed; insights which where not included in the analysis
initially. There is an interplay between the theoretical and the empirical aspects of the study. This
includes the gathering of theoretical and empirical material as well as the actual analysis process.
In short, the relationship between theory and analysis has a “give and take” character.
The analysis of this study is essentially about structuring and making sense of my observations
based on the research performed prior and during the writing of this thesis. The intention with this is
to deduce what can be learned. Learning is a precondition in the effort of achieving insight into and
understandings of the causality between the two processes which are the focus of this thesis. The
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analysis of the empirical materials that are the basis of such learning includes searching for patterns,
categorization and interpretation. To do so, it is necessary to split up the different parts of the
materials and examine their character and nature and the relationships between them. The analysis
of this study is much about simplification as a means of enhancing clearness. It is hence based and
will be guided by the concepts and issues formulated in the theoretical framework.
The theoretical framework consists of mainly two theoretical tenets. One focus is the structural
character of international relations whereas the other is ideational. The first is based on the
underlying assumption that three key desiderata of governments; exchange rate stability, domestic
monetary independence and international capital mobility could generally not be achieved
simultaneously except on an episodic basis. The second is based on the assumption that ideas about
macro-economic cause-effect relationships are powerful as they are the intellectual foundation in
political decision making. How these two main tenets are developed will be presented in the
theoretical framework.
It is important to be aware that those tenets are chosen on the basis of my subjective perceptions of
the social world. It is perceptions which have developed in open discussions with persons which
have opinions on these subjects and after having read relevant writings. It can be argued that it is in
token of how I perceive the social world. The framework is basically explicit formulations of the
perceptions which I consider relevant in terms of the problem formulation of this thesis. It is
perceptions of the reality which are formulated as explicit as possible.
The two theoretical tenets have two essential purposes. Firstly, they serve as criteria for selecting of
the parts of the social world which are perceived as relevant for the problem formulation, i.e. the
tenets form the background of the selection and deselection of relevant empirical materials. As a
consequence, certain aspects of the social world become more apparent relatively to others. For
example, as mentioned in the introduction of this thesis, the French political and economic elites are
the focus of the analysis whereas the French population is only indirectly in focus. Secondly, the
two theoretical tenets serve as a guideline for the actual analysis, i.e. the empirical material are
interpreted on the basis of the tenets and certain aspects of the material are accentuated at the
expense of other aspects. However, it is important to notice that the perceptions of the reality that is
inherent in the two theoretical insights are challenged, contested, sophisticated, and nuanced by
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relating the empirical data to the theoretical tenets. The theoretical framework is by no means
imposed on the reality and there is no intention to aim the analysis at highlighting or testing
universal cause and effect relationship formulated prior to this analysis.
As mentioned above, this thesis has a particular focus on how structural and functional aspects of
politics interact with ideational aspects of politics. In relation to this, the basic approach of
understanding how capital mobility influenced the French EMU process is based on an overall idea
that such influence was primarily indirectly. That is to say, based on the preliminary research I
conducted prior to the writing of this thesis, explanations that tended to consider the French
participation in the EMU as a mainly rational response to the increased level of international capital
mobility was rejected. The French political and economic elite did not simply take the financial
structural alteration we saw with the increased level of international capital mobility influence into
account and changed their strategies accommodate this new situation while their more fundamental
beliefs and identities remained intact. The French road to the EMU was much more complicated
than these immediate and direct explanations point out. Hence, I shall integrate aspects and events
in the French political and economic history that at first glance had little to do with the French EMU
process, but often in retrospect prove to be important for the process. The analytical challenge is,
among other things, to map out these aspects and events and understand how they were influenced
by international capital mobility and how they were important for the French road to the EMU. E.g.
in the analysis, there is a focus on the French conversion in 1981-83 in which the French economic
way of thinking was altered. However, this did not immediately generate new initiatives for French
participation in an EMU. The initiatives came several years later and was only indirectly related to
the experiences of 1981-83. In addition, the analysis also focuses on the asymmetrical economic
power relationship between France and Germany. The point is that albeit this asymmetry was
rooted in the international capital mobility and probably was important in terms of the French
motives for establishing the EMU, it did not necessitate the EMU. As will be evident in the analysis,
France might have accepted the asymmetry which only became significant combined with a number
of other factors and thus important with regards to the French EMU process.
Most of the empirical materials which are the basis of analysis are collected from existing analyses
of the European integration process including some sources which have a particular focus on France
and its role in international relations. In order to ensure the diversity of the analysis I have chosen to
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include a number of different empirical materials which offer approaches of how to understand the
European integration. That is to say I deduce the insights from existing materials with the intention
of gaining new patterns, categorizations and interpretations.
This is combined with interviews with some of the central persons which were part of or/and have
knowledge of the European integration. The interviewed persons are; Niels Thygesen, Erik
Hoffmeyer, Martin Marcussen, Claus Vastrup, Carsten Skjalm, and Jesper Jespersen.
The interviews were conducted at a point of time where the subject of this thesis was the European
integration in general process and not exclusively the French role. Consequently, the questions
asked in the interviews do not specifically address the French role in the European integration
process and the interviews are thus less relevant to this thesis than originally envisaged. However,
as will be apparent in the analysis, the interviewed persons nevertheless contributed important to the
analysis.
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3. The theoretical framework
3.1 Introduction
The challenge is to develop a theoretical template which can generate an understanding of the
apparently complicated relationship between the two processes presented in the introduction. The
fundamental puzzle is ”…the interaction between a changing international economy, one in which
capital flows have increased exponentially, and the domestic policymaking process, particular
political leaders’ beliefs about macroeconomic strategy. Both changes in the structure of the
international economy and the ideational factors that shapes policymakers’ responses to structural
changes are crucial to the story of European monetary integration” (McNamara, 1998, pp. 3-4).
As argued in the methodological section, the role of theories in this thesis is a kind of middle
position between the positivist and interpretivist approaches. Hence, the framework offers a certain
analytical vocabulary and particular way of seeing. As will be clear in subsequent sections, the
framework focuses on some aspects of two processes whereas others are deliberately toned down.
The theoretical point of departure is the tension between structural factors, notably the international
economic structures and the changing of these, and the ideational creation and development of the
beliefs and ideas held by policy-makers, i.e. beliefs and ideas on a variety issues such as the
appropriate economic and monetary policies and the best possible international monetary regime.
The framework is structural one several existing theoretical insights. Insights which are further
developed with the intention of understanding the tension between these structural and ideational
factors.
3.2 Integrating structure and agency
The key theoretical contention of the present framework is: Even though the international economic
structures are vital, such an “environment does not’ instruct’ policymakers, it challenges them”
(Adler, 1991 p. 53). My argument is that structures of the social world are phenomena, the
characters and natures of which depend on the eyes that observe them (phenomena such as e.g.
international economic and monetary systems). Different actors ascribe different characters and
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natures to structures and there are no universal standards of how to understand or evaluate
structures. There is therefore always room for interpretations of the contents and consequences of
structures.
Consequently, an analysis of how international capital mobility has influenced the French road to
EMU has to include a focus on the eyes of the observer. The point is that it is important to
understand the perceptions the French policy-makers and others had on the changing international
economic context they were faced with. For this reason, I argue, an analysis of the relationship
between the two processes, which are the focus of this thesis, has to take the ideational aspects
which form such perceptions into account. I also argue, that it seems reasonable to conceptualize
the increase in international capital mobility as a vital international structure as it tends
systematically to reduce the sustainable domestic economic policy options available to states.
This relates to part of the now classic debate surrounding the influence of structure and agency on
human thought and behavior which has been present in International Relations for decades. This
debate has been one of the pivotal points of the constructivist approaches which inspired this
framework. This debate that, according to Wind, began in IR in the 1980s as a critique of Waltz’s
neorealist theory. The opponents of Waltz’s theory rejected his notion that only a systemic approach
can explain and predict state-action. The opponents argued that Waltz failed to emphasize the
domestic or institutional factors when explaining the behavior of states (Wind, 1997, p. 18). Among
other things, the debate concerns the relative power of agency versus structure. On the one hand,
some scholars hold that actors have the capacity for acting independently without constrains from
social or cognitive structures. On the other hand, some scholars argue that social structures and
systems constrain any kind of human behavior or even completely determine behavior. They tend to
argue that human thought and behavior cannot be convincingly separated from the social context
humans are part of. This framework seizes the middle ground between these two incompatible
ontological positions by developing a theoretical template based on elements from both positions.
The argument is here that due to the complex character of the macro-economic realm actors
responses to external constrains and challenges are rarely based on a simple calculation of costs and
benefits. Yet, this does not render human action irrational, but instead of talking of a perfect
unbounded rationality (which some rationalist approaches tend to) where behavior is considered to
18
be “responses to the forces of physics that act on material objects from the outside” (Adler, 1997, p.
321) it appears to be more convincing to talk of a bounded rationality where the responses to new
structures depend on social constructed perceptions of the reality. This means - in order to make
sense of the changing economic and monetary structures (and economy in general) - that actors
within the political and economic elite must rely on pre-systematized knowledge structures.
Furthermore, I agree with Sinclair & Thomas when they criticize approaches which tend to explain
social processes and social order by purely functionalist and structuralist theories. They argue that
much of the writings on globalization tend to assume that structures - such as the capacity of capital
to exit - overwhelmingly prohibit any effective response (Sinclair & Thomas, 2001, p. 4). In fact,
the nature of actors varies; some are more able to control their own fate compared to others due to
variations in skills and information. Structures do therefore not determine human behavior to a
certain predictable course. In short, this template adopts the ontology that can be found in much
constructivist writings, I for instance agree with Wind when she argues that “social actors as
‘structural dopes’ who follow rules blindly. Actors make choices all the times, but their perception
of possible routes of action will always be conditioned by past experience and the overall social
setting” (Wind, p. 74, 2001). Moreover, the template of this study is also based on the constructivist
notion of a co-constitutive relationship between agency and structure as it has been formulated by
Giddens and others. Consequently, it is assumed that actors are influenced by structures, but at the
same time; structures are produced and reproduced by actors (Wind, pp. 64-68, 2001). The
analytical challenge is to simultaneously understand the nature and development of international
economic and monetary structures and how these relate to the development of policy-makers
consensually shared ideas and beliefs.
3.3 The theories which constitute the framework
With a view of to ‘adding some flesh’ to the above presented ontological notions, the subsequent
section will shortly introduce the theories which are the core of the framework and argue how they
relate to the integration of structure and agency. The framework is mainly structured on two
theoretical tenets; Marcussen’s theory of the power and dynamics of ideas and Andrews theory of
the Capital Mobility Hypothesis (CMH). Moreover, other theoretical insights are integrated in the
framework as it can be seen in the next section which also includes a more in-depth presentation of
the theories
19
Andrews holds that many studies in International Political Economy have ignored the significant
aspect of systemic International Relation theory, specifically structural change in the classic
Waltzian sense. He seeks to fill this gab by constructing a so-called Capital Mobility Hypothesis
that examines how state behavior is both constrained and driven by increasing levels of
international capital mobility (Andrews, 1994, pp. 194-199). The theory is based on an underlying
assumption that three key desiderata of governments, i.e. exchange rate stability, domestic monetary
independence and international capital mobility, could normally not be achieved simultaneously except on an episodic basis. Hence, the three policy objectives are incompatible. The key contention
associated with the hypothesis, as it will be explained later, is; when the economy of states become
more integrated and especially as the degree of capital mobility between them increases, a trade-off
exists between exchange rate stability between states, and their pursuit of independently chosen
monetary policies becomes a severe dilemma. More specifically the rising levels of international
financial integration, which is seen as an important structural change in international relations, has
increased the costs of pursuing divergent and independent monetary objective and has profoundly
influenced on decision-making processes (Andrews, 1994, pp. 194-209).
As it will be explained below, the foreign exchange market pressure is one of the key elements in
Andrews’ theory. Andrews holds that to the degree that financial assets are mobile (e.g. there are no
efficient cross border capital control mechanisms), differential rates of expected return can generate
international capital flows; flows, which again generate foreign exchange market disequilibria. This
disequilibria can produce foreign exchange market pressures which might result in monetary
authorities and policy-makers being unable to conduct the monetary policy they prefer if they want
the national currency to be stable. This basic of Andrews’ theory owes a great intellectual debt,
directly or indirectly, to the pioneering works of Richard Cooper and Robert Mundell (Andrews,
1994, p. 194-195).
From my perspective, the idea with the theory is that due to the lack of efficient cross-border capital
control mechanisms, owners and controllers of mobile financial assets become powerful at the
expense of national monetary authorities and policy-makers. Inherent in the theory lies the fact that
owners and controllers in order to maximize profit are motivated to move their financial assets from
one state to another if they see an alteration of monetary divergences between states, i.e. increase or
20
decrease in interest rate levels between states. This move in financial assets produces the foreign
exchange market pressure because the monetary authorities and policy-makers have to take this into
account in their conduct of monetary policy.
The problem with this chain of reasoning is that it does not put much emphasis on how owners and
controllers of financial assets perceive reality. Hence, I argue that such financial market operators
also act on the basis of perceptions as they cannot grasp the complexity of international economy or
forecast with certainty what will happen in the future. Among other things, this means that the
perceptions owners’ and controllers’ of mobile financial assets have of the monetary authorities’
credibility and confidence are important. Consider for instance a situation of international financial
turbulence in which a state wants to maintain its parity of the national currency. The monetary
authority assures that devaluation is out of the question, but despite a present stable and strong
economy the authority has to compensate for its perceived lack of credibility and confidence in the
eyes of the financial market operators with an increase in its interest rate.
At first glance one might argue that a Waltz inspired structural approach in a self-proclaimed
constructivist theoretical framework is unsuitable. However, as mentioned above, the initial point of
departure of this thesis was to conceptualize the recent decades of increasing international capital
mobility as a changed structural character of the international realm. This is combined with a focus
on how ideas are the basis of actors’ understanding of the structure of capital mobility as it will be
explained below. Following and trying to build on the work of Andrews appears to be a reasonable
way of approaching the elusive complexity of modern financial international integration. The use of
the CMH enables us to analytically conceptualize the complex development of the international
capital market which increasingly blurring states borders.
As mentioned in the methodological section; the methodological approach in this framework is
based on a middle position between an extreme deductive approach and an extreme inductive
approach. That is to say, CMH is not operationalized with a set of hypotheses about some assumed
concrete causalities and tested with empirical phenomena or merely read as another empirical
material with a relaxed role in later analysis. Instead, the CMH offers a conceptual framework for
understanding the nature of capital mobility as a structure. More specifically, the CMH offers a
particular way of understanding capital mobility. A certain kind of analytical vocabularies where
21
there specific focus of how international financial integration with various degree fosters certain
dilemmas within the French political and economic elites (depending on the level of capital
mobility).
The actual analysis thus focuses on this kind of structural power in order to understand the French
decision to participate in the monetary union. In particular, it is Andrews theories on how capital
mobility can influence with different intensities that makes it relevant for an analysis of the French
road to Maastricht as it was a long and intricate road with many ups and downs. With the CMH it is
thus possible to examine not only the nature of capital mobility and its potential influences – the
CMH also enables us to capture how this nature and influence can change over time. Hence, the
CMH offers a somewhat dynamic approach to the understanding of economic structures - at least
compared to the now classic theory of the inconsistent triangle originally formulated by Mundell in
the 1960s. The CMH offers the possibility of conceptualizing the exchange rate stability, domestic
monetary independence and international capital mobility as continua. E.g. in the theory of the
inconsistent triangle it is not possible to integrate how different degrees of international capital
mobility can be important, in this theory we have either complete capital mobility or none capital
mobility.
However, as a means of increasing our understanding of how international capital mobility
interacted with the French EMU process the CMH - in isolation - is inadequate. The CMH
envisages that due to capital mobility there will be changes in countries monetary policy
calculations. However, the CMH cannot speak of the direction of changes. It offers no more than a
theoretical template of conceptualizing structures and structural changes of the international
economic realm. For example, the CMH does not provide a solution to the trade-off between
exchange rate stability and domestic monetary independence. Andrews is aware of this
acknowledges that in order to understand this political choice, it is necessary to focus on the
formation of beliefs an ideas. As he argues, ”…exactly how this trade-off will be resolved depends
crucially upon policymakers' beliefs (i.e., the economic models that inform their decisions) and the
structure of their preferences (the extent to which they value stability)” (Andrews, 1994, p. 195).
In fact, Andrews endorses the argument that structures affects behavior within the system, but does
so indirectly. According to Andrews this means, among other things, that the influence from
22
economic structures is mediated through a process of socialization where states become attached to
the idea of international financial integration in which states see integration as inevitable and
irreversible (Andrews, 1994, pp. 201-202). Andrews’ notion of socialization can be seen as a
mechanism that tends to guide and constrain the monetary and economic policy formulation of
states in certain directions.
Apart from this relatively vague formulation of the role of the ideas and beliefs, my argument is that
Andrews’ theory of the influence of capital mobility in itself is insufficient. An entirely structural
analysis of the French EMU process is unable to grasp its complexity – hence, further theoretical
insights are necessary. As argued above, the international economic environment does not
determine policy-makers, it confronts them. Structures do not determine the behavior of actors’ in
any predictable way. Actors give meaning to and interpret structures on the basis of socially
constructed knowledge, ideas and beliefs and they tend to do it differently in accordance with time
and context. A compressive theoretical section on the nature of ideas and beliefs and how these can
be changed is therefore a necessity. Hence, the theoretical insights from Marcussen’s theory are
integrated in the framework together with other insights. It is a section based on an assumption that
ideas about macro-economic cause-effects relationships are powerful as they are the intellectual
foundation in political decision-making. Hence, I agree with Marcussen when he holds that through
such ideas humans simplify, categorize and stereotype elements in the world (e.g. economic
structures) and consequently decide on the information they want to incorporate into their existing
knowledge. Moreover, we assume that humans organize themselves in an ideational paradigm
which is a kind of imagined community based on a shared set of ideas on macro-economic
management (Marcussen, 2000, pp. 1-31). Marcussen’s theory is based on different theoretical
tenets from a variety of scholars such as: Peter Berger, Thomas Luckmann, John Gerard Ruggie,
and Thomas Risse (Marcussen, 2000, pp. 4-11).
In order to understand how ideas develop over time (i.e. the question of why a set of ideas at some
point stop being consensually shared as legitimate knowledge and why some ideas rather than
others establish themselves as new legitimate knowledge?), this framework integrates the theory of
an ideational life-cycle. This theory assumes that ideas develop over several stages in which the first
stage concerns a process where old ideas are perceived inadequate in handling new events and
structures and this initiates a course of action of searching after alternative ideas which are
23
perceived as able to handle the new events and structures. Finally, new ideas are selected and
institutionalized as the new consensual shared knowledge structure (Marcussen, 2000, pp. 1-31).
The following sections are the more concrete formulation of the framework. It is structured in three
separate sections, the Capital Mobility Hypothesis (CMH), the power of ideas and the dynamics of
ideas. The purpose with the first section is to conceptualize the nature and development of the
international capital mobility, which is here considered to be a structure characteristic of
international relations. The following section, the power of ideas, is concerned mainly with how
ideas can be powerful as the cognitive basis used by actors in order understand the substance and
the consequence of capital mobility. The section on the dynamics of ideas is about how and why
these ideas develop over time.
3.4 The Capital Mobility Hypothesis
3.4.1 Introduction
The key contention of Andrews’ Capital Mobility Hypothesis is that the degree of international
capital mobility systematically constrains state behavior by rewarding some actions and punishing
others. Moreover, the distribution of costs generated by monetary independence under conditions of
relatively mobile capital can be asymmetrical (Andrews, 1994, pp. 193-5).
Andrews’ theory is based on the following chain of reasoning which resembles the work of Mundell
and Cooper. The independent pursuit of monetary policies by states with sometimes divergent
objectives generally produces incentives for capital to cross international boundaries. To the degree
that financial assets are mobile, the differential rates of expected return can generate international
capital flows and these flows might produce foreign exchange market disequilibria. Or in other
words, excess supply or demand in the foreign exchange market. Moreover, the foreign exchange
market pressures produced from these disequilibria can reproduce changes in foreign exchange
reserves with a constant exchange rate or in changes in the exchange rate with constant reserves.
The foreign exchange market pressure is, as will be discussed later, one of the key elements in
Andrews’ Capital Mobility Hypothesis. In reality, since governments are usually not indifferent
about either the external value of their currencies' or foreign exchange reserves, disequilibria are
expected to result in some mixture of changes in both the reserves and exchange rate. As monetary
authorities realize that their pursuit of monetary policies diverging from international trends have or
24
may produce unintended foreign exchange market pressures, they will have incentives to correct
that divergence. Hence, to the degree that capital is able to cross borders; a direct trade-off exists
between exchange rate stability between states and their pursuit of independently chosen monetary
policies (Andrews, 1994, p. 195).
3.4.2 Important assumptions
Based on the above presented notions on the nature of structures and the relationship between
exchange rate stability, private capital mobility, and domestic monetary independence, Andrews
formulates his idea of the Capital Mobility Hypothesis. This hypothesis assumes that international
financial integration has increased states’ costs of pursuing divergent monetary objectives, thus
resulting in structural incentives for monetary adjustment. Before turning to the mere contents of
the hypothesis it is necessary to outline some important concepts - especially the elusive concepts of
monetary autonomy and policy.
Traditionally monetary policy, according to Andrews, refers to the state’s efforts to control its
domestic money supply. Monetary policy is, at least in principle, different from domestic monetary
conditions, as the latter concerns factors such as interest rates and the ‘price of money’ prevailing at
any specific time and monetary policy does not always achieve its objectives. However, as a matter
of convenience, monetary policy, Andrews argues, refers to observable conditions in domestic
markets and in particular to the price of money, that is to say the interest rates in both real and
nominal. Hence, monetary policy can be conceptualized as ‘loose’ or ‘tight’ based on the monetary
conditions it generates relative to other countries or to past experience (i.e. relative low or high
interest rates) rather than interpretation of policy-makers' intentions of the policy instruments used.
Another concept used in the Capital Mobility Hypothesis is monetary divergence which refers to
differences in the monetary conditions between states. This is regardless of the difference or
similarity in policy instruments employed by different monetary authorities. Furthermore, monetary
convergence is defined as absence of divergence (Andrews, 1994, p. 204)
Monetary independence is in Andrews’ theory defined as those policies believed to maximize
desired domestic outcomes independent of external constraints. It is thus a concept which relates to
policy-makers’ preferences and causal beliefs about how to achieve their policy objectives
regardless of monetary conditions in other states. In contrast to this concept, monetary
25
interdependence, which necessitates adjusting policy actions in light of beliefs about how
international interactions (e.g. capital flows), are expected to have an effect on outcomes (Andrews,
1994, p. 204).
The last concept that needs to be defined in order to understand Andrews’ Capital Mobility
Hypothesis is monetary autonomy which is defined as a choice set. A choice set is somewhat
different from the realization of a specific policy objective. It can be thought of in terms of the
foreign exchange market pressures produced by different degrees of monetary divergence.
Moreover, Andrews argues that “according to the capital mobility hypothesis, as national capital
markets become more integrated, the foreign exchange pressures associated with the pursuit of
independently chosen monetary objectives increase. Consequently, the nature of the choice set
available to states (between the pursuit of their externally unrestricted preferences and stabilizing
their exchange rates) becomes more constricted. States are less autonomous in the sense that
monetary independence has become more costly” (Andrews, 1994, p. 204).
3.4.3 The CMH
Andrews holds that the relationships between monetary independence and monetary autonomy can
be illustrated by the figures below which embody a bilateral static simplification of international
monetary relations. The figures illustrate foreign exchange market pressures associated with various
levels of monetary divergence between state A and state B. Foreign exchange market pressures are
represented by the x-axis with the (at least relative) absence of pressure indicated at its origin. State
B's policies are taken as autonomously chosen and the degree of divergence is indicated by the yaxis. Monetary convergence is symbolized at the origin, with loose policy (relative to State B)
ascending from the origin and tight policy (relative to state B) descending from the origin (Andrews,
1994, pp. 204-205).
The monetary autonomy in Andrews' illustrated version of the Capital Mobility Hypothesis
corresponds to the feasibility curve. The intersection of the feasibility curve with the y-axis is
defined as the degree of divergence required to compensate for state A’s underlying payment deficit
which is assumed to be the case in Andrews’ illustration. In this case, in order to minimize foreign
exchange pressures, state A would require rather tighter monetary policies than State B in order to
induce private financing of this deficit. In Figure 1, point 1 illustrates the degree of monetary
26
divergence resulting from State A’s pursuit of its own preferred, fully independent domestic
monetary policy. Point 2 illustrates the degree of foreign exchange market pressure associated with
this monetary policy. This results in the slope of the feasibility curve illustrating the degree of
integration of state A’s and B’s markets for services, goods and especially financial assets, i.e. the
slope of the feasibility curve depicts the degree of market integration of the two states and, in
particular, the level of capital mobility between the two states. It is important to notice that as the
states economies become more integrated, especially when capital mobility increase, the feasibility
curve collapses towards the x-axis. In addition, if the two states has no market integration between
them at all (that is to say, the two economies are hermetically sealed from one another), then no
foreign exchange market pressure can be produced through their pursuit of independent policies. In
this event the feasibility curve will be vertical (Andrews, 1994, pp. 205-207).
Figure 1
(Source: Andrews, 1994, p. 205)
Moreover, the manifestation of these foreign exchange market pressures will often vary. As a result
of the pressures, the exchange rate between the two states may adjust or their foreign reserves
positions may change (as one or both states intervene in defense of the exchange rate) or both.
27
However, Andrews argues that since the capacity of states to intervene in foreign exchange markets
is limited, high levels of foreign exchange market pressure will most likely generate at least some
movement in the exchange rate (Andrews, 1994, pp. 206). As Andrews holds: “Deficit states may
be limited in their capacity to intervene in defense of overvalued exchange rates by the scarcity of
their foreign exchange reserves and their access to external balance-of-payments financing. Surplus
states are limited as well, albeit in different ways. The capacity of surplus states to sterilize the
inflationary effects of capital inflows, while substantial, is not unlimited; hence, unless the
exchange rate is allowed to appreciate, states pursuing relatively tight monetary policies may
eventually suffer from” imported” inflation” (Andrews, 1994, p. 206).
In relation to this, states normally differ in their willingness to tolerate movements in their exchange
rates. There is a tendency for states to differ in their approaches to the trade-off between pursuing
independent policies and incurring market pressures. These different priorities are illustrated in
figure 2 with two indifference curves; A and A´ representing two alternative priorities regarding the
trade-off between monetary policy independence and exchange rate stability (Andrews, 1994, p.
206).
Indifference curve A exemplifies a state that is relatively tolerant in terms of changes in its
exchange rate with state B. Point 1 illustrates the monetary policy which state A would have
conducted (and was able to conduct) if there was no foreign exchange market pressure that had to
be taken into consideration. Yet, due to the level of foreign exchange market pressure, the optimal
monetary policy that is possible can be located in point 2. The important argument here is that point
1 and 2 only slightly from each other, thus illustrating that for state A there is a minimal difference
between preferred and obtainable policy. That is to say, state A is willing to accept a relatively high
level of foreign exchange market pressure (point 5) in order to maintain a relatively high level of
influence on its monetary policy. The cost, Andrews holds, is almost always movements in the
exchange rate. On the other hand, the indifference curve for state A´ depicts a state that is relatively
intolerant of alterations in its exchange rate with state B. In this case, the achievable monetary
policy (point 3) differs significantly from the state A´ preferred one (point 1). However, this degree
of accommodation results in minimal foreign exchange market pressure (point 4), which might be
handled with intervention or a tiny movement in the exchange rate (or perhaps a combination of
both). In other words, in this situation it is possible despite market integration between state A´ and
28
B (the slope of feasibility curve is not vertical) to maintain relatively fixed exchange rates. The cost
is that state A´ is unable to conduct its preferred monetary policy (Andrews, 1994, pp. 206-208).
Figure 2
(Source: Andrews, 1994, p. 207)
As mentioned above, when state A and B become more integrated and in particular as the degree of
capital mobility between the two states increases, the feasibility curve collapses toward the x-axis.
This is the core of the Capital Mobility Hypothesis, which based on the assumption that as capital
mobility increases, the foreign exchange costs of monetary independence increase (at least if the
objective is to maintain relatively fixed exchange rates)1. Consequently, even states with traditional
widely divergent monetary policy preferences will be expected to reduce the degree of monetary
policy divergence between them as the level of capital mobility between them increases. This
process is illustrated in figure 3. In this event, the obtainable monetary policy (point 1) is changed
to point 2 due to an increased level of capital mobility illustrated with the differing slopes of the
It is important note to that Andrews holds that “In theory, if capital were perfectly mobile then monetary divergence would be impossible; the
feasible set would be restricted to a horizontal line and national monetary autonomy would be nonexistent. However, given the presence of exchange
risk and risk aversion, capital is never perfectly mobile even if exchange risk can be eliminated through forward contracts. In such a case a country
may [exercise] considerable monetary independence even though international arbitrage enforces covered interest parity at all times” (Andrews,
1994 p. 208 note 64)
1
29
feasibility curves I and II. As Andrews argues; “The heightened costs of independence, all other
things being equal, induce new levels of accommodation” (Andrews, 1994, p. 208).
Figure 3
(Source: Andrews, 1994, p. 208)
3.5 The power of ideas
In order to gain a better insight into the French road to the EMU, it is vital to understand the process
of policy choices. i.e. I mean that it is vital to map and understand the motives of the French policymakers for their decisions that relate to the process of creating the EMU. As mentioned above, the
challenge is to understand the eyes of the observers. In terms of this thesis, this involves an
examination of how the French interpreted the international capital mobility which started to
accelerate in the early 1970s and the responses they deemed appropriate to handle this new
economic structure.
30
A key element to understanding the French interpretation of response to the increasing level of
capital mobility is the concept of ideas. It is assumed here that ideas and consensual shared ideas are
the fundamental basis of much human cognition and behavior (including the above-mentioned
French interpretation and response). The concept of ideas, as briefly emphasized above, is a central
element of the present theoretical framework.
McNamara offers important insights into the nature and role of ideas in that she argues that policymakers use ideas to estimate the costs and benefits of monetary cooperation and plan macroeconomic policy strategies. Thus policy-makers for instance base their formulation of answers to
questions of strategies and values: What is to be the objective of the monetary policy? What tools
can be used in pursuit of those policies? The answers will vary considerably over time and place,
redefining national interests in international monetary cooperation (McNamara, 1998, pp. 4-5).
In addition, Marcussen also has some relevant notions of ideas. He argues that ideas have profound
effects on human behavior, identity and cognition. For example, Marcussen holds that ideas define
what is appropriate to do and say in many situations and hence frame the range of action which
policy-makers perceive to be right. According to Marcussen, ideas also provide actors with a
language in which to communicate with each other as well as a set of topics on which to
communicate. Furthermore, ideas define the roles actors should play while communicating. In a
sense, ideas do not only constitute political discourse, but also empower actors by constituting them
in special roles (Marcussen, pp. 24-25, 2000). Furthermore, Marcussen argues that ideas frame the
thinking and debate within the macro-economic elite and do not leave much room to maneuver for
the macro-economic elite. In other words, it is assumed that ideas constitute social reality for the
actors involved in the monetary integration process (Marcussen, pp. 1-13, 2000). Moreover in terms
of the role of ideas Marcussen also states: “Through ideas we simplify, categorize and stereotype
elements in the world and consequently select the information we want to incorporate into existing
knowledge structures” (Marcussen, p. 26, 2000).
Marcussen points out that ideas provide actors with a sense of belonging, and this is a notion that is
also related to his general constructivist ontology. In this ontology, it is assumed that individuals are
social creatures born with a predisposition towards sociality. The social world is assumed to be so
complicated that no one can fully grasp the complexity of it. Individuals, Marcussen argues, are
31
presumed to feel uncomfortable with the fact that they have limited cognitive capacity and cannot
fully understand the complexity of the social world. Hence, they attempt to find something that can
simplify, categorize, and systematize this complexity in order to get some kind of cognitive relief
and stability (Marcussen, 2000, pp. 5-17). Or as McNamara argues: “ideas can function like
flashlights, guiding policymakers by illuminating a specific path through the darkness of crisis and
confusion, and providing policymakers with strategies for governance” (McNamara, 1998, p. 58)
It is the opinion of this author that McNamara and Marcussen highlight central aspects of how and
why ideas can be powerful in the process of policy choices. I would argue that humans are social
creatures whose cognitions and behaviors only to a very limited extent are based upon inborn
features. Most cognitions and behaviors are, entirely or partly, based on ideas which are socially
produced. Hence, if we can understand the process of creation and diffusion of ideas we have
understood much of the process of policy choices. I argue, in addition, ideas are not equivalent to
elements in the physical world which are made up of hard tangible fairly immutable structures.
Ideas are not irreversible or given, they are created by human cognition and can be changed by
human cognition. It is precisely this changeable nature of ideas which are assumed to be of major
importance for the French road to the EMU.
In this framework it is finally assumed that actors can achieve cognitive relief and stability with a
membership of an ideational paradigm. Actors are attracted to these paradigms as they offer a
specific meaning structure that enables actors to achieve a better understanding of the social world.
The ideational paradigm has an underlying unity in terms of its basic and often taken for granted
ideas about the functioning of international political economy. Ideas separate the members of the
paradigm in a very fundamental way from actors located in other paradigms. Because actors have a
need of affiliation to an ideational paradigm and search for such a paradigm it becomes an
important analytical task to map and understand the process of constructing paradigms. The ability
to create, change, control and direct such processes is extremely powerful because, as we shall see
below, it includes the power of constructing part of human thinking. To summarizes, ideas are
assumed to be intersubjective perceptions, which form the cognitive basis of the member of the
ideational paradigm and among other things direct attention to certain perceived mechanism in the
social world, while disregarding others. In short, an ideational paradigm is constituted by certain
ideas.
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3.6 The dynamics of ideas
3.6.1 Introduction
In order to understand why a number of actors within the political and economic field are adhering
to particular ideas and often disregard others, it is vital to identify the origins of these ideas how
they develop over time and how they are diffused. In order to facilitate an understanding of this,
both McNamara and Marcussen have developed templates which are structured in more or less the
same manner and are based on almost identical theoretical assumptions. McNamara’s template
focuses on the appearance of a so-called liberal view of monetary policy in Europe. She presumes
that the dominance of this specific monetary policy idea is the result of a process of policy failure,
policy paradigm innovation and policy emulation unfolded among the European states (McNamara,
pp. 5-6, 1998). Marcussen’s template is formulated in a more theoretical and general vocabulary
and focuses on the appearance, development and diffusion of ideas. Marcussen’s template, the
ideational life-cycle, is structured on several relatively separate stages. This section shall present an
ideational life-cycle with a view to understanding how the structure of international capital mobility
has influenced the French EMU process. The life-cycle is inspired by the work of both McNamara
and Marcussen, but is structured on the basis Marcussen’s template albeit with some modifications.
3.6.2 The ideational life-cycle
The ideational life-cycle is structured in several relatively separate stages. It is integrated in this
framework in order to gain insights into the process of idea development and diffusion in order to
understand how this process interacts with the structure of capital mobility as it is conceptualized in
the CMH. A more in-depth outline of the ideational life-cycle of this framework will be presented
in the following. In accordance with Marcussen’s writings, the ideational life-cycle can in short be
summarized as follows: The first stage is the ideational equilibrium a stage where the actors within
the European macro-economic organizational field share a set of uncontested knowledge structures
about the basic function of economy. The second stage concerns a period of time when this
consensually shared knowledge is challenged by a perceived external shock. Consequently, actors
find themselves in a stage of ideational vacuum during which they do not know what to believe in,
which economic instruments are the most appropriate to handle the immediate problems, or how to
prioritize between different economic problems. At this stage of the ideational life-cycle, actors are
33
open and sensitive to new ideas (in contrast to the stage of ideational equilibrium) which can help
them emerge from their collectively felt cognitive dissonance. Once new ideas are collectively
selected as a replacement of the old shared knowledge a process approaching full institutionalizing
can begin (Marcussen, pp. 13-23, 2000).
3.6.3 The ideational equilibrium
The first stage is the ideational equilibrium. On the basis of Marcussen’s notions, it is assumed here
that it is a stage in which elites within the European macro-economic field share a set of
uncontested knowledge structures formulated as the above mentioned ideas. It is important to notice
that actors in this period normally do not change their fundamentally beliefs about economic
relations; thus it is a belief system which is fairly stable. As mentioned above, because actors
regularly feel burdened by cognitive inconsistencies and are not capable of grasping the complexity
of the social world they attempt to freeze the simplifications and categorizations of these ideas
(Marcussen 2000, pp. 1-14).
In addition, I would argue that the normal situation within an ideational paradigm is that the ideas
which constitute it, are stable and broadly accepted by the members and their behavior will
correspond to the ideas. In this way, the ideas become very powerful in terms of generating a
certain identity for the members of a paradigm which again foster a commitment and an interest
with regards to upholding and disseminating those ideas.
However, this does not mean that the collective identity of a given paradigm shapes all concrete
preferences and interests. My argument is that in many specific decision-making situations it cannot
be excluded that actors behave on the basis of egoistic and material interests which do not
necessarily correspond to the ideas of the paradigm. At this stage of the ideational life-cycle it is
appropriate to reflect on Schimmelfennig’s (2001) theoretical considerations. In short,
Schimmelfennig’s theory of rhetorical action is based on the ontological assumption of weakly
socialized actors. On the one hand it is assumed that actors belong to a certain community whose
constitutive norms and values they share and which produce (at least partly) a certain identity for
the members of the community. On the other hand, it is expected, in many situations that actors
develop and instrumentally pursue egoistic, material interests that compete with their commitment
to the community values and norms (Schimmelfennig, 2001, p. 62). In other words, in the notion of
34
weakly socialized actors it is assumed that members of a particular community are not necessarily
as homogeneous as it is implicitly assumed in Marcussen’s and McNamara’s approaches.
Moreover, a key concept in Schimmelfennig’s approach is the rhetorical action which is defined as
a strategic use of norm based arguments in pursuit of ones self-interests. That is to say that the
validity of one’s arguments and behaviors will be based (at least partly) on whether it is in line with
the institutionalized identities, values, and norms of the community. Consequently, actors whose
self-interests are perceived to be compatible with the community norms have an opportunity to add
cheap legitimacy to their position (Schimmelfennig, 2001, p. 63).
The notion of rhetorical action is adopted in the ideational life-cycle of the present study. Hence, in
the political and economical process of creating the EMU, those arguments which were in line with
the general consensual knowledge structure within a given ideational paradigm are more likely to be
considered as legitimated and receive more attention and diffusion compared to more normconfronting arguments.
More precisely, in the stage of ideational equilibrium where elites within the European macroeconomic field share some ideas, total harmony does not prevail. In this period of time, it is
assumed here that an actor or a group of actors are able to frame their positions and arguments in a
manner so as to be perceived by members of the community to be in line with the shared ideas of
community. All of this is done strategically and deliberately and serves as a means to increase the
interests and benefits of the actors or group of actors which started the framing. Furthermore, there
is also a mechanism of public exposure of illegitimate goals and behaviors as a process of shaming
the opponents into norm-conforming behavior. However, it is important to note that even though the
behavior of actors can be based on purely egoistic and material interests, this does not mean that
such interests are produced outside time and context. Even egoistic and material interests are
basically social constructions which are the result of complicated social interaction between human
beings. The point is, however, that this interaction could have taken place outside the ideational
paradigm.
35
3.6.4 The ending of the ideational equilibrium
In Marcussen’s ideational life-cycle it is assumed that when ideational shifts occur within the
macro-economic field, they tend to be a major scale and dramatic. Marcussen argues, that old ideas
on macro-economic management die out as a result of what is commonly perceived among this
field to be external shock and consequently policy failure. It is a shock which tends to challenge and
undermine the prevalent and relatively uncontested knowledge structures as they are described
above. The shock creates a period of policy delegitimization and deconstruction where new policy
windows open because the shocks render old reigning ideas (Marcussen, pp. 13-14, 2000).
Moreover, Marcussen argues that actors within the macro-economic organizational field search for
alternative policy strategies to replace the considered inadequate ideas, i.e. actors find themselves in
a situation of ideational vacuum where they have no norms or ideas to believe in and no consensus
on how to handle problems (Marcussen, pp. 13-16 2000). Marcussen defines the ideational vacuum
as “…a period in which policy makers do not know how to prioritize policy objectives and in which
they are ignorant as to how to achieve policy objective in general” (Marcussen, p. 14 2000). At this
stage, actors are very open to adopting some of the many ideas that are floating about in order to
restore the situation of ideational equilibrium (Marcussen, pp. 13-16 2000).
It is the opinion of this author that Marcussen - with his notions on how actors start to distrust their
own ideas and how this make them more open to new ideas - highlights important aspects of
ideational development. His theory captures the essence of how ideational development often is not
an undramatic transmission where ideas slowly and smoothly are replaced with new ideas. My
argument is that ideational development often is most more like a revolution than an evolution.
At this point, it is appropriate to provide a more explicit formulation of the nature of the shock as it
is defined in this framework, notably a shock which is assumed capable of challenging existing
ideas and trigger an ideational vacuum within an ideational paradigm. In contrast to Marcussen it is
here argued that a shock is not external to the members of a paradigm. In contrast, a shock is a
certain feeling inside individuals which lead to a state of confusing and uncertainty. What are
external to individuals are new events and structural changes which under certain conditions can
cause a state of shock. New events and structural changes might be of an economic, cultural,
political, technological, nature, military, or a social crises or development. It can be argued that the
increasing international capital mobility which started to accelerate in the 1970s is a structural
36
change that triggered a state of shock for some individuals within the economic and political elites
in Europe. In general, what conditions such a state of shock depends on how these new events and
structural changes are perceived, if the individuals perceive that these new events and structural
changes can be handled on the basis of the existing consensually shared ideas it is not likely that
this could trigger a state of shock. This relates to part of the classic agent-structure problem as it
was outlined in the introduction to this framework. This study assumes that events and structures
are subjects to interpretation by actors and, more importantly, not all actors interpret events and
structures in the same manners. It is precisely this diversity of how structures are interpreted, which
is one of the major puzzles in the following analysis of the French EMU process.
Marcussen argues, that because ideas within a given paradigm are relatively stable and resistant to
new and challenging ideas, it is realistic to assume that actors will take action in order to meet the
new events and structural changes, and that it is the perceived failure of these actions that is
decisive for whether actors find themselves in a state of shock. Moreover, someone often functions
as an ideational promoter of shock. That is to say, an actor or a group of actors framed a particular
event or structure, e.g. an economic recession, as an extraordinary situation where the existent
instruments are inefficient to cope with the new situation and require new measures (Marcussen,
2000 p. 12-20)
It is important to notice that there are ontological differences between Marcussen’s concept of
ideational vacuum and the state of shock as it is defined in this framework. Basically, an ideational
vacuum is defined as a collective feeling of cognitive inconsistency among a group of actors in
which they suddenly find themselves in the unfortunate situation of not possessing legitimate
answers to increasingly difficult questions. The state of shock is here assumed to be more individual
in a sense that it is a feeling of one or few individuals of not being able to comprehend a given
situation. The result is the same as with the stage of ideational vacuum; individuals find themselves
in a stage of cognitive dissonance. In both cases; if new events or structural changes are considered
to be insurmountable, a period of policy delegitimization and deconstruction can be triggered.
At such a juncture, I argue, actors are assumed to be particularly susceptible to new ideas as actors
enthusiastically will be seeking new coping mechanisms in order to restore the much more
comfortable situation of ideational equilibrium. Hence, it is assumed that actors will be open to new
37
ideas and it is precisely at this period of time that some actors will be promoting and framing their
preferred means for coping with the chaotic environment.
3.6.5 New ideas become embedded
The final stage of the ideational life-cycle of this framework is based on the Marcussen’s work
without any modifications or alterations. The stage concerns the process of how some new ideas
become embedded in the ideational paradigm. A key contention at this stage, Marcussen argues, is
that the determining factor for whether a particular idea becomes influential is to what degree it is
transformed successfully into institutionalized practice. That is to say, the failure or success of ideas
are not inherent in their properties, but depends on their presentation and framing and the process of
translation. However, new ideas never enter a normative vacuum, but must compete with other
ideas, norms and perceptions in a highly competitive environment. Consequently, new ideas must to
a certain degree resonate with the environment into which they appear. On the other hand,
Marcussen’s theory is based on the notion that the meaning of any particular idea and the linkages
between existing ideas and emergent ideas is often not obvious and must be actively constructed by
proponents of new ideas (Marcussen, 2000, p. 18).
38
4. Analysis of the French economic tradition in 1970s
4.1 Introduction
The subsequent analysis focuses on the economic and monetary policy development in France in
the 1970s. What is particular conspicuous in this development is the relationship between two
policy objectives which apparently during the 1970s became more and more difficult to achieve
simultaneously. The two policy objectives where the objective of growth and employment and the
objective of a strong and stable franc. As it will argued below the two objectives were motivated by
the French ambition to become a powerful actor in regional and world politics. In terms of the
subject of this thesis, it is interesting to examine how the two objectives were related to
international capital mobility, which started to achieve momentum in the 1970. The section starts
with a brief outline of the economic and monetary development of France in the 1970s.
As mentioned in the introduction to this thesis the point of departure of the analysis of how
international capital mobility has influenced the French EMU process is the transformation of the
French economic policy that took place in the period 1981-83. In order to understand this radical
transformation it is crucial to be aware of the political and economic context with which the French
political and economic elites were faced with, when they decided to change the French economic
policy. The abovementioned context was formed, at least party, during the 1970s. The purpose of
the subsequent analysis of the 1970s is therefore, primarily to form the basis of the following
analysis of the 1980s.
4.2 The French economic and monetary policy development in 1970s
It can be argued, that one of the most noticeable aspects of the French economic policy tradition is
the objective of a stable and strong franc. As mentioned above, this was grounded in the French
ambition of being an important and powerful actor in international politics. Many perceived a stable
and strong franc as the precondition for this. This has been repeatedly stated by numerous
policymakers, e.g. Raymond Barre, prime minister in the period 1976-81, who emphasized
that ”France had to be able to play an eminent role in the EC and in international affairs. She could
not fulfill it without an economy able to sustain competition and without a solid and stable
currency” (Boissieu & Pisani-Ferry, 1995, p. 23). Moreover, Dyson & Featherstone argue that the
39
French objective of a stable franc in general enjoyed broad public support, creating a tradition that
cut across party and institutional boundaries and had deep roots in French culture and politics.
There was an influential policy belief that associated devolution as well as a floating franc with
poor financial management and in international monetary diplomacy French negotiators were the
most persistent critics of floating exchange rates (Dyson & Featherstone 1999, p. 76-77). The
emphasis on the relationship between monetary power and powerful diplomacy was introduced with
the creation of the 5th Republic in the late 1950s. Hence, shortly after de Gaulle was elected
president of the Republic in 1958, he appreciated the value of the stable French currency and his
point was clear when he argued “I shall give to France a model franc whose parity will not change
just as long as I am there” (Dyson & Featherstone 1999, p. 76). Yet, it is important to be aware that
a majority of the French - in contrast to the Germans - held the view that monetary stability was
determined by the quality of international and European co-operation, and a majority of French
policymakers rejected the German argument that monetary stability had first to be built at home
(Dyson & Featherstone 1999, p. 76).
Despite of the profound French focus on the importance of a stable and strong national currency, I
shall argue that a policy of monetary stability in practice was only half-hearted carried throughout
the 1970s. The subsequent examination of the French economic development will make clear that
the objective of a stable and strong franc to some extent collided with an objective of economic
growth, modernization, and employment.
During the last months of de Gaulle’s presidency inflation increased rapidly and the trade deficit
grew considerably. The President, however, kept his promise from the time when he was first
elected, thus refusing to devaluate the franc. Months later, Pompidou became the new man at the
Elysée and devaluated the French currency in August 1969. The new President had a rigid belief
that immediate growth, investment and employment came before all other economic aims. This
belief was by no means controversial at the time as a majority of French academics, business and
trade union leaders were inflationary (Howarth, 2001. pp. 43-44). It can be argued, that this belief
was the core of the abovementioned policy objective of growth and employment; a belief which
was in continuation of an established French economic and monetary policies which were based on
a special French version of Keynesianism with a profound tradition of state interventionism in the
economy, a tradition dating back to the 1930s (Risse et al., p. 169-170, 1999). However, within the
40
first three years of Pompidou’s presidency, the franc remained strong and stable underpinned by the
strongest economic growth since WWII (Howarth, 2001. pp. 43-44). Hence, it can be argued that in
the early 1970s France was in a situation where there was no profound contraction between the two
above mentioned policy objectives. This situation was to change in the following years.
In 1973 rising inflation and a decreasing trade surplus made it difficult to maintain parity of the
franc in the Snake. In the same year an economic recession became a reality with an increase in oil
prices in the autumn of 1973 and a decline in the economic growth. The French government failed
to adopt measures to control the increasing inflation and decided that the best way to handle the
recession was to carry on with economic growth policies. At the same time, Germany successfully
contained inflation which increased the monetary divergence between France and Germany and
resulted in downward pressure on the franc in the Snake. Instead of altering the French monetary
and economic policy, in 1974 the French decided to remove the franc from the Snake. During the
first four months of 1974 the inflation reached its highest level since the beginning of the Fifth
Republic (Howarth, 2001. pp. 43-44). On this basis it can be argued that within the first three years
of Pompidou’s presidency it became more and more problematic to adhere to both policy objectives
at the same time. Pompidou and his Neo-Gaullist government chose to give priority to the growth
and employment at the expense of a strong and stable franc.
When Giscard d'Estaing succeeded Pompidou as president of the Fifth Republic in 1974, it was
believed that restoring the economic situation required firm action as inflation was escalating
dramatically and the trade deficit threatened to reach record levels. This situation resulted in the
adoption of austerity measures in June 1974 which effectively resulted in a considerable decrease in
inflation and generated a trade surplus. The franc was furthermore allowed to return to the Snake in
1975. Yet, the austerity measures were met with considerable domestic opposition from especially
Neo-Gaullist politicians. Giscard d'Estaing was under pressure from the Chirac government which
insisted upon adopting measures to stimulate economic growth and combat increasing
unemployment, and once the economic situation was stabilized, Giscard d'Estaing returned to more
growth-oriented policies. Yet, the result of these policies was dramatically and disappointing:
Inflation rose and the trade deficit escalated. Consequently, the franc was again under downward
pressure and in March 1976, following a short monetary crisis during which the German declined to
revalue their currency, the French floated the franc. Despite this, the Chirac government continued
41
the growth-oriented policies until august of 1976 where Chirac resigned. The worsening economic
condition led the President to insist that the government implement austerity measures. On August
26 1976, Barre was appointed as Prime Minister and the government committed itself to a program
of anti-inflationary measures. The Barre government succeeded in lowering inflation as well as
trade deficit and the franc was strengthened in terms of the D-mark (Howarth, 2001. pp. 43-44).
Giscard d'Estaing’s presidency, was in my view truly characterized by shifting priorities between
the two policy objectives. Moreover, it seemed that there was no stable consensual shared idea of
how to handle the dilemma.
4.3 How to understand the French economic and monetary policy development in
the 1970s
In terms of the theory of ideational life-cycle, the diversity of the French strategies and objectives in
the 1970s can, at first glance, be seen as something which fundamentally challenging the relevance
of the theory; a theory which, as argued above, constitutes the core of the theoretical foundation of
this study. From the above analysis it can be deduced that the normal situation in 1970s France was
a struggle between different and apparently incompatible objectives. That was more or less the
normal situation in the 1970s. There were no indications of one authoritative ideational paradigm
which offered at set of legitimate shared ideas of how to handle the economic and monetary crises
that France experienced in the 1970s. It can be argued that the 1970s was characterized by two sets
of political objectives; the objective of growth and employment and the objective of a stable franc,
which - due to international capital mobility - were difficult to maintain simultaneously. It was a
situation which can be illuminated by the key contention of CMH, which is based on the
assumption that in a case of international capital mobility a trade-off exists between the objective of
exchange rate stability and the objective of independently chosen monetary policies.
That is to say, that during the presidencies of both Pompidou and Giscard d'Estaing there were, as
we saw above, attempts to stimulate the economic growth and combat increasing unemployment. In
general, until the late 1970s several French governments employed expansive credit policies to
stimulate growth and the monetary authorities tolerated inflation and lowered the interest rates
(actually negative in real terms) in order to stimulate economic growth (Sandholtz, pp. 6-23, 1993).
These economic growth policies enhanced the monetary divergence between France and particular
42
Germany which conducted a policy of monetary stringency with a focus on disinflation and
relatively high interest rates (relatively high interest rates compared to France). This monetary
divergence can be illustrated with the figures of the CMH which shows France and its relationship
with Germany. The increase in monetary divergence can be illustrated by an upwards move on the y
axis and the degree of foreign exchange market pressure associated with this higher level of
divergence will increase (the point 2 on the x axis move to the right). Due to the high level of
foreign exchange market pressure it was difficult to maintain a stable and fixed exchange rate of the
franc as the financial assets that were mobile started to move out of France because of an expected
relatively low profit (compared to especially Germany).
This brings us to the analysis of the level of international capital mobility in France in the 1970s
which, as the CMH makes clear, settle on both severeness of the trade-off and whether a trade-off
exists at all. In general, the general purpose of capital control is to isolate domestic financial
markets. Capital control mechanisms were with various intensities a profound element in French
economic management from the post-war period until the 1980s. In the 1970s and 1980s capital
restrictions were deemed necessary to insulate domestic interest rates from world markets. These
control mechanisms were part of France’s already impressive array of administrative measures,
designed to direct the flow of savings and investments. The Treasury for instance channeled funds
directly from the government budget to industries (Goodman & Pauly, pp. 23-24, 1993).
Nevertheless, for decades, prior to the early 1970s, administrative controls on capital movements
had been gradually liberalized. The liberalization process was particularly intense throughout the
1960s and reached its peak in 1971 with the abolishment of the devise titre system2. From 1971,
capital restrictions were gradually intensified (Giavazzi & Giovannini, p. 165, 1989). Yet, the fact
that France in the 1970s was not able to maintain a stable currency – as opposed to Germany in
particular – serves to indicate that the control mechanisms were not able to isolate domestic
financial markets effectively. The problem for the French was that the Fifth Republic was part of a
relatively open economy with many links to the international capital market. As a result, the
existence of higher interest rates abroad (above all in Germany) constituted an incentive for owners
of financial assets to circumvent capital control mechanisms (Gros & Thygesen, 1998, pp. 3-191).
That is not to say, however, that we have indications that France financially was completely
2
A system that permitted French resident only to purchase foreign assets from another French residents, thus freezing the stock of foreign assets held
by domestic residents.
43
integrated into the German economy and total unrestricted capital mobility between the two states
without any restrictions (the feasibility curve is not vertical running along the y-axis).
To summarize the role of international capital mobility in France in the 1970s became a wedge
between the two objectives which traditionally had dominated the discourse in France. That is to
say, different governments and presidents had to prioritize between exchange rate stability and
domestic monetary independence (and to some extent also economic independence) and Giscard
d'Estaing even altered his preference during his seven years as president. It is important to notice
that not one ideational paradigm was able to established itself as the leading paradigm with some
consensual shared causal ideas of how to choose between these two objectives. Hence, it seems
reasonable to conceptualize the 1970s as a decade of ideational vacuum where the policy-makers
did not possess a collectively shared knowledge structure with regards to handling economic and
monetary crises. Most of all, the 1970s in France was the beginning of what can be seen as an
important ideational transformation process within the French political and economic elites. The
asymmetry problem between France and Germany started to become nearly institutionalized in the
1970s and was in the following decades one of the most crucial turning points in the European
integration process. A turning point which cut across party and institutional boundaries. The
asymmetry problem concerned the French dissatisfaction with the increasing German economic and
monetary power. This problem will be a major issue in the following analysis.
44
5. Analysis of the French conversion
5.1 Introduction
The existence of a connection between the creation of the EMU and the structural alteration of the
global and European financial and monetary regimes is generally assumed in much European
integration research. In particular, emphasis has been put on the European financial liberalization as
part of the SEA program during the late 1980s. Many scholars consider this liberalization to be a
process that increased pressure on national monetary authorities in most EC member states to
reorganize the European monetary regime (e.g. Marcussen 1998, McNamara 1998, Gross &
Thygesen 1998). However, I shall argue that the French conversion from a Keynes inspired
economic policy to economic austerity in the beginning of the 1980s is maybe even more intriguing.
As Andrews argues: “Indeed, among the many changes in European politics of the past thirty years
that made the introduction of EMU imaginable, few are more remarkable than the decision of the
Mitterrand government to undertake a program of fiscal and monetary rigeur” (Sinclair & Thomas,
p. 11, 2001). The subsequent section shall attempt to analyze why this dramatically fiscal and
monetary rigeur came about with a focus on the role of international capital mobility. The section
also analyzes the repercussions of the introduction of this fiscal and monetary rigeur; a new policy
which in the following is termed politique de rigueur (a French expression for the tight or austere
policy).
An analytical focus on the introduction of politique de riguer is essential as such a shift was part of
an indispensable process of economic and monetary convergence among the potential members of a
monetary union. The absence of this process would have made the EMU, as we saw in the late
1990s, unrealistic. As Sandholtz argues: “If governments had not abandoned national economic
strategies that required differential rates of inflation and periodic devaluations, discussions of
monetary union would have been out of questions” (Sandholtz, 1993, p. 2).
In the years prior to Mitterrand’s investiture on 21 may 1981 as the first socialist president in the
Fifth Republic, there had been, as we saw above, an ongoing struggle between rival ideas on macroeconomic management. This was more or less the normal situation in France in the 1970s. The
subsequent analysis will show that after two years of economic crisis and the failure of an economic
recovery program, Mitterrand’s presidency became the starting point of a unique era of nearly
45
consensual shared ideas about a new economic and monetary management. Ideas which not only
became the leading economic way of thinking within the French economic and political elites, but
came to dominate the way of thinking in most other European states. It was ideas about the
relevance of disinflation and monetary and economic stability and far from the Keynesian approach
which had been adopted in some of the 1970s economic policies.
5.2 Everything seems normal
In 1976, Giscard d’Estaing appointed Barre as Prime Minister and Minister of Economy and
Finance. Shortly after, Barre attempted to change the economic priorities in France with focus on
disinflation, the external balance and nominal exchange rate stability. The objective was to escape
the vicious inflation-devaluation circle that France had experienced in the years 1972-1977. This
attempt to change the economic priorities and the way of thinking was met with resistance from
unions, employers, entrepreneurs, political partners and opposition. In general, memories of the
successful devaluations of 1958 and 1969 were still strong, and many believed that changes in the
nominal exchange rate would, ex post, offset any inflation differential vis-à-vis the main trade
partners (Boissieu & Pisani, 1995, pp. 9-15). It can be argued, that Barre was not very successful in
terms of reforming the actual conduct of economic policy, nor in altering the economic way of
thinking.
Nonetheless, as Boissieu & Pisani inform us, Barre’s attempt was crucial as it introduced new
economic priories and created new instruments for economic policy and therefore prepared the
evolution of French economic policy formulated as the politique de rigueur (Boissieu & Pisani,
1995, p. 10).
At the outset, the new socialist government and the President embarked upon a program of creating
democratic socialism based on leftist Keynesianism in order to improve the economic situation of
the Republic. The background for this program was a French economy that had been in recession
for a year and in which the unemployment rate had increased considerably. In addition and despite
the recession, the rate of inflation was accelerating dramatically. Moreover, the trade balance was
deteriorating, the level of international debt was escalating, and the Franc, already overvalued,
appreciating in real terms (Flynn, pp. 128-133, 1995).
46
From my perspective it appears reasonable to argue that when Mitterrand and the Socialistdominated government took office in 1981 everything seemed to be back to normal. There were
initially few indications that this presidency would be the beginning of a crucial transformation of
part of the French Keynesian orthodox economic way of thinking (except an unexpected decision
not to devaluate).
When the socialists became leaders of the Fifth Republic, it was a surprise to many that they
decided not to devaluate the franc. The international financial operators believed that the new
leaders of the Fifth Republic would devalue as they, during the election campaign, had promised to
adopt an expansive economic recovery program. Devaluation in relation to the D-mark was
essential for economic purposes in order to compensate for the cumulated inflation differential
between France and Germany. During the Barre reign there was international confidence in his
determination to avoid devaluation and reduce inflation and this confidence had successfully
discouraged speculation. The new president and government truly lacked this credibility (Howarth,
2001, p. 55).
One of the basic points in the ideational life-cycle, as argued in the theoretical section, is when
firmly institutionalized causal ideas become destabilized by what is perceived by the elites to be a
radical external alteration. When Mitterrand was elected as the first socialist president of the Fifth
Republic, the major challenge was how to handle the recession in French economy. However, from
the perspective of this author, the recession in 1981 was not perceived as something that required
new macro-economic strategies or profound alteration of the existing Keynesian strategy. Thus, in
the first months of Mitterrand’s presidency, there were no indications that the ongoing recession
could foster a destabilizing shock for the president or most other leading socialists.
As Goodman argues, recalling the perceived successes of previously Keynesian economic programs,
there was within the Socialist Party no reason to panic (Goodman, pp. 111-141, 1992).
Moreover: ”At the end of 1981, Mitterrand and Mauroy were not convinced that France had
serious economic problems” (Goodman, 1992, p. 133). More importantly, in terms if this study, the
Socialists Party does not appear to be concerned that external constrains, e.g. international capital
mobility, could obstruct the conduct of a Keynesian economic policy. In addition, as the Socialist
dominated government enjoyed a secure parliamentary majority, it was initially relatively easy to
47
enact into law a variety of measures that were perceived to improve the country’s economic
situation (Flynn, pp. 128-133, 1995).
5.3 The failure of the recovery program
The economic recovery program, Keynesian in approach, called for fiscal expansion, income
redistribution and increased public sector employment – measures designed to stimulate both
consumption and investment. By reestablishing economic growth, the socialists believed that they
could put the Fifth Republic on the track to enduring prosperity. Growth would reduce inflation in
two ways: Firstly, by leading to higher government revenues (i.e. reestablishing a balanced budget),
secondly, by contributing to a fuller utilization of France’s productive capacity, thus reducing firms’
fixed costs as a percentage of total costs. A combination of reduced inflation and increased
investment would improve the international competitiveness of French firms and maintain external
balance (Goodman, p. 127, 1992).
It seems reasonable to argue that although Mitterrand was a socialist president and his government
was a coalition between the socialist party and the smaller communist party the economic thinking
of the socialists had similarities with previous Gaullist presidents and governments. In fact, during
previous recessions most governments had pursue an expansionary economic policy as a strategy of
improving the economic situation. In the mid 1970s for instance, the neo-Gaullist Prime Minster
Jacques Chirac had continued stimulation of the economy even after the recovery was well
underway. Chirac disregarded his finance minister, who believed that a stimulus package of more
than 15 billion francs would spur inflation and imports. Chirac announced a package twice that size
(Goodman, p. 117, 1992). Hence, from my perspective the program of creating democratic
socialism did not represent a radical break with former economic programs.
As we saw, initially there was no overwhelming economic concerns within the French Socialist
Party when they came to power. Moreover, Mitterrand’s pride in some of the achieved results
during his first eighteen mounts in office was well-deserved. The French economy grew by 2 % in
two years while growth rates in most other EC member states were stagnant. In addition,
unemployment rose more slowly in France than in Germany or in the United States (Goodman, p.
134, 1992). As Hall notes “No other Western nation had been able to reduce the growth of
unemployment so significantly” (Hall, p. 195, 1986). Yet, the program of creating democratic
48
socialism based on leftist Keynesianism did not fulfill the socialist ambition of prosperity despite of
growth rates that were higher than some other EC countries. Gradually, the economic problems
proved to be far more consequential than the early programmatic victories - for both the
government and for Mitterrand. After a few months in office, as it will be analyzed in the next
section, many socialists regularly began to question the conventional Keynesian wisdom (Flynn, p.
128, 1995).
Moreover, despite the socialists’ commitment to a stable currency, the government only managed to
avoid devaluation until October 1981. The first of three devaluations within the ERM took place on
4 October. A total 8,5 % realignment was agreed upon in negotiation with the Germans and the
other EMS partners. The condition was that France reduced expenditures by 10 billion franc and
froze another 15 billion of the 1982 budget. However, continued reflation had worsened the trade
imbalance and increased government debt and the inflation differential with France’s largest trading
partners was still not reduced. Hence, the second devaluation took place on 14 June the following
year. A total 10 % realignment was agreed between France on the one hand and Germany and
Holland on the other. Despite those two realignments there was, within the international financial
community, a belief that those realignments could not neutralize the Franco-German
inflation/cost/productive differential. In addition, the financial community distrusted the French
commitment to defend the parity of the franc. Speculation against the franc began only two months
after the latest realignment and continued in spite of a series of measures and announcements
designed to discourage it. In the following months, the French Central Bank used a large proportion
of its foreign currency reserves to defend the parity of the franc and by the end of 1982 the reserves
had dropped 50%. This made it clear to many of the French socialists that in order to avoid periodic
devaluation within the ERM, a much more fundamental austerity program was a necessity. The
third devaluation took place on 23 March 1983 with a total 8% realignment between Germany and
France. In the negotiation of the third devaluation the French were forced to accept a new and farreaching plan. Taxes were to be raised by 40 billion franc in 1983, public spending cut by 24 billion
franc and wages and prices increases limited to 8% per year (Howarth, 2001, pp. 55-59).
The CMH suggests that a situation of monetary divergence and ineffective capital controls normally
produce incentives of capital to cross international boundaries. In the initial phase of Mitterrand’s
presidency, I would argue, the situation was to some extent more complicated and somewhat
49
different. In these two years, France witnessed an exceptional situation where large quantities of
capital left the Republic - only partly due, however, to the monetary divergence between France and
the surrounding world (e.g. the above mentioned Franco-German inflation/cost/productive
differential).
The political and economic background for this situation was, as mentioned above, the newly
elected socialist President and government. Mitterrand and the Socialist Party came to power by
promising – among other things - a ‘radical break’ with capitalism (Balassa, 1985, p. 363). Despite
the fact that the socialist economic program had similarities with much neo-Gaullist economic way
of thinking, Mitterrand was by many seen as a non-consensus leader and as a leader for only one
segment of the society. Moreover, there was anxiety in the wealthy segment of the French society
(even within the middle class) about taxation and confiscation of capital, an anxiety that was
underpinned by rumors about French agents taking photos of French citizens outside Swiss banks
(Cooper, 1987, p. 569). As Cooper argues “Those who did not identify with him [Mitterrand] and
his views were frightened about consequences for their economic well-being”. (Cooper, 1987, pp.
569-570 in “Barriers to European Growth” 1987 ed. by Lawrence & Schultze) Cooper argues
furthermore that “under the circumstances, it is not surprising that many French wanted to export
their capital”. (Cooper, 1987, p. 570 in “Barriers to European Growth” 1987 ed. by Lawrence &
Schultze)
On this background, my argument is that the socialist’s economic program not only triggered a run
on the French currency, as it will be argued below, but the presence of a socialist at the Elysée also
fostered distrust among the capital owners which further increased capital outflows. That is to say,
the financial market reacted on perceptions and expectations and not only on economic and
monetary realities. This is an important aspect of the international and domestic economic realm
which is neglected in the CMH, but was crucial for the evolution of the politique de rigueur.
Another aspect that in my view challenges the relevance of the CMH, is the fact that the structural
differences between France and the main trading partners (especially Germany) that produced
incentives of capital to cross international boundaries was mainly economic divergence and not so
much monetary divergence (an important difference between the 1970s, where there especially was
differences in interests rates, and the early 1980s). In fact, neither Germany nor France
50
fundamentally altered their monetary policy in the first period of Mitterrand’s presidency. France
only temporarily increased its interest rates during the waves of speculations (Goodman, 1992, pp.
58-142). In the socialists’ macro-economic strategy, fiscal policy was instead the principal motor of
economic growth and little attention was in fact paid to monetary policy. Basically, it was a strategy
where measures of fiscal expansion, income redistribution and increased public section were
designed to stimulate both investment and consumption (Goodman, 1992, p. 127). There are
therefore no indications that a monetary divergence between France and Germany was the main
reason for the massive outflows of capital from the Fifth Republic.
The economic divergence mentioned above was especially conspicuous between Germany and
France and concerned in particular differences in inflation rates prior to Mitterrand’s inauguration
and in the first two years of his presidency. While parity between the French currency and the
German currency had not been changed since 1979, during the following two years prices rose
twice as fast in France as they did on the other side of the Rhine. Consequently, the franc
appreciated by 10 percent in real terms (Goodman, pp. 128-9, 1992). Hence, when the new elected
socialists embarked on an expansive fiscal policy as a means of putting France’s economy back on
the track the economic context was an overvalued franc. Moreover, as we saw above, during the
two first years of Mitterrand’s presidency the inflation increased even further as an unintended
consequence of the recovery program. This fostered, together with increasing trade and budget
deficit and partly ineffective capital control mechanisms, incentives for capital to cross international
boundaries as capital owners and controllers were concerned about the future value of franc. It was
a process which has similarities with the one presented by the CMH when increased monetary
divergence produces boost the foreign exchange market pressures in a situation of relatively level of
capital mobility. A process which made it difficult to maintain a stable currency and, as we saw
above, France was unable to prevent devaluations.
5.4 The ideational crisis
As we saw above, the French socialists believed that the economic recession in 1981 was a normal
economic challenge that could be handled with normal measures. Mitterrand and the government
therefore introduced a traditional Keynesian economic recovery program which was believed to be
the right medical treatment for the unhealthy French economy. As it will be argued below, after a
51
few months with a socialist at the helm at the Elysée, everything started to change and after two
years with socialist leaders, economic strategies and priorities was completely altered.
According to Howarth, most French socialists were in the early 1981 convinced of the relevance of
the Keynesian approach in stabilizing the economy. In fact, the long period when the Socialist Party
(French: Parti Socialiste, PS) was in opposition, had radicalized many of its members into
supporting a rather leftist Keynesianism (Howarth, 2001, pp. 55-83). In addition, Bell & Criddle
inform us that the PS prior to the 1981election was very eager in terms of ensuring economic
growth and creating redistributive economic measures. Moreover, as Bell & Criddle point out, the
socialists spend little time prior to the 1981 election considering and debating the economic
implications of its policy and indeed, little time elaborating the details of the measures to be
pursued (Bell & Criddle 1988, pp. 152 - 153). Howarth holds that their economic way of thinking
was grounded in a rather statist version of Keynesianism, uneasily combined with a strong dose of
Marxism. There was a general mistrust within the Socialist Party towards the market and to the
majority of the socialists, inflation was not a serious concern (Howarth, 2001, p. 70).
One of the key contentions of this theoretical framework is that actors find it difficult to
comprehend the complexity of the social world and thus search for cognitive relief and stability
with a membership of an ideational paradigm. This paradigm is constituted by several ideas which
offer a specific meaning structure that simplify the social world in a manner which allows actors to
understand it. The insights of Howarth and Bell & Criddle presents a picture of a socialist party
which prior to the 1981 election had based their entire economic policy on one economic way of
thinking without debating its relevance or implications. Even though it is difficult to determine with
certainty which ideational status Keynesianism had among the socialists at that time, the uncritical
approach the socialists had to Keynesianism gives a clear impression that this ‘ism’ served as the
ideational paradigm for PS members. From my perspective, Keynesianism was most likely a kind
of consensual shared idea within the PS; an idea of how to approach the economic recession that
France were faced with in the early 1980s. One might argue that Keynesianism gave meaning to the
members of the PS in terms of understanding as well as handling the recession and it also served as
a kind of dogma for the members.
52
As we saw above, when the socialists came to power in the spring of 1981, they initially embarked
on an economic program based on traditional socialist ideas. The conventional wisdom among
scholars that seek to understand this critical moment in French history is that this program failed
miserable when the adverse reactions of the international financial market hit the French economy.
(e.g. Howarth 2001, Dyson & Featherstone 1999, and Morawcsik 1998). Even though there is
nothing wrong with such an argument, it is by no means sensational. The analytical challenge is to
understand how this impact of international capital mobility on the French economy influenced the
conversion of the traditional and well-established French socialist way of perceiving economy. As it
will argued below, international capital mobility did not determine directly or in a predictable way
the ideational conversion we saw after two years with a socialist at the Elysée. One might argue that
this ideational approach of how to understand the French conversion is an implicit critique of much
rationalist theorizing on this subject.
According to Howarth, the problem for Mitterrand and the socialist government was that they had
committed themselves to two objectives which gradually proved to be incompatible due to the
Republic’s increasing integration in the world economy. That is to say that the economic recovery
program had the unintended consequence of producing financial mistrust and massive outflows of
capital that enabled a stable currency (Howarth, 2001, pp. 55-59). What is particular important here
is according to Howarth that most socialists started to believe that they were faced with a distinct
choice between a traditional Keynesian growth stimulating policy and the politique de rigueur
which was supposed to generate stable currency. This belief seriously challenged the pre-victory
socialist economic approach which was based on the notion of Keynesianism in one country where
it was possible to conduct an economic policy relatively independent of external constrains. This
relates to the fact that even though Mitterrand and the socialist government tried to impede the
capital outflows with an intense use of capital control mechanisms, it seemed impossible to avoid
the three devaluations (Howarth, 2001, pp. 55-59).
Nevertheless, some socialist economists maintained that there was no need to alter the economic
recovery program as they argued “although the French economy was not so large that it could
simply ignore foreign developments, neither was it so small that it would be forced to adjust”
(Goodman, 1992, p. 128).
53
It can be argued, that the socialists truly underestimated the importance of external constrains for
the conduct of economic policy when they started to implement the recovery program. As we saw
above, the Socialists Party was not particular concerned with the facts that external constrains, i.e.
international capital mobility, might obstruct the conduct of a Keynesian economic policy in the
early 1980s.
However, as Lawrence & Schultze point out, gradually national sovereignty, in its traditional
understanding, became regarded as an illusion in an independent world. Several waves of
speculations prompted heated debates and confusion within the government as to how to respond
(Lawrence & Schultze, 1987, p. 568). The battle lines were drawn within the Socialist Party
between those who supported the policy of austerity (such as the policy of disinflation and budget
reduction) and the commitment of stable currency versus those who supported reflation, devaluation
of the franc and leaving the EMS (Howarth, 2001, pp. 21-55). In my opinion, this truly indicates
that there was by no means consensus among the socialists in terms of how to deal with the
structural changes of increased capital mobility.
Frieden likewise points out that even Mitterrand from the autumn of 1982 felt that he did not know
how to handle the crisis because the franc continued to appreciate in real terms, and after October
1982 it came under constant attack on foreign exchange markets. The crisis reached its climax in
March 1983 in a period that has been called ‘The ten days that shook Mitterrand’. At that time
France had to devalue to avoid running out of reserves in a matter of days, and this devaluation was
to take place within the domain of the EMS or represent a definitive break with the French ambition
of being part of a European monetary system (Frieden, 2001, p. 34). Mitterrand’s decision on
whether to stay within the ERM and embark on a program of austerity or to continue the Keynesian
program and accept a floating franc could probably have gone either way. His rather confused
attitude on desirable economic strategy both encouraged and disencouraged a float. However, in
March 1983, after two years of ongoing struggle within the government and the party, and after he
had changed his own strategy several times, Mitterrand made up his mind. From the spring of 1983
he started to implement the politique de rigueur and after the foreign currency reserve of the
Banque de France had improved, the president did not take the opportunity to remove the franc
from the ERM. Mitterrand’s European attitude, the support of the acquis communautaire and an
54
ingrained belief in the leadership role of France in Europe most likely encouraged this definitive
decision (Howarth, 2001, p. 62).
From my point of view, the problem for Mitterrand and the government was that the socialists
lacked a predefined program of how to handle the economic crisis they were faced with after their
traditional conventional program failed. Many socialists felt that the failure of Keynesianism had
challenged and undermined the prevalent and relatively uncontested knowledge structures of the
Keynesian approach. Mitterrand himself admitted, according to Howarth, that he lacked sufficient
economic knowledge to decide between the different arguments in favor of and against participation
of the ERM (Howarth, 2001, p. 70). For many socialists, notably Mitterrand, after two years in
office there were signs of some level of ideational vacuum (as it is described in the ideational lifecycle) as there were widespread confusion, uncertainty and frustration among the socialists. The PS
simply lacked a consensus on how to handle the problems. It seems fair to argue that especially
Mitterrand afterwards became more pragmatic in his management style and more open to new ideas.
According to Howarth, Mitterrand began intensely to consult his political and economic advisers in
order to develop new strategies of how to handle the crisis. To many advisers he gave the
impression; either that he had decided nothing or that he had decided against the position presented
to him. This was done deliberately as a method of testing the advisers and his own beliefs (Howarth
2001, pp. 60-82).
However, based on the above analysis one can argue that international capital mobility by no means
determine the evolution of the politique de rigueur. The introduction of the rigueur was a result of a
very complicated political process as the above analysis clarified. This was a process where the
international capital mobility was one of the main factors that triggered the crucial period of
ideational vacuum among many socialists policy-makers, notably Mitterrand. Hence, it gave room
for new ideas to be institutionalized as the leading discourse. In other words, the international
capital mobility was one of the things that triggered a juncture where Mitterrand and the
government were susceptible to new ideas and enthusiastically tried to restore the much more
comfortable situation of ideational equilibrium. Moreover, the above analysis gives no indications
that international capital mobility significantly influence the actual choice of politique de rigueur.
55
5.5 Ideational conversion process
Andrews argues that there has, in retrospect, been considerable soul-searching amongst the
government leaders who launched the politique de rigueur. That is to say, Andrews hold that these
leaders have tended to explain the conversion of macro-economic policies primarily in terms of a
learning curve, both for themselves and for the country, about the current-account effects of
pursuing ‘Keynesianism in one country’. Andrews’ point is that these retrospective explanations
should not be taken at face value (Andrews, 2001 pp. 19-20). Hence, he points out that: “Despite
later renditions, the earliest accounts provided by the major participants in the French
government’s decision to adopt a strong currency policy within the EMS was instead largely driven
by concerns about capital-account movements. The determining factor appears to have been a
calculated assessment of the economic and especially financial costs of allowing the franc to float;
similar concerns motivated the non-devaluation decision of 1981. It was only afterwards that a
trade-based (and hence pro-European) slant was offered as a justification for these decisions”
(Andrews, 2001 pp. 19-20). Dyson & Featherstone have a somewhat different understanding of the
launching of the politique de rigueur as they argue “The failure of the economic ‘relaunch’
provided a powerful learning experience for French elites … The main lesson was that French
elites were faced with a radically new environment: of globalization of financial markets and of the
EMS. Both combined to constrain French elites to accord a new valuation to fostering a ‘stability
culture’ in France. Only in that way could constraint be turned into opportunity” (Dyson &
Featherstone, 1999, p. 85).
From my perspective, the arguments of the above authors pinpoint a central issue in relation to the
introduction of the politique de rigueur; an issue that can be conceptualized as two, to some extent,
rival positions.
One position states that the introduction of the politique de rigueur was due to a relatively simple
and rational reaction of the French policy-makers, who were faced with a new economic and
monetary context and therefore had to adjust their existing strategies and policies in order to make
the best of this new situation. Their basic interests and identities remained the same. Hence, there
was no learning process where the interests and identities were altered.
56
Another position, which can be seen as a rival position, states the introduction of the politique de
rigueur was a result of a social and cognitive learning process in which the French policy-makers
changed their basic interests and identities, not because they were forced to do so, but because they
believed in something new; i.e. they felt that they had achieved new insights and knowledge that
they did not have before.
In simplistic terms, Andrews’ and Dyson’s & Featherstone’s understandings are partly similar to
each of these positions. Hence, Andrews explicitly rejects the idea that the introduction of the
politique de rigueur was part of a kind of learning experience that altered the identities of French
policy-makers identities, e.g. a learning experience that made the policy-makers more pro-European
in attitude. Dyson & Featherstone, in contrast, seem more open to an idea that the introduction of
the rigueur was more than just a rational response to an external changed structure as they argue
that the globalization of financial markets fostered a new stability culture in the Republic.
However, it is important to be aware that the concept of ‘learning process’ could induce somebody
to conclude that this always is an improvement in comparison to the situation prior to the learning
process. This is not necessarily the case; my argument is that it is more appropriate to term the shift
from a Keynesian inspired economic policy to the politique de rigueur as ‘an ideational conversion
process’.
The following is an analysis of whether the French socialists were subjects of an ideational
conversion process when they decided to replace the traditional Keynesian way of thinking with the
politique de rigueur. An analytical focus on this issue is important because it gives indications of
how intense international capital mobility has influence French policy-making. There is a particular
focus on Mitterrand because he was the key actor in French politics in the 1980s.
The monetary imbalance between European states, which can be seen as the visible background for
the 1981-83 crisis, was in Mitterrand’s mind only part of a more fundamental political problem; he
could not accept that in terms of economy France was perceived as a second-rate country
(Hoffmeyer, 2005, p. 96).
57
According to Hoffmeyer, in the period 1981-83 the French socialists realized that in order to
reestablish and maintain the balance towards the D-mark, they had to adapt a new economic
paradigm formulated as the politique de riguer (interview: Hoffmeyer). Boissieu & Pisani-Ferry
formulate Mitterrand’s motives in a very clear manner: “There was a reward of the end of rigueur:
power” (Boissieu & Pisani-Ferry, 1995, p. 23). In terms of the politique de riguer Mitterrand was in
particular interesting, because he was among the first that saw the political perspective in
rebalancing the German economic power with this new policy. As it will be argued below the
French president relatively early on – and before almost all other policy-makers – saw the
connection between the politique de riguer and the European integration.
Dyson & Featherstone argue that the French President had a strong element of moralism and
emotionalism in his conception of Europe. French evolvement in the European integration process
was about sharing power on a basis of equality and about putting in place the building blocks for
settling decades of conflicts in Europe. French security and prosperity depended on sharing
economic and monetary power at the European level, in particular with Germany. Moreover
Mitterrand emphasized the importance of a stable franc which was part of the politique de riguer
and derived from the belief in a French leadership in European integration and within the
international monetary system. He believed that the capacity of French negotiators to effectively
play a role in forums like the EC, the IMF and G7 was undermined by a weak franc. In the absence
of a stable franc, to say the least, it was difficult for French negotiators to effectively criticize the
US economic policy management which was believed irresponsible or credibly present proposals
for reform of the international monetary system. In terms of Germany, which prided itself on the
strength of the D-mark, a relationship of mutual trust and genuine partnership was difficult to create
if the French were perceived as lax in their essential standards of economic management (Dyson &
Featherstone, 1999, pp. 75-83).
On the basis of this, it might be argued, that in Mitterrand’s mind the problem with the failure of the
socialist recovery program was not only that it made it difficult for the socialists to ensure
employment and growth, but the failure also elucidated the French weakness relative to Germany.
Mitterrand started to believe that something had to be done. That is to say, Mitterrand interpreted
the 1981-83 crisis as an event that had consequences for the Republic in the long run.
58
Likewise, Dyson & Featherstone point out that the president’s first great theme in the following
years was the pressing need to adapt to the phenomenon of ‘globalization’. Mitterrand’s main
concerns after March 1983 were to pursue the logic of opening France up to Europe and to the rest
of the world. The President adopted the term of modernization with the intention of France for the
challenge of globalization but by doing so within a framework of social fairness (Dyson &
Featherstone, 1999, p. 62-202). His emphasis on the framework of social fairness indicates that he
was, after all, still a politician from the left part of the political spectrum and that his idea of
opening France up was not something that contradicted his socialist background. In fact, as it will
be argued below, he maintained that further European integration could counterbalance the power
of the international financial markets. One can argue that the 1981-83 crisis did not force Mitterrand
to completely replace his socialism with the economic policy formulated as the politique de riguer,
but rather to supplement it with a strategy of European integration.
After two years as president of the Republic Mitterrand determined that the construction
européenne would be the organizing theme of his presidency. In Mitterrand’s mind the construction
européenne was about building a federal European co-operation that would resemble the federations
of the U.S. and South-East Asia. From the president’s point of view the concept contained political,
social, economic as well as cultural aspects. A strengthened EC was the necessary counterweight to
the power of the global markets. European integration, Mitterrand realized, was the place in which
policies to promote modernization and a social dimension had to be pursued (Dyson & Featherstone,
1999, p. 151). It could be argued that Mitterrand’s understanding of the construction européenne
was the ideational setting upon which his way of thinking was constructed. After 1983, it became a
kind of systematized knowledge structure that Mitterrand thoroughly used to conceptualize the
French position in European and global politics. Mitterrand deliberately tried to disseminate his
understanding of the construction européenne, in order to become the dominant ideational paradigm
which penetrated both his own PS and the neo-Gaullist parties.
Thus, Mitterrand gave some very emotional speeches in which he emphasized the uselessness in
insolating France from the surrounding world and argued that only in corroboration with the rest of
Europe (and especially with Germany) might the glory of the French Republic be re-established.
The French population to a large extent supported the construction européenne. An opinion poll of
59
November 1986 suggested that 85 % of the French voters regarded the pursuit of the construction
européenne as ‘important’ or ‘very important’ (Dyson & Featherstone, 1999, pp. 151 - 163).
All this brings us to the difficult question of whether Mitterrand during the 1981-83 crisis (and the
years that followed) went through an ideational conversion process where his basic interest and
identity were altered or whether his decision to introduce the politique de riguer was a relative
simple, rational and strategic response to a changing international context. In general, it is always
difficult to conclude anything unequivocal when it comes to humans’ most basic motives. Yet, it
seems most likely that there were some elements of ideational conversion in Mitterrand’s
interpretation and reaction of the 1981-83 crisis. This is evident from the fact that he saw the
potential consequences of the crisis from a very wide perspective. For Mitterrand the two first years
at the Elysée was not just an ideational crisis – indeed, the events of the first two years also opened
up new possibilities for his presidency. He envisaged the creation of a European construction in
which the French Republic had a permanently prominent position. It seems fair to argue that
Mitterrand’s approach to the 1981-83 crisis was not characterized simply by damage control. This
is by no means the smoking gun that proves that Mitterrand was a subject of an ideational
conversion process, but it indicates, in my opinion, that his interpretation and reaction to the crisis is
based on something more than rational calculations.
5.6 The repercussions of the introduction of the politique de rigueur
In the first years following the introduction of politique de rigueur in 1983 the French political
context was an acute sense of a programmatic vacuum. Some socialists including Mitterrand
believed that there was a need to put in place new ideas that would give a new identity to the PS in
time for its party congress in the autumn 1983 and to minimize the socialist losses in the National
Assembly election of March 1986. From Mitterrand’s point of view the PS lacked a political
identity and an economic strategy of how to handle future challenges after the traditional French
Keynesian program was perceived outdated. The president’s central theme was that the politique de
rigueur was vital but not enough. The president deliberately started an intense process of political
and ideational soul searching in order to develop a new identity and strategy for both his presidency
and the PS (Dyson & Featherstone, 1999, pp. 147-151).
60
From my perspective it was indeed a period of ideational vacuum as it is presented in the theoretical
section of this study. Hence, the president and other leading socialists found themselves in the
unfortunate situation of not possessing legitimate answers to increasingly difficult questions and
were particularly susceptible and open to new ideas. One might say that Mitterrand, most likely
deliberately, tried to create a sentiment within the socialist party that the politique de rigueur was a
vital part of a new identity of the party, but by no means sufficient. Hence, according to Dyson &
Featherstone the challenge for the President and others was to reconcile the March 1983 decision
(the decision to introduce the politique de rigueur) with domestic political requirements and align
the PS behind it (Dyson & Featherstone, 1999, pp. 147-151). My point is that Mitterrand fostered a
situation of extraordinary openness within the presidency and the government; a situation where
ideas, which normally would have been considered as illegitimate or unrealistic, would be taken
into consideration.
Likewise, Dyson & Featherstone argue that the consequence was an intense process of political and
ideational competition to fill that vacuum and develop a new realistic identity for the President and
the PS. Mitterrand cast about for new unifying ideas and political figures who could embody them
and project a revitalized PS to the electorate. In this process, Mitterrand unleashed a process of
competition between prominent socialist leaders such as Bérégovoy, Delors, and Fabius (Dyson &
Featherstone, 1999, pp 147-151).
However, it is important to note that in this time of ideational development there was in particular
one crucial constraint. According to Dyson & Featherstone, the ideational development was guided
by the fact that Mitterrand with the introduction of politique de rigueur in March 1983 had made a
fundamental political decision: the Fifth Republic was to remain within the ERM, adapt to its
constrains and seek out influence within the EC. During 1983, his presidency’s great project was
redefined as Europe, and his collaborators and their ideas were from now on selected from the point
of view of their suitability for the pursuit of this project (Dyson & Featherstone, 1999, pp 147-151).
That is to say, I argue, the success of promotions of new ideas depended on whether they were in
line with the president’s new objective of France as an integrated part of the European integration
process - or to be more accurate; the success depended on whether it was framed and perceived to
be compatible with the new objective.
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After the March 1983 decision Delors, as minister of finance, started to work for a construction of
an ideational linkage between politique de rigueur and French participation in further European
economic and monetary integration. He was among those who put the EMU back on the French
political agenda. Moreover, particularly after the 1983 decision, he worked on reducing the
economic and monetary divergence towards Germany. He supported Mitterrand’s vision of Europe
as the great project, i.e. Delors agreed with the president’s strategy on getting regional and global
power by means of building a stronger EC with Germany and France as the axis. Delors was among
the first that believed that in order to balance the German power in the EC in general and in the
EMS in particular, there was a need for further economic and monetary integration (Dyson &
Featherstone, 1999, pp 147-151).
In order to provide the PS with a new political identity and economic strategy, an economic
research of the minister of finance under Delors directions was initiated. The research produced an
economic rationale for the stable franc in terms of promoting international competitiveness.
Competitive devaluation was rejected as an inflationary process. Particular emphasis was placed on
giving long-term support to the stability of the French currency by enforcing measures to restore
corporate profitability, to decentralize wage bargaining, to strengthen the role of the Banks in
industrial financing and to restructure public spending by underpinning its social dimension. These
measures were created to promote international competitiveness in a socialist framework of
solidarity focused on the firm. With this economic research Delors deliberately tried to fill the
vacuum within the PS by promoting economic polices with a specific Delorian content (Dyson,
1999, pp. 147-151).
What is particularly important with regards to this study, is that in the process of developing these
polices, much focus was directed at the German model of conducting monetary and economic
polices. In general, Delors was more comfortable with the Christian-Democratic and SocialDemocratic ethos of this model than with Anglo-American capitalism. That is to say, as early as in
1983, when this research was conducted, Delors had realized that a French convergence towards the
German model was a sine qua non for EMU (Dyson, 1999, pp. 147-151).
But Mitterrand remained skeptical of his minister of finance, sensing that Delors’ suggestions of
future French socialist economic policies lacked an active role for the state in modernization and in
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promoting social justice and cohesion. This distrust came to a head when Mitterrand used the
Council of Ministers’ meeting of 23 June 1983 to warn Delors of the political dangers of a onesided preoccupation with politique de rigueur. Hence, in July 1984, when it came to putting in place
the new Socialist government to prepare for the Assembly elections in March 1986, Delors was
dispatched to the EC Commission as its President. Fabius became prime minister and Bérégovoy
minister of finance. Both were by Mitterrand considered able to mount the domestic political
counter-offensive at the level of ideas and policy initiatives and to emphasize strong political
control of French policy development (Dyson & Featherstone, 1999, p 149). Nonetheless, the
economic research of the Ministry of Finance under Delors’ directions later in the 1980s appeared
to influence the French economic way of thinking as it formed the lineaments of the co-called
strategy of competitive disinflation. Elements of this strategy were implemented in the period 198689 as one of the French governments main economic programs (Dyson, 1999, pp. 147-151).
It is my assertion that the crisis period from 1981-83 and the couple of years after the introduction
of the politique de rigueur were crucial periods for the French EMU process. As mentioned above,
Mitterrand attempted to give the PS a new identity which was more than just the politique de
rigueur. He deliberately created an atmosphere of ideational openness where practically all new
ideas had a change to be incorporated as the new identity of the PS as long as they were perceived
compatible with Mitterrand’s vision of the construction européenne. It is most likely that Delors,
prompted by Mitterrand’s own openness, thought that it was the time to promote the idea about the
EMU as part of construction européenne. Even though Mitterrand rejected Delors’ initiative, the
EMU had been placed on the political agenda and was to remain there for the rest of Mitterrand’s
presidency. As Dyson & Featherstone claim: ”In 1984, in the aftermath of the March 1983 decision,
EMU nudged its way back onto the agenda in Paris…” (Dyson & Featherstone, 1999, p. 147).
However, the question of when the EMU became part of the French political agenda is contested
among scholars who seek to understand the French EMU process. For instance, Skjalm claims that
the EMU arrived on the agenda relatively late in the process. He argues that it was the failure of the
French attempt to reform the asymmetrical structure of the EMS in the late 1980s that seriously
placed the EMU on the French political agenda (Interview; Skjalm). Yet, in my view, the failure of
the French reform attempt was important (and will be the subject of further analysis) but it is an
overestimation of the importance of this event to state that it was decisive for whether or not the
French political and economic elite started to discuss the relevance of a monetary union.
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6. Analysis of the asymmetry
6.1 Introduction
After the 21 March 1983 realignment, the French socialist government succeeded in avoiding a
further realignment of the franc-mark parity for a long period, despite several speculative attacks,
and the EMS entered a period of extraordinary stability which lasted for 28 months (Gros &
Thygesen, 1992, p. 81). The boundaries of this part of the analysis are marked by the March 1983
decision to tie the franc definitively to the EMS and the May 1988 presidential election which
renewed President Mitterrand’s mandate and made it possible for him to pursue a policy in favor of
further economic and monetary integration.
According to Howarth, most of all, these five years marked an intellectual and political
consolidation of the objectives of a strong and stable franc within the EMS and low inflation, a
consolidation which became accepted across traditional institutional and party barriers. Furthermore,
French policymaking on monetary co-operation in these five years differed from that of the
Socialist government’s first two years principally in that the continued membership in the EMS was
no longer in question (2001, pp. 102-104).
The point of departure for this part of the analysis is the economic and monetary asymmetry
between France and Germany which was particularly conspicuous in the period 1983-88. A separate
focus on the asymmetry is appropriate as it was a significant part of the economic and political
context in which the French EMU process took place. The analysis is structured in two main parts
of which the first focus on the asymmetry prior to the cohabitation, i.e. 1983-1986, and the other
focus on the asymmetry during the cohabitation, i.e. 1986-88. This is done, among other things, in
order to underline how different policy-makers interpreted the asymmetry.
The analysis of this period begins with a brief introduction to the asymmetrical structure of
international economy that the French policy-makers were faced with in the period 1983-88.
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6.2 The asymmetrical structure of the EMS in the 1980s
As we saw in the introduction of this thesis the level of international capital mobility started to
increase in the late 1960s after a historical low level in the first years after the ending of WWII.
However, it was in particular during the 1980s that we saw signs of a globalized financial market.
Hence, the Economist claims; in the future, economists will reflect on the 1980s not as the decade
of the international debt crisis, nor on the dollar’s boom and bust, still less of Reaganomics and
monetarism. According to the Economist, none of the matters marked a decisive transformation in
the forces that drive the world economy. Nevertheless, the 1980s did observe such a transformation.
During those years many of the boundaries between national financial markets dissolved and a
genuinely global capital market began to emerge, this in defiance of the fact that several countries
tried to isolate their economies by restricting cross borders capital movements. The Economist
argues that it is for this development that the 1980s will be remembered. (The Economist, 1992)
As it will be evident in the subsequent section, a central aspect of the period 1983-88 is that the
EMS operated in asymmetrical fashion and that French policy-makers during this period became
more and more discontented by this character of the European economic structure. In terms of the
correlation between capital mobility and the French road to EMU, it is crucial to focus on how the
degree and nature of the economic and monetary asymmetry changed over time and to examine
how the assessments of its effects developed. The below analysis deals with the intense relationship
that has existed in decades between Germany and France; a relationship where asymmetry - until
the introduction of the EMU in 1999 - played a significant role.
Most likely, as a reaction to the increasing level of international capital mobility, the French
socialists, as it will be explained below, introduced draconian capital control mechanisms from
March 1983. Yet, it is beyond the scope of this thesis to analyze the relationship between the level
of international capital mobility that we witnessed in the 1980s and the French decision to introduce
further control mechanisms.
The capital control mechanisms included restrictions which stipulated that foreign bonds and
equities could only be traded by French citizens among themselves. Importers faced strict limits in
their ability to cover their foreign exchange risk, while exporters were required to send home
foreign-currency earnings almost instantly. French nationals could only keep a foreign bank account
65
while they resided abroad. French tourists could take only a small amount of foreign exchange out
of the Republic and were not allowed to use their credit cards. The purpose of these control
mechanisms were to keep domestic interest rates lower than those generally prevailing in the rest of
the world and there was a perception that these mechanisms were necessary if France were not to
abandon the objective of exchange rate stability. The controls of 1983 placed the French economy
in the tightest corset since WWII (Goodman & Pauly, 1993, p. 73)
On this background, it seems reasonable to conclude, from the introduction of the politique de
rigueur in 1983 and beyond, that there was an intensified use of control mechanisms on
international capital movements. Although France enforced controls even before the rigueur the
controls were tightened in this period.
According to Hoffmeyer, France used the capital control mechanisms to isolate the domestic
interest rates from the effects of foreign exchange speculations and the French socialists considered
the control mechanisms as barriers towards the speculative attacks on the French currency
(Interview: Hoffmeyer). Moreover, Gros & Thygesen conclude that even though the concrete
effects of these controls mechanisms is an issue of intense debate and disagreements among
economists and political scientists, capital controls were probably effective in protecting domestic
interests rates in the short run - at least prior to 1987. The control mechanisms were most likely
ineffective in the long run (Gros & Thygesen, 1998, pp. 132-135). In fact, Giavazzi’s &
Giovannini’s analysis of the EMS in the period between 1980 and the mid-1980s indicates that due
to economic divergence among most EC member states the EMS would have broken down if had it
not been for the existence of capital control mechanisms (Giavazzi & Giovannini, 1989, p 18 - 19).
Goodman & Pauly argue likewise during the first six years of the EMS that no French government,
whether of the Right or the Left, was prepared to increase interest rates enough to maintain the
value of the franc in the EMS. Capital controls enabled the French government to keep interest rates
lower than it would otherwise have been possible (Goodman & Pauly, 1993, p. 71).
Basically, the asymmetry inside the ERM related to the central role of the D-mark as the ‘anchor’ of
the system, to which other currencies of the EMS were pegged. The source of the asymmetrical
structure was dual: the low German tendency to inflate and the international role of the D-mark.
The former, combined with the economic weight of the country and the priority attached by the
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other EC partners to exchange rate stability and the fight against inflation enabled Germany for
decades to set the monetary standard for most other countries in Western Europe, France included.
On the other hand, the gradually more significant role of the D-mark as an international reserve
currency placed Deutsche Bundesbank in a key position with respect to the external monetary
policy of the EMS as a whole. The major dispute with the asymmetrical structure of the EMS
concerned the unequal distribution of the burden of intervention and adjustment. That is to say; the
burden of supporting the stability of the exchange rate system rested disproportionately on the
shoulders of the countries with the weaker currencies - including France (Tsoukalis, 1993, pp. 198199).
In order to conceptualize the nature and the development of the asymmetrical structural relationship
between France and Germany it is useful to integrate the CMH in the analysis. In this section of the
analysis, it will be made clear that within the first couple of years after the introduction of the
politique de rigueur the socialist government was very focused on the maintaining as much of the
power to maneuver in economic policy-making as possible. They therefore implemented, as we saw
above, a variety of different restrictions on cross-border flows of capital which were to some extent
successful in protecting the Fifth Republic of what the Socialists believed was the negative effects
of foreign exchange speculations. Consequently, I argue, the feasibility curve in this period was
relative steep, at least compared to the situation later in the 1980s, indicating that the socialists
managed partly to isolate the French from the German economy (e.g. keeping interest rates below
their free market value) while maintaining the stability of the franc. This means that within this
period France, despite the German dominance, had relatively little monetary convergence with its
neighbor on the other side of the Rhine.
Nevertheless, this situation altered within a few years when the numbers of speculative attacks on
the franc increased. This was mainly, as it will be argued below, due to the fact that France and
Germany gradually started to become more financially integrated and especially as the degree of
capital mobility between them increased. In the CMH this can be illustrated with a feasibility curve
that collapses towards the x-axis.
There were several factors that led to the increased level of financial integration. The most
conspicuous was the decision of the Socialist government to adopt substantial liberalization of its
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internal financial markets in 1984. This liberalization process was intended to deepen French
financial markets, strengthen the financial position of French firms and allow the Banque de France
to control the money supply, not with credit ceilings, but by manipulating interest rates. The
government planned not only to eliminate credit control and domestic capital restrictions, but to
create new money, bonds and futures markets (Goodman, 1992, p 126-141 and Goodman & Pauly,
1993, pp. 73-75). Yet, it is important to notice what Andrews argues ”Despite similarities between
them, it is analytically useful to distinguish between regulation of national financial markets and
regulation of capital movements between them. In the case of France, for example, substantial
market liberalization took place beginning as early as 1984, but capital controls were not
abandoned until 1990” (Andrews, 1994, p. 200). This national French process of financial
liberalization resulted in the extended development of French capital markets which greatly
increased France’s financial integration into the world economy and made it more difficult to
restrict cross-borders flows of capital (Goodman, 1992, p 126-141). In addition, the gradual
improvements in communications and information technologies strengthen the financial integration
as it enhanced the capacity of capital asset-holders to evade the jurisdiction of unfriendly regulators
(Andrews, 1994, pp. 198-201).
Apart from this increased financial integration between France and the surrounding world, notably
Germany, there are other factors which increased the pressure on the franc and made it more
problematic to conduct a monetary and economic policy that did not converge towards the German
polices. There was, prior the election to the national assembly in March 1986, profound and
increased pressure on the French currency because of both accumulated inflation differentials
between the German and French economies and a fall of the dollar (The fall of the dollar is
important here due to the fact that it concerned flows of capital from the dollar to the D-mark)
(Howarth, 2001, pp. 84-85).
According to Thygesen, it became more and more problematic to isolate the French economy from
the surrounding world - and notably Germany. That is to say; when the asymmetry within the EMS
increased, the trade-off between exchange rate stability and the pursuit of independently chosen
monetary policies became more obvious to the French policy-makers (Interview: Thygesen).
Hence, when Chirac (neo-Gaullist) became prime minister in the spring of 1986 the new
government was faced with several waves of speculation against the French currency. The
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government was therefore forced to both devaluate and increase interest rates (Howarth, 2001, pp.
84-85). Consequently, I shall argue that gradually France started to loose its power to maneuver in
economic policymaking, among other things due to capital mobility.
It can be argued that the core of the asymmetry is that France was a subject of the mechanism
outlined in the both the CMH and the inconsistent triangle. That is to say, France had to choose
between two of the three objectives: exchange rate stability, domestic monetary independence or
international capital mobility. According to Skjalm, Germany - due to its role as the dominant
country in the EMS - had the privilege of being able to pursue all three objectives simultaneously
(Interview: Karsten Skjalm).
6.3 The interpretation of the asymmetry in general
This asymmetry between France and Germany can be conceptualized as a structural aspect of
international relations which was decisive for the French policy-makers’ strategies towards the
European integration process. However, as the theoretical section depicts; actors’ formulations of
responses to changing structures cannot be analyzed without consideration of the ideational factors
which are basis for human behavior. In other words, it is important to analyze how actors perceived
the asymmetry and the general changed political/economic structures including the consequences
they figured out and what choices they made. All this depended deeply on the social and political
context they were part of.
Dyson has formulated this approach in very clear language: “The reality, here in the form of a
structural condition, does not simply influence actors’ behavior as a traditional rationalistic
position would claim” (Dyson, 1994, p. 262). He argues furthermore that financial changing
structures only are subject to actors’ ‘perception, interoperation and calculation’ (Dyson, 1994, p.
262).
Even though the French policy-makers’ responses to the asymmetry problem varied throughout the
period 1983-88, and although the purpose with this section is to map those different responses, it is
possible to formulate some general themes which includes most responses.
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During the 1980s, the problem of the asymmetry became gradually more and more evident for the
French political and economic elites and reached its highest point during the second phase between
1983 and 1987 (Tsoukalis, 1993, pp. 198-199). The asymmetry problem united French economists,
officials and policy-makers in this period behind a notion of fairness in assigning responsibility for
intervention to support an exchange-rate system. Most policy-markers were frustrated by the
German dominance in the EMS as they felt that the French economic performance could match the
German and there was therefore not any reason why the French Republic should be second to the
economy on the other side of the Rhine (Interview: Thygesen). Moreover, there was a broad
underlying and consistent agreement that the French negotiating position on a coming treaty
amendment should prioritize the problem of the asymmetry (Dyson & Featherstone, 1999, p. 84).
6.4 The interpretation of the asymmetry prior to the co-habitation
The first part of this analysis shall focus on Delors’ and Bérégovoy’s reaction and interpretation of
the asymmetry. Those two policy-makers are particularly interesting due to their very different
approaches to handling the asymmetry and therefore serves to illustrate the key assumption’s of this
analysis; that different actors have different perceptions of the asymmetry and in order to
understand how the asymmetry has influenced the French EMU process, we have to understand
such perceptions. From my perspective, Delors and Bérégovoy represent two poles of how to react
and interpret the asymmetry. The key policy-maker in this part of the analysis is Mitterrand and the
analysis will therefore concentrate on his perceptions, reactions, and interpretations of the
asymmetry.
6.4.1 Delors’ and Bérégovoy’s interpretation
After the French socialists in 1983 had decided to stay within the EMS Delors started to work for a
construction of an ideational linkage between the politique de rigueur and French participation in
further European economic and monetary integration. From my perspective, Delors was the first
prominent policy-maker who started to put the EMU back on the French political agenda after years
of darkness.
The following analysis will show that, in practice, all leading socialist gradually supported
Mitterrand’s vision of Europe as the great project and that Delors was no exception. However,
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Delors’ vision and strategy in the couple of years after the introduction of the politique de rigueur
was somewhat different than most other leading policy-makers.
Most of all, as argued by Abdelal, Delors was among the first that believed that in order to balance
the German power in the EC in general and in the EMS in particular, there was a need for further
economic and monetary integration. Moreover, he explicitly stated that he preferred to live in a an
EMU zone as opposed to in a D-Mark zone, meaning that that he would not accept the German
dominance or the uneven burden of adjustment and he saw the increase in cross-border flows of
capital as a threat to French sovereignty (Abdelal, 2006, pp. 6-13). From this, it can be argued that
Delors considered the German economic dominance incompatible with the French ambition of
being a powerful actor in regional and global politics - and a radical solution, in the form of an
EMU was a useful solution. What is important here, and what separate Delors from other politicians
of his age, is that Delors saw this radical solution relatively early – and earlier than policy-makers
such as Fabius, Bérégovoy and Mitterrand. From my perspective, Delors maintained this approach
of how to handle this asymmetrical structure between German and France both as minister of
finance and as president of the European Commission. As it will be seen below, one of the
analytical challenges of this part of the analysis it to estimate whether Delors managed to make an
ideational linkage between the asymmetry and the French participation in the EMU. This issue has
been of significant dispute among scholars.
As we saw in the preceding analysis, Mitterrand distrusted Delors and the Ministry of Finance when
it came to the work of giving a new identity to the PS Mitterrand considered Delors too preoccupied
with the economic aspects of this work. In terms of the influence of the asymmetry on the French
EMU process, it is interesting to see that neither Fabius nor Bérégovoy were disposed to set French
policy in a longer term framework of EMU and were less inclined to base domestic policy on the
German model as Delors had done (Dyson & Featherstone, 1999, pp. 147-151). That is to say, with
Mitterrand’s critique of the research of the Ministry of Finance, his dispatch of Delors in 1984, and
the appointments of Fabius and Bérégovoy indicate that the president saw no direct link between
the problem of the asymmetry between France and Germany and further monetary and economic
integration (including an EMU). Hence, there are no indications in the couple of years after the
introduction of the politique de rigueur that Delors managed to promote the idea that the French
problem with the asymmetry could successfully be resolved with the formation of an EMU.
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Bérégovoy’s reaction and interpretation of the asymmetry were very different than Delors’ as it will
be evident below. According to Dyson & Featherstone, Bérégovoy was in the period 1984-86 an
important figure in the French socialist government as he played a crucial role in reinforcing the
policy of the stable franc. He saw a political advantage in associating the PS with monetary stability
and financial rectitude and he deliberately used the French membership of EMS for that purpose.
(Dyson & Featherstone, 1999, pp. 147-151).
Hoffmeyer points out that Bérégovoy wanted to balance the German economic power in the EMS
by conducting an economic and monetary policy that was as austere as the policy of Germany.
From Bérégovoy’s point of view, this was the only way that France could obtain a state of
equilibrium with Germany. Hence, a French devaluation was out of the question and he had a
personal ambition of being the first minister of finance of the Fifth Republic not to have devalued
the franc (interview: Hoffmeyer). Monetary stability, including the equilibrium towards Germany,
was for Bérégovoy ultimately a matter of domestic political discipline. What is important for this
study is that in relation to the ERM, the EMU played no serious role for Bérégovoy and he was not
intellectually convinced about the strength of giving primacy to the EMU (Dyson & Featherstone,
1999, pp. 147-151). It can therefore be argued, from the perspective of this author, that Bérégovoy’s
reactions and interpretations of the changed economic situation after the introduction of politique de
rigueur did not foster a renewed belief on the relevance of an EMU as it had done for Delors and
later did for the President. That is to say, the new situation with intensified problem of the
asymmetry did not, in Bérégovoy’s mind, necessitate an EMU. The problem could be resolved
within the existing EMS with an intense effort to reestablish the credibility of the French economy.
6.4.2 Mitterrand’s interpretation
Introduction
In order to understand Mitterrand’s reaction and interpretation of the asymmetrical structure
between France and Germany (and French relations to the surrounding world), it is necessary to
integrate an analysis of Mitterrand’s ideational and personal background. This background is
important for in order to understand Mitterrand’s role in both the period prior to and during the
cohabitation.
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According to Howarth Mitterrand was a policy-maker with a well-developed strategic sense that
enabled him to make use of the occurrences he was faced with in his fourteen years as president of
the 5th Republic. He had a genuine understanding of the political game with its many complicated
aspects, but lacked insight into and interest in the economic characteristics of the international and
national politics. For instance, one observer of the SEA negotiations noted that the French,
including the president, had poor understanding of the full implications of financial integration for
the formation of French monetary policy (Howarth, 2001, p. 92).
Hence, one might say that in Mitterrand’s mind, the European integration process was nothing more
than politics and that Mitterrand above all was a policy-maker that was guided by general political
objectives and did not spend much time trying to understand the technical or economic aspects of
the European integration process.
Moreover, as Dyson & Featherstone point out, Mitterrand was most at home situating EMU and
other aspects of the European integration process in historical discussions about European
integration, reconciliation with Germany and ensuring no future war in Europe. In this medium he
was the masterful craftsman, happy with the materials with which he was working. Beyond that role
Mitterrand was a mistrustful, watchful observer of a process of negotiation of whose technical
content he had little understanding (Dyson & Featherstone, 1999, pp. 97-98). Mitterrand based his
strategy as a political leader on an interpretation of history of Europe and this led him to conclude
that European statesmanship was a matter of seeking out opportunities, whenever they might be
found and of keeping up the momentum. When he took office, Mitterrand did not have a clear
vision of what a politically unified Europe might look like, nor did he during his term develop a
clear vision on this matter (Dyson & Featherstone, 1999, pp. 125-126).
Mitterrand became convinced about the relevance of an EMU
As mentioned above, Mitterrand emphasized the idea of establishing a strong European community
as a counterweight to globalization. Mitterrand turned to Dumas, Guigou and Attali to develop ideas
on how to handle globalization (Dyson & Featherstone, 1999, pp. 147-156). In general, based on the
analysis in above sections, one can argue that Mitterrand was convinced that the construction
européenne, without a particular focus on a monetary dimension, was the correct strategy to for
73
reestablishing the French influences in European or global politics. Yet, as the below analysis
demonstrates that began gradually to change from 1984 and onwards.
From Mitterrand’s perspective, the European area was the place where the policies to promote
modernization and a social dimension had to be pursued and he therefore confirmed his support for
the Draft Treaty on the European Union adopted by the European Parliament. At the Fontainebleau
European Council in June 1984, he sponsored the idea of a committee on institutional questions. A
politically reformed EC was seen by the president as the precondition for his construction
européenne. The objectives of the reform initiatives were to clear away long-standing problems, the
EC budget issue in particular, in order to open up space for new European initiatives and to
establish the president as a European statesman of the first rank (Dyson & Featherstone, 1999, pp.
147-156) .
In relation to this, just prior to Fontainebleau, Dumas (who was more inclined than Fabius or
Bérégovoy, or at this stage, Mitterrand, to prioritize EMU) conducted a wide-ranging review of
European policy. It is particular important for this study that this Dumas Memorandum gave
attention to the EMS as a condition of economic independence from the U.S. especially as a means
of escape from dependency on the U.S. dollar and U.S. interest rates. The Memorandum stressed to
the need for a more concerted policy and, eventually, a European currency as a better protection
against external risks. This theme was to figure strongly in French positions on the EMU from 1988
onwards. In addition, the Dumas Memorandum argued that the EMS enabled a more effective
European contribution to the reform of the international monetary system. That reform had,
according to the French to be based on a ‘rebalancing’ between its three main ‘pillars’ – the dollar,
the yen and the ‘écu’. The Memorandum looked forward to the eventual creation of a European
Monetary Fund with real powers, permitting the defense of European currencies against the U.S.
dollar thus making the ‘écu’ a proper European and international currency. In his Memorandum,
Dumas sketched French proposals to remedy the weakness in the functioning of the EMS and
highlighted how within G7, at Versailles and Williamsburg, the French socialist government had
sought to ensure that the EC spoke with one voice on international monetary issues. In the first
place, the Memorandum sought to reinforce economic policy convergence, but very much phrased
in terms of French economic ideas and of reciprocal economic concessions (Dyson & Featherstone,
1999, pp. 147-156).
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As we saw above, the French strategy of conducting Keynesian economic policy in one country was
perceived as an illusion after the experience of 1981-83 and in the years that followed, the French
government and president started to rethink the position of the 5th Republic in world politics. The
Dumas Memorandum, which was approved and instructed by Mitterrand, can be seen as an
indication that leading French socialists from the mid-1980s started to reflect on whether they
should integrate a strong economic and monetary dimension in the construction européenne (Dyson
& Featherstone, 1999, pp. 147-156). Indeed, Mitterrand had earlier stressed that the construction
européenne was about political, social and cultural matters and not so much economic and
monetary issues. With the Dumas Memorandum an ideational linkage between such issues and the
construction européenne was made. That is to say, Mitterrand’s adoption of the Memorandum can
be seen as a noticeable example of the how the president in the mid-1980s started to perceive
economic and monetary issues as something that could be used as a measure to improve the French
position in global politics. In other words, construction européenne with a clear integrated monetary
dimension was the precondition for a strengthened France.
The Dumas Memorandum and the president’s adoption hereof can be seen as the French reaction
and interpretation of a new the economic and monetary globalization with which France was faced
in the 1980s. By the end of 1985, the EMU became part of the political French agenda.
At first glance such a relatively rapidly ideational change can be seen as dramatic if one considers
that an EMU entails the loss of some degree of monetary sovereignty (at least formally). However,
from my perspective the key to the understanding of Mitterrand’s change in attitude towards the
EMU can be found in his ideational and personal background. In Mitterrand’s mind, French
participation in a monetary union is presumably not considered as radical as most other policymakers would believe it to be, at least if one consider that he was not interested in or even
understood economic issues. This can in particular be illustrated by an event that happed a few
years later. In the political negotiations concerning the actually design of an EMU, Mitterrand was,
according to Skjalm, indifferent on the issue of whether an EMU should be constructed on a basket
of parallel currencies or whether it should be a single currency. He was indifferent because he
simply did not understand the differences between these two types of monetary regimes and even
more important; he was unable to comprehend the different consequences of the design of an EMU
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(interview: Skjalm). It seems as if Mitterrand started to integrate an EMU in his vision of
construction européenne only because he saw the political perspective of further economic and
monetary integration. From my perspective, Mitterrand’s rejection in 1983 of Delors’ ideas of EMU
as part of a new identity of the PS was, most likely, not because he consider Delors’ ideas as too
radical, but because the president was at that time unable to see the political potential in an EMU.
That is to say, he did consider French involvement in further economic and monetary integration as
something that could balance German power and increase French influences. Yet, that started to
change the following year. However, it is important to stress that Mitterrand’s reconsideration of the
relevance of an EMU was, at least partly, stimulated by Dumas and the Dumas memorandum even
though it is difficult to determine the precise personal motives for Mitterrand’s turnaround. One can
argue that asymmetry influenced Mitterrand’s perceptions of the relevance of an EMU in a very
indirect manner.
6.5 The interpretation of the asymmetry during the cohabitation
6.5.1 Introduction
The national assembly election in 1986 ushered in a new epoch in the history of the 5 th Republic.
For the first time the government and the president came from opposite sides of the political
spectrum: Chirac was a neo-Gaullist and Mitterrand was a socialist. The following two years of
French politics was a period of cohabitation in which, as it will be argued below, particular the neoGaullist party, RPR, started to change their attitude towards the EMS and the EMU. The analysis of
the asymmetry during the cohabitation sets off with a short review of how the socialists interpreted
the development of the asymmetry as this is important for the understanding of the neo-Gaullists’
interpretation of the asymmetry.
The political and economic context for the neo-Gaullists was, as we saw above, years of socialist
attempts to balance the German economic and monetary power with the politique de riguer.
According to Hoffmeyer, especially Bérégovoy was convinced that this strategy would fulfill the
French ambition of increased economic and political power. It is important to notice that the
socialist government had conducted the politique de riguer in such a convincing manner that they
had to some extent obtained economic stability. Thus, France achieved to stabilize the parity
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between the franc and the D-mark from the mid 1980s except for the devaluation in 1986. Moreover,
also the strategy of disinflation was very successful (Hoffmeyer, 2005, p. 79-89).
However, as Hoffmeyer points out, the problem with the politique de riguer was that the stability it
has produced did not manifest itself on the international financial markets. In a turbulent period of
time, the financial market still preferred the German currency at the expense of the French currency.
Hence, the French monetary authority was in order to maintain the parity of the franc forced to
maintain interest rates at a higher level compared to BUBA. As we saw above, from Mitterrand’s
point of view this structural difference between Germany and France was absurd and incompatible
with the president’s belief in a naturally equal relationship between the two states. Furthermore, it
was counterproductive to Mitterrand’s endeavor of promoting the French Republic as a powerful
and reliable partner in European and global politics (Hoffmeyer, 2005, p. 79-89). In addition, from
the mid-1980s and onwards, the French economic and political elites, including the President,
became more and more frustrated by the German dominance (Hoffmeyer, 2005, p. 79-89).
However, as Dyson & Featherstone argue that even though Mitterrand from the mid-1980s was
increasingly frustrated with the German monetary dominance and realized that the German
powerful economic position in Europe worked against his idea of construction européenne, he
disagreed with the view of the Quai d’Orasy 3 which primarily much focused on controlling
Germany in France’s national interest. Indeed, the President was cautious to distance himself from
this conception of European integration and sought to play down theme of seizing power from
Germany (Dyson & Featherstone. 1999, pp. 71-98).
I agree with Dyson’s & Featherstone’s contention that Mitterrand approached the asymmetry
problem by working for a European Monetary Union, but did it without detailed considerations of
the substance or the consequences of such a Union. Mitterrand saw the asymmetry problem as more
wide-searching than mere economic and monetary issues and was subsequently more focused on
sharing power on a basis of equality. He wanted to construct a framework, the EMU, which enabled
France to use the shared economic and monetary policies (shared with mainly the Germans) as a
means to be a powerful actor in international relations (Dyson & Featherstone. 1999, pp. 71-98).
3
The French Ministry of Foreign Affairs
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Again it is important to note that such an approach to European integration in general and the
relationship to the German neighbor was by no means widely shared at the political level - or in the
foreign and finance ministries. Hence, according to Dyson & Featherstone, actors like Boissieu and
Trichet had evolved into convinced Europeans, but this conviction stemmed from a realistic view of
French national interests - compared to that of the president. The substitute for French leadership of
construction européenne was a ‘German Europe’: Europe as a ‘D-mark’ zone. An ‘écu zone’ was
the preferred alternative. From Mitterrand’s point of view the security and prosperity of the republic
depended on sharing economic and monetary power at the European level with Germany (Dyson &
Featherstone. 1999, pp. 71-98).
6.5.2 The neo-Gaullist interpretation of the asymmetry
After the National Assembly election in 1986 a new neo-Gaullist government took office. The new
prime minister was Chirac and he pursued a tougher, more nationalist approach on the ERM and
EMU in an approach designed to reflect and appease the more Euro-skeptic elements of the neoGaullist Party, RPR, by means of demanding that Germany meet its requirement and treat the EMS
as a symmetrical system of adjustment (Dyson & Featherstone, 1999, p. 156).
In April 1986, the new government devalued the French currency (6%) in order to create a growth
and momentum in the French economy which suffered from high levels of unemployment. Yet, it
was most likely an injudicious action as it increased the mistrust to the French economy among the
actors within the financial market. Moreover, it challenged the reliability of the politique de riguer
which the socialists had based their hopes on (Bérégovoy especially) (Hoffmeyer, 2005, pp. 79-84).
Dyson & Featherstone argue that the members of the neo-Gaullist party was among those French
that were disposed to blame the inadequacies of the general international economic structure, and in
particular the asymmetry of the EMS, for the problems of the franc rather than to focus on domestic
causes (to some extent it cannot be excluded that they had a point). In contrast to Germany, there
was a common belief that monetary stability was determined by the quality of international and
European co-operation. The typical German position was that monetary stability had first to be built
at home (Dyson & Featherstone, 1999, pp. 67-75).
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What is particularly important in terms of this is that Chirac, according to Hoffmeyer, reacted on the
economic and monetary asymmetry between France and Germany in a very direct and
confrontationist manner. He informed The German Chancellor Kohl that this asymmetrical structure
had to be altered otherwise France would leave the EMS (Hoffmeyer, 2005, p. 83). In general,
Chirac conducted a war of words between Bonn and Frankfurt, putting the Germans under heavy
emotional pressures. From Chirac’s point of view the problem of the franc had nothing to do with
the French economic and monetary fundamentals. The problem was due to the failure of the BUBA
to take appropriate measures to defend the ERM from speculation consequent on disequilibrium
produced by the falling U.S. dollar (Dyson & Featherstone, 1999, p. 161).
As the above analysis points out, the French policy-makers had fundamentally different beliefs
about the appropriate reactions to the asymmetrical structures of European and international
relations. It can be argued that Bérégovoy and Chirac represented two extremes views; Bérégovoy
assumed that is was possible to match the German power with the implementation of the politique
de riguer and without alteration of the EMS whereas Chirac believed that it was the Germans that
was responsible for the problem of the franc and the EMS had to be reformed. This highlights the
importance of attempting to understand France; some scholars tend to view the Republic as more or
less one unit in international relations which speaks with one voice and has coherent interests and
strategies. It is my argument that an understanding of the different interpretations of the asymmetry
shall provide us with important insights as to how the international capital mobility has influenced
the French EMU process.
6.5.3 Demanding EMS reforms
Before turning to how the neo-Gaullist dissatisfaction with the asymmetry was put into practice it is
important to recapitalize Mitterrand’s ideational and personal background and to consider how this
influenced the cohabitation.
As we saw above, the asymmetry between Germany and France was from the president’s point of
view absurd and incompatible with his ambition to reestablish France as a factor of power in
international relations. He recognized earlier than most other policy-makers (notably most of
leaders of RPR) that the EMU was an appropriate response and a method to interpose the German
dominance. This idea of Europeanization of the economic and monetary polices became as early as
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the mid-1980s part of his construction européenne. On the other hand, as Hoffmeyer argues, the
making of the EMU or the actual design of the EMU was not in the president’s interest. For
Mitterrand the important objective was primarily that the monetary policy became a common
European issue (interview: Hoffmeyer).
As pointed out above, Mitterrand was above all a policy-maker who was guided by general and
broad formulated political objectives. As Dyson & Featherstone hold: “Mitterrand was most at
home situating EMU in historical discussions about construction européenne, reconciliation with
Germany, and ensuring no future war on in Europe … In this medium he was the masterful
craftsman, happy with the materials with which he working. Beyond that role Mitterrand was the
mistrustful, watchful observer of a process of negotiation of those technical content he had little
understanding” (Dyson & Featherstone, p. 98, 1999). One might say that Mitterrand saw his role
in French politics as the statesman who ought to outline the great policies of the 5th Republic and he
did not spend much time trying to understand the technical or economic aspects of the European
integration process.
From my perspective, the precise consequence of this approach of the presidency is difficult to
determine, but there are some indications that this lend a particular character to the cohabitation. In
particular, it is important to note that Mitterrand, according to Howarth, chose not to interfere in the
formulation of the French policy on EMS even though elements of the EMS, mainly institutional
matters, fell within the reserved domain of presidential power guaranteed in the French Constitution
(Howarth, 2001, p. 83). This corresponds to the fact, I argue, that Mitterrand was not particularly
interested in and did not understand the detailed aspects of the economy and it is therefore likely
that he refused to take part in the comprehensive considerations about how to reform the EMS.
Moreover, it is most likely that he did not understand or tried to understand the possible
consequences of the reformed EMS.
It seems reasonable to argue that from Mitterrand’s point of view the European integration process
was basically about ensuring peace and stability on the continent, and from the point of view of that
perspective one might imagine that discussions and disputes on how to make the EMS more
symmetrical were not considered relevant. Furthermore, Mitterrand’s refusal to take part in the
EMS reform debate are probably rooted in the fact that several years prior to this debate he had
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decided to make the EMU part of his construction européenne. He therefore had no interest in
reforming a system that would be abolished with the introduction of the EMU. In addition, there are
no indications that the president considered the reform attempt to be an obstacle to this part of his
construction européenne.
The point is that with Mitterrand’s decision not to interfere with the EMS reform, he made a unique
division of labor between the government and the presidency. That is to say, the decision gave room
for the more nationalist approach of the neo-Gaullist party, PRP, making it possible for both Chirac
and his minister of finance, Balladur, to conduct a tough, direct and confrontationist policy towards
the Germans without the risk of being criticized by the president. Basically it can be argued that the
RPR approach to the EMS reform process hardly corresponds to Mitterrand’s dissociation of the
theme of seizing power from Germany. This dissociation was based on the idea of sharing power
with Germany instead of controlling Germany in French’s interest. On the basis of this, it can be
argued that Mitterrand’s decision not to interfere in the EMS reform excluded a potential collision
between the neo-Gaullist’s relatively aggressive approach to the negotiation of the EMS reform and
Mitterrand’s more reconciling approach; collision that could have decreased the French credibility
in the negotiation of the EMS in 1987.
The new elected neo-Gaullist government attempt to reform the asymmetrical structure of the EMS
stemmed from similar, yet modified, objectives compared to those pursued by the French in the
EMU negotiations in the early 1970s: increased monetary stability without unacceptable economic
and monetary convergence. In the early 1970s, the French opposed any convergence at all whereas
in the 1980s they opposed full convergence to German standards. More specifically, the objectives
of the attempt in the 1980s was to improve EMS support mechanisms, establish the principle of
German responsibility through the strengthening of the divergence indicator and guarantee German
participation in intramarginal interventions and interest rate co-ordination. The overall objective
was to increase French room to maneuver in economic policy-making by means of increasing the
co-ordination of policies and the mutual obligations within the EMS, thereby decreasing the de
facto autonomy of policy-making, but increasing positive monetary power4 (Howarth, 2001, p. 86).
4
Positive monetary power means that a state is able to influence or even determine the behavior of other states.
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For Balladur, who was the key policy-maker at that time, the problems of the franc in the EMS
(notably, the asymmetry problem) were linked to the depreciating U.S. dollar and the general
international monetary system. One of the key events in international monetary developments in the
late 1980s, seen from a French perspective, was the Louvre Accord from February 1987. This
Accord, which objective was to stabilize the international currency market and halt the continued
decline of the U.S. dollar went at least some of the way in terms of meeting the French demands
and was therefore considered a small victory for French diplomacy. The Louvre Accord was seen as
an important means of taking pressure of the ERM consequent on the instability of the U.S. dollar.
In doing so, it opened up a new scope for a more energetic policy on EMS reform (Dyson &
Featherstone, 1999, pp. 159-162).
However, it is important to stress that in the period prior to the 1987, the general attitude among
neo-Gaullists (including Balladur) was that if the franc had to be kept in the ERM for power and
economic reasons, then the EMS should be reformed to serve French economy better. Balladur and
most other leading neo-Gaullists would only accept the creation of a single currency except as part
of a very long term strategy (Howarth, 2001, pp. 83-113).
From this it can be argued that at that time the reactions and interpretations of the asymmetrical
structure between France and the surrounding world did not include thoughtful speculations on the
type of EMU that became a reality twelve years later (at least not within the neo-Gaullist RPR)
Unfortunately for the French government, in January 1987 foreign-exchange-market pressure led to
devaluation of the franc in the ERM. This episode was very serious, and Chirac took the
opportunity to turn it into a crisis in Franco-German relations. Chirac conducted a war of words
between Bonn and Frankfurt, putting the Germans under heavy psychological pressure. Balladur
exploited the crisis to get reform of the EMS firmly on the agenda. The neo-Gaullist leadership was
very forcefully emphasizing on the problem of asymmetry in the EMS and stress on interest-rate coordination and a position for the franc in the EC central bank reserve holdings. Behind this very
emotional reaction towards the asymmetry was a relatively nationalistic political outlook (at least
compared to the president and the PS) that was inherent in the RPR. In relation to this, Balladur
started to formulate some more concrete ideas for the EMS reform. Balladur outlined three
proposals: Firstly, the ECU had to be a genuine currency. Secondly, EC central banks had to make
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more use of each other’s currencies as reserve. Thirdly, harmonization with the U.S. dollar and the
Japanese yen (Dyson & Featherstone, 1999, pp. 160-161).
6.5.4 Basle-Nyborg agreement
After several years of arguing for a reform of the EMS and after Chirac had informed Chancellor
Kohl that France would abandon the EMS if nothing was changed, the negotiations for an EMS
reform began (Hoffmeyer, 2005. pp 79-84). There were strong pressures from mainly France and
Italy for a correction of the asymmetrical nature of the system. The negotiations produced the socalled Basle-Nyborg agreement of September 1987 (Tsoukalis, 1993, pp. 198-205). At the summit
at Nyborg in Denmark, the Germans finally agreed to the principle of strong currency country
participation in intramarginal interventions. The French had high expectation for the agreement; the
goal was once and for all to eliminate the asymmetrical burden of adjustment within the system.
Namely, the system had to be changed so it was no longer mainly the weak currency countries
(notably France) that had to take action to maintain parities. However, the French were not ready to
accept the implied loss of de jure autonomous control; the changes had to be made within the
context of the existing EMS (Howarth, 2001, pp. 83-112).
The Basle-Nyborg agreement of September 1987 was highly technical in content and basically
conducted by the EC central bankers. Yet, Balladur carefully observed the negotiation as it was a
chance for him to demonstrate French and in particular the neo-Gaullist leadership of construction
européenne. The ambition was, apart from the change of the asymmetry, to gain domestic political
profile for the government and for his own political career (Dyson & Featherstone, 1999, pp. 162163).
In brief, the Basle-Nyborg agreement concerned regulations for the settlement of accounts of the
ECU, possibilities for financing of intramarginal interventions (i.e. interventions before reaching the
bands limits) and regulations with regard to credit. Moreover, the very short credit period was
extended with a month. It was agreed to finance intramarginal intervention with the use of a credit
system (it was not an obligation). Finally, an expansion of the use of the official ECU. In addition,
there was an objective of increased economic convergence between EC member states, more
flexibility in the use of the existing instruments/mechanisms and a more intensive supervision of the
economic and monetary development (Hoffmeyer, 2005. p 83).
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It is important to notice that a German condition for accepting the agreement was that France had to
start removing its variety of restrictions on cross border capital movements (Howarth, 2001, pp. 83112). Consequently, I shall argue that the French government was forced to embark on a process of
international liberalization, - however reluctantly. This process which was intensified due to French
participation in the SEA which included a liberalization of cross-border capital movements. From
this it can be argued that the gradual removal of capital control between France and the surrounding
world was a result of the Internal Market Program and the Basle-Nyborg agreement produced an
altered monetary structure in the EC. Hence, the possibilities for capital to cross the French borders
were increased and the French economy internationalized. That is to say with the gradual removal
of capital control, the French monetary authority lost the opportunity to ‘throw grit into the
machinery’, in order to isolate the French economy from external constrains. This can be illustrated
with the CMH with the feasibility curve collapsing towards the x-axis. On the other hand, the
ambition of the Basle-Nyborg agreement was to make a system where EMS states were more
willing to assist each other in a monetary crisis by means of interest coordination and improved
intramarginal interventions.
6.5.5 French disappointment
In general, from Balladur’s point of view the Basle-Nyborg Agreement constituted an improvement
to the credit and intervention mechanisms of the EMS. Nonetheless, it was by no means the
fundamental reform for which the French government earlier had called. In particular, there were
two gaps; a failure to correct the fundamental problem of asymmetry at the heart of the EMS and a
continued lack of a concerted policy towards the U.S. dollar (Dyson & Featherstone, 1999, p. 163).
However, in September 1987 the French negotiators had no illusion about the lack of importance of
the agreement for the structure of the EMS (Interview: Hoffmeyer).
The financial markets were not impressed by the reform agreed upon in the autumn of 1987, and it
gradually appeared as a minor technical adjustment and thus did not serve to illustrate the
attractiveness of the EMS currencies as envisaged by the French. Speculations against the French
currency continued relentlessly. Within a few months, the French came to realize that the NyborgBasle Agreement was not what they had imagined (Howarth, 2001, pp. 83-112). Hence, the
dissatisfaction with German dominance of European monetary policy continued. In January 1988,
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Balladur circulated a letter to his EC counterparts suggesting that it was time to talk about a
European Central Bank that would be responsible for a common currency, the ECU. In the letter
Balladur argued that EC should evade a system where one state set economic and monetary policies
for all and criticized the German economic and monetary policies for hampering growth (Sandholtz,
1993, p. 29).
In January 1988, Balladur presented an important memorandum to his EC counterparts in which he
argued for rapid pursuit of the monetary construction of Europe. He de facto accepted the logic
behind the creation of a single currency zone, all the while providing few details on how this could
be realized. What is important here is the fact that Balladur’s proposal was not just another reform
of the existing monetary system in Europe as the reform attempt of September 1987. The
memorandum went well beyond the institutional reform of the EMS although at that time no one
knew what it could entail (Howarth, 2001, pp. 83-112). Howarth has formulated this decisive
moment for Balladur and the neo-Gaullists as follows: “The failure of the French reform efforts to
fundamentally alter the asymmetry of the EMS demonstrated to key policymakers that their core
European monetary power motives could not be served in the context of the existing system”
(Howarth, 2001, p. 84).
Based on the above analysis, it can be argued that this perceived failure of attempting to gain
influence on the economic and monetary polices in Europe with an EMS reform became a turning
point for the neo-Gaullists. The preceding analysis indicates that many key policy-makers within
the RPR party went through a baptism of fire in trying to reform the EMS in the two years they held
office. The result was a process of policy reflection. Due to the reform failure, the EMU came on
the agenda - also within the neo-Gaullist party - and it became even more problematic to criticize
the latter EMU negotiations with the argument that there was an existing alternative in the form of a
modified EMS.
Furthermore, I shall argue that the failure of the attempt to reform the EMS within the existing EC
framework can be seen as an event that deeply challenged the traditional neo-Gaullist idea of the 5th
Republic as a powerful actor in European and international politics. To some extent the situation
can be compared to the socialist government’s experience during its two first years in office where
their beliefs on the Keynesian economic strategies were challenge by the perceived waves of
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speculations on the franc. In the late 1980s, the neo-Gaullists had had to reconsider their future
strategy as had the socialists four years earlier. The period after the failed reform attempt can be
seen as a time when the neo-Gaullists normal stage of ideational equilibrium became upset, but it is
difficult to determine whether it was a period of ideational vacuum. Anyhow, in the period after the
failure of the reform attempt, the neo-Gaullists became more open to the idea of an EMU. Gradually
there seemed no alternative approach to the perceived problem of the asymmetrical power structure
of the EMS.
In general, from the above analysis of the period 1983-88 it can be concluded that what was
particular decisive for the relaunch of the EMU in the 1980s, in relation to the increased level of the
international capital mobility, were the French general policy-makers reactions to this new
economic structure. This includes both the socialists and the neo-Gaullists. The French president
and the socialist and neo-Gaullist governments could simply have accepted the presence of the
German structural economic and monetary superiority (and to some extent the superiority of the
U.S.) and be less focused on the French traditional role as regional superpower. That is to say, they
could have come to terms with the fact that it was the Germans (and the U.S.) that determined the
economic and monetary environment in the 1980s as some other EC-member states did. However,
this did not correspond to the French self-image of 5th Republic. The French were reluctant to
accept the German superiority within the EC. This reaction made them reconsider their strategy and
at the end started to work for an Europeanization of the economic and monetary polices on the
continent.
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7. Analysis of the choice of the EMU design
7.1 Introduction
In the spring of 1988, Mitterrand was reelected as president, Chirac was his opponent and resigned
afterwards as prime minister. Chirac was replaced with the socialist Michel Rocard who became the
new leader of a socialist government. Thus, the election became the end of the cohabitation between
the RPR and the PS. After Mitterrand’s disengagement of the reform attempt of the EMS, during
the cohabitation he decided to play a much more active role in the following years. Indeed,
Mitterrand was determined to enter the presidential election in spring of 1988 as the ‘most
European’ candidate and was particularly preoccupied with the need to demonstrate that he was
more adventurous with regards to the EMU than Balladur (Dyson and Featherstone, 1999, p. 166).
Mitterrand was probably the only French key policy-maker, apart from Delors, who considered the
EMU project as a means to the creation of a federal Europe (Howarth, 2001, pp. 142 & 137). In the
light of the development, as it has been sketched out in the preceding analysis, the French decision
to embrace the EMU in the early 1990s can be seen as an understandable response to the years of
frustrations of economic asymmetry. As we saw above, the EMU came on the agenda from the
mid-1980s, but there were no indications of consensually shared ideas of how to design a new
monetary arrangement.
The political process of developing the design took mainly place in the period from Mitterrand’s
reelection in May 1988 to the Maastricht summit in December 1991. What is particular relevant for
this study in this epoch of the integration process, is how the increased level of international capital
mobility influenced the actual design of the EMU. The subsequent section analyzes the political
process of developing the design of the EMU with focus on the influence of international capital
mobility. The main emphasis is on whether the ECB is to have an independent status. The focus on
this aspect of the design of the EMU is due to the fact I consider it one of the most noticeable signs
of the German power position. Other aspects of the design of the EMU are likewise important, such
as the objective of the price stability and the convergence criteria, but due to the limited time and
space available to this thesis, these aspects have been deselected.
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7.2 Two positions on the design of the EMU
The complicated political process of establishing the actual design of the EMU brought to light
profoundly different beliefs, ideas and priorities among the members of the European political and
economic elites. The development of the design of the EMU soon turned out to be a struggle
between mainly the French and the German positions; a struggle between two sets of philosophies
which were apparently rather incompatible. These philosophies, had to be united in some sort of
common understanding before a formal agreement on the EMU was possible. Before turning to the
actual analysis of the political and ideational process of constructing bridges between these two
positions, it is appropriate to briefly outline the content of the positions.
Most of all, there was a fundamental disagreement concerning the status of the ECB which became
the major turning point in the EMU process from the late 1980s. In short, the German position
rejected any ideas of dependent central banks in opposition to the French position. Beneath the
different French and German attitudes on central bank independence, dissimilar ideas of the role of
money and the general function of the state prevailed.
According to the German position, monetary stability was considered to be a categorical imperative
of democratic and economic order linked to the upholding of the rule of law (inflation is a
non-voted tax). The Germans believed that the citizens have as much right to a stable currency, as
they have right to the security of their person and their property. This belief was rooted in the
German experience of hyperinflation during the interwar period. As a result, macroeconomic policy
ought to involve as little manipulation as possible of credit, which explains the decision to transfer
control over monetary policy to an independent central bank (Howarth, 2001, pp. 131-136). In
principle, there should be no formal or informal link between the monetary policies conducted by
the central bank and the political system responsible for general economic policies.
In contrast, most leading French politicians were opposed to the idea that the stability of the
currency could be considered as an imperative separate from other economic goals. Low inflation
was valuable, but not as a goal regardless of its impact. Other factors had also to be considered. All
policies should be ultimately controlled by the republican state and democratic elected officials or
bankers - monetary policy was no exception. Independence ran against the modern French tradition.
The French position was unmistakably expressed by Treasury Director Christian Noyer in the
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beginning of the 1990s, when he publicly stated that independence was incompatible with the
French tradition of the one and indivisible 5th Republic. Moreover, the antagonism towards the idea
of an independent central bank was based on a widespread belief that monetary policy should not be
separated from economic policy as the former should be seen as a means of the latter (Howarth,
2001, pp. 131-136).
7.3 The economic context the French were faced with in the period 1988-91
In order to understand the political process which led to the actual design of the EMU, it is
appropriate to focus on the now historical context the policy-makers were faced with from the late
1980s to the signing of the Maastricht treaty in December 1991. In terms of monetary development,
the asymmetrical operation of the EMS had fundamentally not been changed in those years.
As we saw in the preceding sections, the objective of the Socialist government (notably Bérégovoy)
was to lower interest rates, in order to narrow the rate differential towards Germany. Indeed,
Bérégovoy managed to lower rates by 1 % between May and July 1988, significantly narrowing the
differential with German rates (Howarth, 2001, pp. 113-144). In addition, from the late 1980s the
EMS had on the whole been successful in stabilizing the parities between the EC currencies and in
general the EMS had functioned well with the Bundesbank and the German as the leaders
(Interview: Thygesen).
From the above one might argue that Bérégovoy’s goal of balancing the German economic power
with the politique de riguer was well on its way in the early 1990s. That is to say; his strategy of
balancing the Germany economic power in the EMS by conducting an economic and monetary
policy that was as austere as the Germans was to some extent a successful. The Bundesbank and the
Germans were still the main power with regards to setting the monetary polices for France and most
other states on the continent, but probably due to the success of the politique de riguer the French
was no longer forced to set their interest rates at a much higher level than the Germans. Yet, this did
not, as one might expect, moderate the French eagerness for a new European monetary arrangement
as the below paragraphs will make clear.
As we saw in the preceding analysis, the asymmetrical structure of international economy made the
French very dependent on external factors, especially when the level of capital mobility started to
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increase dramatically during the 1980s. On the basis of the preceding analysis, it can be argued that
due to this structural alteration, France was forced to reconsider its traditional Keynesian way of
thinking. In continuation of this, France generally became more dependent on Germany in its
conduct of economic and monetary polices as it became more and more problematic to introduce
polices which deviate from the German polices. In my view, this structure between France and
Germany constituted the economic context that the actors perceived as the reality in the period from
the late 1980s to 1991; a context that was not by most actors considered to have changed much
despite of the relative success of the politique de riguer. Bérégovoy was most likely an exception to
this, but he, according to Howarth was not part of Mitterrand’s inner circle at that time (Howarth
2001, p. 179). In terms of the development of the design of the EMU this economic context was a
kind of commonly perceived reality that practically all actors, within the French macro-economic
organizational field, took into account in their consideration of the proper behavior and strategy.
As pointed out earlier, I shall argue that the interpretations and the reactions to the asymmetrical
structure of international economy were decisive for the French involvement in the EMU process i.e.
the asymmetrical structure did not directly determine the French involvement. This also includes the
political process of developing the design of the EMU. The French interpretations and reactions to
the economic context, as outlined above, offers one of the key insights in to understanding why the
EMU in December 1991 turned out to be based primarily on the ideas of the German position with
an independent ECB and indivisible monetary policy.
7.4 The French reaction and interpretation of the economic context
Based on the preceding analysis it is reasonable to argue that during the 1980s it became obvious
for practical all within the European macro-economic organizational field that the Germans were
the leaders of the EMS, and all member states of the EMS were subordinate to the German
monetary power. France was no exception to this. What is important here is that France reacted
towards this asymmetrical economic power structure with gradually more and more intensified
eagerness to alter this situation. From the French point of view the situation was untenable and
notwithstanding of nearly all consequences, the German monetary power had to be divided.
Especially Mitterrand saw the EMU as a means in his attempt to reestablish and expand the French
power position in regional and global politics. Mitterrand was a vital and active player at this stage
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of European integration. In contrast to the negotiation of the EMS reform in 1987, which he saw as
an unimportant economic and technical issue, Mitterrand perceived the creation of a monetary
union as a crucial political aspect of vision of construction européenne. Furthermore, the issue of
the EMU fell without doubt into the reserved domain of the president guaranteed in the Constitution
(Howarth, 2001, p. 142).
It is the opinion of this author, that the intensified French eagerness in terms of altering the
asymmetrical economic power structure within the EC was a major factor in understanding why the
EMU was mainly structured on the German economic philosophy at the expense of the French
philosophy. It is suggested here that the French were particularly willing to compromise on the
actual design of the EMU in order to satisfy German demands. Indeed, Mitterrand appeared eager to
be the French President that managed to break German power. This was in deep contrast to the
German approach to the EMU negotiations. The asymmetry of the EMS was not in opposition to
their interest (at least not in economic terms) and they were much less enthusiastic in the process of
altering the EMS. Most Germans were comfortable with merely continuing the existing EMS. The
Bundesbank in fact worked directly against any alteration of the EMS and against the EMU project
in general (Howarth, 2001, pp. 83-113). Consequently, when the French started to promote their
demands on the design of the EMU they realized that they were - due to different ‘levels of
eagerness’ between the two states - in a relatively weak negotiation position. In short, the economic
and monetary asymmetry of the EMS was reflected in a kind of political power bias between
Germany and France.
It can be argued that the negotiation of the actual design of the EMU in the period 1988-1991 was
‘nested’ in both the economic power context and in terms of how actors interpreted and reacted on
this context. Apparently, actors behaved strategically and rationally, but did it within this ideational
setting. Notably Mitterrand was motivated by large historical and geopolitical considerations which
he felt able to bring to fruition in the framework of his second presidential term.
The approach of Mitterrand to the EMU negotiations manifested itself quite early. The president’s
preoccupation was with the political direction of the EMU negotiations as we saw above. He was
one of the first of that realized (together with his closest advisors Dumas and Guigou) that the
French had to accept the German principle of central bank independence. Mitterrand, Dumas and,
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Guigou believed that it was a strategically necessary concession if the Germans were to be induced
to accept the loss of their monetary sovereignty particularly in the context of the symbolic
importance that the D-mark had assumed in post-war reconstruction (Howarth, 2001, pp. 113-144).
This willingness to sacrifice this French key demand for an EMU was partly due to the Delors
Committee in that they were informed by Delors and de Larosiére about Pöhl’s harsh demand. Pöhl,
who was the President of the Bundesbank, in this committee promoted the German demand for an
independent ECB as a fait accompli. Pöhl refused to sign the Delors Report if this German demand
was included in the Report. Moreover, Delors was very focused on obtaining consensus within the
Committee and therefore accepted Pöhl’s demand (Interview: Hoffmeyer). De Larosiére very
explicitly pointed to the principle of central bank independence as the only way to make progress on
an ECB and a single currency. During the period 1988-91 most socialists, including Bérégovoy who
long remained skeptical towards the German demands, realized that Mitterrand’s strategy of
accepting the German design for the EMU in exchange for guarantees of the irreversibility of the
transition period was necessary (Howarth, 2001, pp. 113-144).
It can be argue that the French acceptance of the German demands on central bank independence
did not correspond to the fact that one of their main motives for engaging in the EMU process was
to increase influence over European monetary policies. That is to say; with the construction of an
ECB based on the German economic philosophy the French policy-makers were again prevented
from having any real influences on the monetary policy of the 5th Republic. The only, yet important,
difference was that with the introduction of the EMU the ECB had to conduct their monetary
polices on the basis of all members of the monetary union and not only the Federal Republic. Yet,
this serves to underline that the French were aware of their relatively weak negotiation position and
that Mitterrand saw the EMU as part of an overall political project of reestablishing the French
power position in regional and global politics.
7.5 The German attempt to expand their power position
In relation to this political power bias between France and Germany, it is interesting to look at how
the German government and the Bundesbank approached the initial phase of the negotiations of the
EMU. In this phase, France and Germany simultaneously sought to increase and capitalize their
advantageous power situation. At the Franco-German bilateral summit at Evian on 2 June 1988,
Mitterrand and Kohl agreed to start intense discussions on EMU and to establish the Delors
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Committee which should develop ideas on how to advance and design an EMU. What is important
for this study, is that the Germans stated that a precondition for the participation of the Federal
Republic in this initial phase of the EMU process was Mitterrand’s support for a precise timetable
for capital liberalization. Mitterrand believed that he had no choice other than to accept the
Germans demand. Hence, later that month, the Ecofin ministers adopted a directive calling for the
removal of all remaining obstacles to capital movements by 30 June 1990 for eight countries
(France was one of them) and by the end of 1992 for the poorer four member states. This would
mark the start of Stage One of the EMU project (Howarth, 2001, 115).
This event illustrates the asymmetrical political power relation between France and Germany.
France had to accept the German demands before even starting the negotiation of the concrete
design of the EMU. It is also important to be aware that the German focus on financial liberalization
was a deliberately strategy and not only a general idea about the usefulness of financial
liberalization. The German insistence on liberalization, prior to the negotiation of the design of the
EMU, was rooted in a wish for a German inspired monetary policy in a future EMU. They supposed
that in order to obtain this objective it was necessary for the transition phase between the EMS and
EMU to be undertaken on German conditions. This strategy ensured that during the transition phase
the Bundesbank was able to control the level of interest rates for all potential members of the
coming EMU. The Germans believed that the removal of all cross-border capital restrictions would
expose the member states of the powerful international financial markets. This would enable the
German’s to convince the other EC member states that there was no alternative to the German
position on the design of the EMU (interview: Vastrup).
Especially the Bundesbank approached the EMU process in a very harsh manner demanding
financial liberalization during the transition phase. The removal of capital restrictions was deemed a
precondition for even starting the initial phases of an EMU because the Bundesbank believed that if
the states could not stand the pressures from the financial market, it would be better that they
realized this sooner than later. Pöhl has later expressed that this was his way of putting his foot
down towards the French (interview: Vastrup).
The Germans considered monetary discipline as a precondition for a stable transition phase between
the EMS and EMU. The liberalization of capital mobility was certainly a method to obtain this
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objective and the liberalization had to take place prior to the introduction of the EMU. The
liberalization conduces to the effort of avoiding divergence in the monetary policies between the
potential EMU member states. If policies diverge (as they will do if capital control mechanisms
exist) imbalances will be built that will increase the risk of a collapse of the EMU. The German
argument was that if the restrictions on cross-border capital movements were abolished, this would
ensure that the member states were kept up to the mark (Interview: Skjalm).
Based on the findings of the above, it can be argued that the implementation of a program of
financial liberalization, which came about because of German pressure and was ultimately
supported by the EC Commission, made the German monetary dominance even more distinct and
obvious. Hence, already in this initially phase of the complicated political process of producing the
actual design of the EMU, the Germans strategically expanded the political power bias towards the
French (and the rest of the EC member states).
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8. Conclusion
As mentioned in the introduction, this thesis is about mapping, understanding, capturing and
identifying the nature of the causality between international capital mobility and the French EMU
process. The preceding sections of analysis show that the French road to the EMU was influenced
by this mobility in a different manner throughout the roughly twenty years which are in focus. On
the basis of the analysis, it can be argued that in most instances the influence between capital
mobility and the French EMU process was indirectly through the alteration of the ideas that formed
the interests, strategies and behaviors of French policy-makers. This conclusion differ from the
scholars of European integration which approach the field of examination from a rationalistic
perspective and usually do not consider the transformation of policy-makers’ ideas as the decisive
factor (see for instance Moravcsik 1998 and Garrett 1992)
It is my conclusion that to begin with, i.e. when the Socialists took office in 1981, everything
appeared to be normal. Although the French Republic was in the midst a severe economic recession,
this was not a source of major concern among leading socialists as they believed that their
Keynesian recovery program was the right medical treatment for the unhealthy French economy.
From my perspective, it is appropriate to conceptualize the first months of the Socialist reign as an
ideational equilibrium.
Many scholars argue that the recovery program failed miserable when the adverse reactions of the
international financial market hit the French economy (e.g. Andrews 2001 and Howarth 2001). This
thesis does not challenge this statement which has almost been accepted as conventional wisdom,
however, it offers a somewhat different understanding of this critical moment in time as it
emphasizes the role of ideational aspects.
The long period when the Socialist Party was in opposition had radicalized many of its members
who was now supporting a rather leftist Keynesianism. It can be argued that Keynesianism had the
role of a consensual shared ideational framework for the PS. This is supported by the fact that, in
practice, no one questioned the relevance of the ‘ism’ because it gave meaning to the socialists in
terms of how to understand economics. Moreover, the PS spent little time prior to the 1981 election
considering and debating the economic implications of its policy and, indeed, little time elaborating
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on the details of the measures to be pursued. In short, Keynesianism was part of the political
identity for most Socialists.
However, the Keynesian recovery program did not fulfill the socialist ambitions of high growth and
reduced unemployment. Gradually, the economic problems proved to be far more consequential
than expected. In addition, the recovery program and the fact that there was a socialist at the helm
of the Elysée had the unintended consequence of producing financial mistrust and massive outflows
of capital that enabled a stable franc.
The fact that Keynesianism had the status of a dogma within the PS made the consequences of
failure of the Keynesian recovery program very profound. A few months after the election in 1981
the Socialists started to realize that the recovery program in which they had confidence was a vast
failure. This prompted heated debates and confusion within the party and trigged a kind of
ideational crisis and following that an ideational vacuum. The ideational vacuum turned out to be an
important juncture in French history as Mitterrand and the government became more susceptible to
new ideas and enthusiastically tried to restore the much more comfortable situation of ideational
equilibrium. It gave the politique de rigueur the possibility to be part of the new economic program
of the PS. However, it is important to point out that the ideational vacuum were not decisive with
regards to choosing politique de rigueur as the new socialist economic policy. The introduction of
the politique de rigueur turned out to be important for the EMU, because it meant that Germany and
France started to conduct the same economic and monetary polices (at least partly) and this was a
precondition for the EMU.
The failure of the recovery program was also important because the socialists (notably Mitterrand)
started to believe that it was only in cooperation with other countries that France could be an
important actor in international relations. Hence, in Mitterrand’s mind construction européenne was
about building a federal European cooperation which was the necessary counterweight to the power
of the financial global markets. Moreover, few years after the crisis in 1981-83, the creation of an
EMU became part of Mitterrand’s construction européenne.
It can be argued that the construction européenne was the political interpretation of the
consequences of the failure of recovery program. It was the result of an ideational conversion
96
process and not just a rational response of the new international economic structure we saw with the
increased level of international capital mobility. In this way the present thesis is different from
many rationalistic analyses of the first years of Mitterrand’s presidency (e.g. Andrews 2001 and
Morawcsik 1998).
The period from the introduction of the politique de rigueur in 1983 to the Maastricht summit in
1991 was marked by French frustrations about the asymmetry within the EMS. This asymmetry
became more and more prominent and apparent in this period among other things due to the
increased level of international capital mobility. The asymmetry problem united French economists,
officials and policy-makers behind a notion of fairness in assigning responsibility for intervention to
support an exchange-rate system. Most policy-makers were frustrated by the German dominance in
the EMS as they felt the French economic performance could match the German and there was
therefore not any reason why the French Republic should be second to the economy on the other
side of the Rhine. The politique de rigueur did to some extent moderate the effects of the
asymmetry, but it could not redeem the French expectations of an equal relationship between
France and Germany.
In terms of the EMU, it is important to be aware that the asymmetry in itself did by no means
determine the renewed French interests in the EMU that was evident in during the 1980s. It what
the reactions and interpretations of the asymmetry that showed out to be decisive for the French
EMU process; it was, among other things, because the French policy-makers refuse to accept the
asymmetry the EMU became desirable. Indeed, the French policy-makers could have chosen to live
with the German monetary dominance or continued their attempts to reform the EMS within the
system.
It can be argued that the reactions and interpretations of the asymmetry were based on the idea that
the French Republic had to be an important and powerful actor in regional and world politics. This
was an obviousness for many French policy-makers. The fact that France was second to Germany
was incompatible with the French ambitions of being powerful. The failed attempt to reform the
EMS with the Basel-Nyborg agreement in 1987 can be seen as an important ideational conversion
process for the neo-Gaullists. From that time, even the neo-Gaullists saw no alternative than to be
involved in further economic and monetary integration with Germany. This was perceived by a
97
majority of French policy-makers, both Socialists and neo-Gaullists, to be the only solution to the
asymmetry problem.
The actual design of the EMU as it was accepted at the Maastricht summit in December 1991 was
influenced by the power relationship between France and Germany. It was a struggle between two
set of economic philosophies, the German and the French (the French was still different from the
German despite of the introduction of the politique de rigueur). Germany was perceived as the
strong negotiator because of the preceding years of economic German dominance within the EMS.
France was perceived as the weak negotiator because of their strong eagerness to alter the existing
situation. France had no choice but to accept the German demands and the EMU primarily was
constructed on the basis of the German economic philosophy.
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