Britain & the origin of the EMS, 1978
The Euro has its roots in the EMS - the European Monetary System - which operated for 20 years between March 1979 and January 1999.
Files on the setting up the EMS are now being released in Britain and other European countries. We review them here and place the best documents online.
- the first English translation of the secret 30 Nov 1978 meeting at the Bundesbank where Helmut Schmidt won over his sceptical bankers with the promise that the rules of the new system need not be taken too literally, if and when they conflicted with German interests - discovered by David Marsh in researching his new book The Euro (Yale University Press, 2009)
- papers from the European Union archives in Brussels recounting what heads of government actually said to each other in Council
- British documents showing how Prime Minister Callaghan was excluded from key decisions, and how he reacted when the penny dropped
1973 Mar: pre-history - "the snake"
Late in the evening of Thursday 1 March 1973, the British Prime Minister, Edward Heath, met with West German Chancellor Willy Brandt at Schloss Gymnich, near Bonn. It was a time of acute crisis in international markets. The last components of the post-war system of fixed exchange rates, Bretton Woods, were collapsing – the US authorities unilaterally unpegging the dollar from gold, allowing it to float – and European governments were struggling to formulate their response.
Brandt made an astonishing suggestion. The member states of the European Community should join a “common float” against the dollar, linking their currencies and pooling reserves to defend their parities. Since the Bundesbank held vast reserves, unlimited support from this source would have transformed market perceptions of sterling and other participating currencies. It would also have constituted a large step towards full monetary union. For a strong supporter of European integration like Heath, the prospect was alluring. In fact the proposal was not entirely a surprise - we had heard something similar a few weeks before in Paris from Brandt's Finance Minister, Helmut Schmidt - but voiced by the German Chancellor himself, the idea had historic significance.
Bretton Woods had been in decline for several years, destabilised by the weakness of its anchor currency, the US dollar. Responding in March 1971 the six EEC countries agreed in principle to link their currencies as a first step towards monetary union. They made their first practical move towards that goal in April 1972 by launching a currency alignment, soon nicknamed "the snake", setting a limit of 2.25 per cent on deviations between its members. The snake as a whole was permitted to move within a broader range of 4.5 per cent against the dollar, while the dollar itself held a fixed value against gold, at least until March 1973.
Britain had been a founder member of the snake (though yet to join the EEC at that point), but was forced out in humiliating style only six weeks later, sterling then floating free. Under German insistence the snake did little to support the currencies of weaker members: the UK itself had insufficient reserves to defend the parity and indeed its policies lacked the credibility an effective defence required. With a recent history of devaluation and relative economic decline, the markets were inclined to treat British assets as a bad bet. Brandt’s proposal for a kind of super snake offered sterling a way back, and more.
But if there were gnomes in Zurich (as an earlier British PM discovered), there were trolls in Frankfurt, the home of the Bundesbank. West Germany's central bankers tenaciously defended their mountain of gold. Bloodied, Brandt and Schmidt speedily retreated from the idea that German reserves might underpin the joint float and the British were sent away disappointed. Sterling stayed out of the unreformed snake, although for a period, on Heath's instruction and in deepest secrecy, we shadowed it. Over time the system became too tight a discipline for the French franc and lira also, coming to resemble a Deutschmark (DM) bloc rather than a European currency in embryo.
1978 mar 12: déjà vu in bonn
Almost exactly five years later, on Sunday 12 March 1978, the British Prime Minister, Jim Callaghan, met Brandt's successor as West German Chancellor, Helmut Schmidt, for a private supper at his official bungalow in Bonn. Up to this point the Callaghan-Schmidt relationship had probably been the closest between British and German leaders in any period, and on terms of apparent confidence they talked alone for six and a half hours, breaking at 1 in the morning.
The conversation covered the whole range of bilateral topics, but one stood out. Schmidt told Callaghan that he was pursuing "an exotic idea" which he had yet to share even with the French, "to create another European snake, but of a different kind". In fact the plan he sketched bore clear resemblance to the one he and Brandt had suggested to Heath: an alignment of currencies defended by a common pool of reserves (50 per cent of all member's holdings, Germany's included, to be managed by Finance Ministers rather than central bankers). Little of the detail had been worked out, but Schmidt's motivation was comparatively clear. He was concerned to boost European rates of growth, and argued greater monetary stability would achieve that; he wanted to further European integration in general, and the goal of monetary union in particular; finally, most ominously from the British point of view, he was determined to rescue Europe from what he saw as the ill-effects of the long slide in the value of the dollar, resulting from the supposed 'benign neglect' of the currency by US policy-makers back to Nixon and beyond.
The fall of the dollar was a source of particular angst to the Germans, who watched the consequent appreciation of the DM and the inflow of speculative funds with deep forboding, and Callaghan immediately suspected a key goal of Schmidt's initiative was to limit the damage by holding down the DM relative to Germany's main trading partners in Europe. In British eyes such a policy threatened to impose deflation on weaker economies like ours, while insofar as it was directed against the dollar, the initiative implied a direct challenge to US economic and political leadership of the West, at least part of which originated in Schmidt's remarkably low personal opinion of President Carter. Callaghan had repeatedly tried to maintain good relations between the two men, with little result. On this occasion the kindest thing Schmidt could bring himself to say of his US counterpart was that "the captain was not in charge, even though he was well-meaning". Some on the British side thought Schmidt almost unhinged on this topic, attributing his views to thyroid problems.
Callaghan responded cautiously - far more so than Heath - but the proposal certainly got his attention. He agreed Schmidt's specific request not to share the initiative with his Chancellor of the Exchequer, Denis Healey, though this made it significantly harder for him to craft a British response.
The Prime Minister knew nothing of the Brandt-Heath exchanges, but officials at No.10 immediately spotted the parallel and drew it to his attention. Those officials might profitably have spent an hour or two studying the files on the 1973 episode, as things turned out, but it seems they relied on the rather patchy institutional memory. Detailed work on the British response was handed to a Treasury man (Ken Couzens) and a senior figure from the Bank of England (Kit McMahon), working in secrecy from colleagues.
1978 mar-apr: waiting for giscard
It quickly became clear than the Germans were reluctant to commit the Schmidt scheme to paper, and that it was unlikely to gain definition till the French Parliamentary elections in April at the very earliest: had the left won, Schmidt told Callaghan he would not go ahead with the scheme. In fact Giscard was far from being in the dark as to Schmidt's thinking - the two had long matured the ideas rehearsed in Bonn - but it is likely true that he preferred not to be involved in detailed discussions which might leak in the run-up to the poll and hand his opponents on the left a stick with which to beat him.
Against expectations, Giscard's party won the elections and a right-wing government was formed led by Raymond Barre. The French now entered openly into the process. Callaghan met Giscard and Schmidt for breakfast before the final session of the Copenhagen European Council on 8 April and believed he had secured explicit agreement to a 'tripartite' approach, the three powers each designating a single official to take things forward. (Couzens was chosen for Britain, with the result that the Bank of England fell out of the inner circle and struggled to return to it.) The French and Germans were each to prepare a paper, which the British would examine in a "neutrally critical stance". For political reasons Italy was to be included in the scheme, though it was not to be involved in these preparatory discussions . Schmidt said that he envisaged a two-tier Community in the longer run.
Intriguingly, the proposals at this stage gave a central role to the European Unit of Account (EUA), an obscure monetary instrument against which currencies would be pegged and cash settlements made between participating central banks, to be issued perhaps by a "European Monetary Fund". (The EUA is better known by its later name, the European Currency Unit, a terminological change promoted by Giscard because its acronym, ECU, was also the name of a medieval French coin). Plainly the EUA/ECU had the potential to develop into a parallel currency, and at the breakfast meeting Schmidt and Giscard told Callaghan explicitly that such was their intention. Many years later the idea of a parallel, as opposed to a single, European currency played a part in MT's diplomatic response to European Monetary Union ("the hard ecu"), though it tended to be seen as a spoiler rather than a serious proposal.
1978 apr-jul: from copenhagen to bremen
Although conversations at official level quickly began after Copenhagen, the British still struggled to elicit more detail, or even a coherent outline. Schmidt's remarks on reserves before the full European Council there - the first time the EMS was formally broached to all nine member states - were significantly more cautious than his comments to Callaghan in their one-on-one meeting in Bonn, and as late as July the paperwork we had seen was consistent with there being no pooling of reserves whatever. But in conversation with Kit McMahon on 12 May, Karl-Otto Pöhl, Deputy-President of the Bundesbank, spoke tantalisingly of unlimited credit along the lines of the "Brandt-Heath ideas" of 1973. He affirmed too that the French were keen to see the British in, with the hope of diluting German dominance of the new system.
Schmidt brought a German delegation to Chequers on 23 April. But little progress was made on monetary matters; indeed there were a few sharp exchanges. He opened one meeting by saying that some of his ideas had leaked to the press from London. He sparred with Healey. Taxed with the problem of "global imbalances", he neatly encapsulated the German view with the retort that "one solution was that those with deficits should get rid of them!"
The British position was now to play things long. We wanted to avoid any decisions that would prejudice our attempts to coordinate international reflation at the Bonn G7 Summit in July, which included a monetary element, and beyond that, Callaghan was determined to give no hostages to fortune before the next General Election - due by October 1979, but thought likely to come that autumn. In this context internal Labour Party divisions over Europe were a significant factor, of which Schmidt had personal experience: he had spoken to a Labour conference on Europe in 1974 and had vivid memories of the Euroscepticism whcih dominated the party's left and strongly influenced its right. At some points he professed to believe that Callaghan would like to join the EMS, but that his party would not let him.
Contacts with the French seemed for a time more fruitful. They were prepared to put some things on paper, and appeared to share our inclination to slow the process down. But Giscard was a difficult man to read and personally distant from Callaghan - it was 'Helmut' and 'Jim', but not 'Jim' and 'Valéry' - and we feared that our contacts in the Paris ministeries might prove a poor guide to the eventual shape of French policy, which would be made in the Élysée. We sought to strengthen our position among the Nine by taking the initiative in the Community's Finance Council which on 19 June agreed a set of propositions which should govern any eventual scheme, particularly that strong currency countries had a duty to adjust policy as well as weak ones.
But then there was a decisive development, not to our advantage. On 23 June Giscard and Schmidt met in the latter's home town of Hamburg and agreed the line they would take at the upcoming European Council in Bremen at the beginning of July. Any French preference for delay now evaporated, if it had ever really existed. The two would press for a decision in principle to set up a European Monetary System. Secondary disagreements were summarily resolved - whether the snake should be superseded or retained in the new system, how narrow the margins of fluctuation ought to be. The Franco-German motor had moved into gear, given purchase by the fact that the Germans were about to assume the six month presidency of the European Council - followed, in January by the French. (The back-to-back German and French presidencies may well have been a large factor in persuading Schmidt to launch the idea when he did.) A reasonable interpretation of the Hamburg decisions would be that British participation was probably not expected, possibly not desired.
Callaghan was profoundly stung. The consultation he felt he had been promised at Copenhagen had not materialised. The injury was rendered greater by the fact that neither Giscard nor Schmidt even saw fit to brief him on the outcome of their meeting, although a two page Franco-German paper reached us on 28 June setting out the bare outlines of their scheme. Preparing for a major discussion of British policy on 3 July, Callaghan jotted in his notes: "I'm not having a Franco/German plan foisted on me". At the meeting both the Treasury and the Bank argued there was merit in Britain joining, in the hope that we could shape the new arrangements and that German reserves would underpin it all, while staying out would expose sterling to renewed pressure. But Callaghan was adamantly against, focussing on the problem that the system would have a deflationary bias for Britain. Afterwards, chatting to Bernard Donoughue, a close adviser, he congratulated himself for having "torpedoed that load of nonsense". The Prime Minister refused to attend a pre-summit lunch with Giscard and Schmidt previously agreed, pleading a pressing engagement in London, aware that discussion between the three of them would leave him isolated. He would do better making his points in the presence of the Nine, where some support would be found for British anxieties.
In the end a short early evening meeting with Schmidt and Giscard was scheduled. Even the dry official record makes plain how tense and difficult this encounter must have been. The British aim at Bremen was to avoid a decision in principle to set up an EMS, though we were prepared to see a detailed proposal worked out for approval at the next Council. But a decision in principle was precisely what the French and Germans intended to secure and Callaghan's efforts to find common ground were flatly rejected, Giscard taking the lead. Meeting Jenkins immediately afterwards, Schmidt confided: "Things have gone very badly with Callaghan". In a post-dinner session some measure of compromise was found (the Italians, Dutch and Irish lending us some support, for their own reasons), but the damage was done. Even though the summit communiqué gave no commitment in principle and we gained an agreement to look at resource transfers between members (opaquely dubbed "concurrent studies", in the hope of not spooking those likely to be footing the bill), nothing could get away from the fact that the decision had been made to draw up a detailed scheme and the Franco-German paper published by the German presidency.
Callaghan flew home to face sharp criticism from political friends and enemies alike.
1978 jul-nov: negotiating from outside
Bremen made British participation in the launch of the EMS very unlikely (or perhaps "even less likely" puts it better). Callaghan had not been disposed to join in the first place and his room for political manoeuvre, never great, was now diminishing at a rapid pace. Rebutting MT's claims in the Commons that Britain, "the victor of Europe", had been left isolated and in the economic second-division, its weakness exposed, he vowed uncomfortably to fight our corner while remaining constructively involved. Minutes later two former Labour Cabinet Ministers attacked him from a Eurospectical position, one from the right and one from the left of the party. A press briefing the same day by Ken Couzens went sadly wrong and produced a headline in The Times that the Treasury was "sceptical to the point of contempt" about the sketchy Franco-German scheme, doubtless an exaggeration, but probably not wholly mistaken as to his thinking. Tony Benn circulated a cabinet paper demanding "a British 'non' of Gaullist clarity and resonance", against which sentiment Callaghan annotated, correctly: "we have no veto!" (The EMS stood outside the the Community treaties.) And at the Bonn G7, a week later, a summit discussion expected to issue in a polite but neutral welcome of the European initiative by the US degenerated into a Schmidt-Carter argument in which Carter was so negative about the EMS (fearing its impact on the dollar) that American officials had to run round afterwards saying he hadn't meant to sound that hostile, "it had all come out wrong".
Schmidt tried to build some bridges with Callaghan in a private meeting at Bonn, but he opened discussion by referring to the Couzens briefing and the meeting bore no practical result. Indeed it seems the Callaghan-Schmidt relationship never quite recovered from their collision at Bremen and the events leading up to it, a set of events that left Callaghan gloomily talking to officials at No.10 of the possibility of British withdrawal from the Community. The British Government now had to influence the shape and detail of the scheme that was emerging essentially from the outside, and from that position, of course, leverage was lacking. We achieved some tactical victories in the Community's Finance Council, but in the end the Hamburg meeting of 23 June accurately foreshadowed the way things would go: an essentially Franco-German negotiation developed.
A number of senior British ministers still hankered to join, Chancellor Healey and Foreign Secretary Owen among them, but only if the right terms were available from the British point of view, which it became progressively clearer they were not. The one consistently immovable object was Callaghan, who was plainly determined to keep us out, the issue pitting the Prime Minister against his two most senior colleagues as it was to do in MT's government a decade later, albeit for a much shorter time and with less combustible results. Our public position remained undecided, if only because we were seeking to influence the details of the scheme as it took shape and to secure whatever we could from "concurrent studies". (We worried too about the impact on sterling of a sudden realisation that we were going to stay out.) But with the government and governing party deeply divided and a General Election on the way, British entry was a practical impossibility in the near term, as our European partners certainly understood.
The motions had to be thoroughly gone through, of course. The Treasury took charge on our side and developed the ideas earlier put forward to the Nine. These focussed on pooled reserves and on the notion that resource transfers were necessary to bring about sufficient economic convergence to make the EMS durable (Britain's high and rising net contribution to the European budget was already an issue). We pressed too that parities should be set against a basket of currencies rather than nominal rates (a technical point that mattered a great deal, since a basket approach was likely to impose much greater obligations on the stronger currencies, the DM in particular). Essentially we sought that the new system should embody 'symmetry' - the requirement that strong currency countries adjust policy as well as weak ones - in the knowledge that this was an idea with some appeal to the French, who had had their own troubles maintaining membership of the snake, as well as to the Italians of course.
This was all very well, but there is no evidence it made any impact on the talks that mattered. In fact German policy now drove the design of the EMS, the Bundesbank whittling away elements of the Franco-German scheme that troubled them. Meeting Giscard at Aachen over 14/15 September, Schmidt was prevailed upon by his bankers to insist that the new system resemble the snake in its anti-inflation discpline, and Giscard conceded, France agreeing to join the EMS virtually on German terms. (That at least is how the British saw it, and some in the German Finance Ministry too, as their own minister later admitted to the Bundesbank Council.) Components indicative of 'symmetry' such as the currency basket were comprehensively downgraded or removed outright. Some concessions were indeed to be made to weaker brethren under the "concurrent studies", in the form of proposals for more generous Regional Aid and loans, but the sums were relatively small. There was to be no pot of German gold (let alone a mountain).
Aachen was decisive for the British position. The decision to stay out of the EMS was taken in greatest secrecy by a Cabinet Committee on 10 October.
1978 nov 30: a visit to frankfurt
It was expected that the final details of the scheme would be wrapped up at the European Council in Brussels 4/5 December. But before that could happen a much more private meeting took place at the Bundesbank in Frankfurt on 30 November, Schmidt finding it necessary, against all precedent, to address the bank's Council directly in explanation and defence of his policy. The Bundesbank has released its 73 page verbatim transcript of the event. For the convenience of English-speaking readers the document has been translated; the German original is also available on the site.
This record can reasonably claim to be a seminal text in the history of European integration. It repays close study. Although Schmidt obviously tailored his remarks to his audience - as noted above, he had suffered more than a few wounds at their hands over the years - he spoke more frankly than he would ever have done in public. He was blunt in expressing his view that England [sic] might eventually leave the Community, essentially through economic weakness and failure of leadership: "the English have grown accustomed to finding a scapegoat for the economic woes of their country in the European Community and hitting out at it ... the political leaders in England find nothing easier than to make use of this scapegoat ever more often". He feared a similar fate for Italy, but while one purpose of the scheme was to bind Italy in, its impact on the British is left hanging. He believed that by instinct Callaghan would like to have joined from the start (he was almost certainly wrong about that). But one day the UK would join and a way should be found "to allow them to come straight in belatedly without loss of face, when the preconditions have clarified themselves". He noted: "We must be on the look out a bit, so that they do not walk off with all the advantages from the start while taking on none of the duties. That will be an important point. But Herr Callaghan has already understood that".
The British were marginal, however. The scheme was devoted to stabilising "the relationship of the two core countries of the European Community", because "they can only form the backbone of the Community in the long term when they do not belong to two different monetary areas". And this policy depended, in Schmidt's view, crucially on the personal bond he had formed with Giscard: "I say very softly: with Mr Mitterrand, I would not have dreamt of bringing forward such a proposal". He anticipated a Giscard victory in the 1981 French Presidential elections, leaving him in office till 1988.
And in stabilising the relationship with France, Schmidt sought to head off what one might call the historic accusation, a charge that he abbreviated, with unflinching economy, to a single word: "Auschwitz". It was obvious to him, and to the people sitting around him in the Bundesbank, that post-war Germany was the very emblem of worldly success, particularly in its economic aspect and also, surprisingly, its military might. (This former Defence Minister proudly insisted that it was "the second strongest military power of the West".) But German achievement merely deepened the underlying problem, because "(t)he more successful we are in the areas of foreign policy, economic policy, socio-economic matters, and military matters, the longer it will be until Auschwitz sinks into history". "It is all the more necessary for us to clothe ourselves in this European mantle. We need this mantle not only to cover our foreign policy nakednesses, like Berlin or Auschwitz, but we need it also to cover these ever-increasing relative strengths, economic, political, military, of the German Federal Republic within the West. The more they come into view, the harder it becomes to secure our room for manoeuvre". And this problem applied even to France, the closest ally, where "you can trace just how thin the ice still always is in all friendship" (his choice of metaphor perhaps reinforcing the point).
Having laid out his rationale for the EMS, Schmidt then turned immediately to the question which most exercised the Bundesbank: might its obligations under the new system to intervene in defence of weaker currencies conflict with its constitutional commitment to monetary stability in Germany? An axiom of Bundesbank thinking was that purchase of weaker currencies would increase the German money supply and so threaten inflation. An exchange of letters on this difficult topic had taken place between the President of the Bank, Otmar Emminger, and the Federal Government two weeks before (also translated on this site). Dr Emminger had effectively requested Schmidt to give a written assurance that in a severe currency crisis involving a weaker currency, that currency would either be forced to devalue or the bank would be given "an at least temporary release from the duty of intervention".
Schmidt made a fascinating reply: "I must say to you openly that I have quite severe misgivings about a written specification of this sort, a written specification of the possibility of an at least temporary release from the intervention. Let us first of all assume that it appeared tomorrow in a French or Italian newspaper. What accusations would the newspapers then make in editorials against their own Government who got themselves mixed up with such a dodgy promise with the Germans. A Government which promised them to intervene in the framework of certain rules of the game, but internally put in writing its intention to be able to do otherwise if need be. In the matter itself I agree with you, gentlemen, but I deem it out of the question to write that down. In the matter it is yet the case that there has been a beautiful saying the world for two thousand years: ultra posse nemo obligatur. [Editorial note: "No one is obligated to do more than they can do".] And where the ultra posse lies one decides for oneself. My suspicion is that, if it came to a real crisis, it would then run according to historical experience, as it has run previously: that the debtor countries clear out first and not the creditor countries. But it could perfectly well be that case that the creditor Federal Republic might one day have to clear out; it is all thinkable, only one cannot write such a thing down".
Emminger responded helpfully here, perhaps by pre-arrangement, accepting the Chancellor's insistence that the thing not be written down. "I understand very well that one cannot now lift that into the limelight somehow, especially not just before the summit conference". Schmidt thereupon showed the meeting annotations he had made against Emminger's letter - a large "R" (for 'richtig' - 'right') against the crucial clause. It was all rather different from the terms on which he had spoken to Callaghan that evening in Bonn eight months earlier.
The existence of the letter remained secret until a future Bundesbank President revealed its terms to stunned French officials in 1992.
1978 dec - 1979 Mar: delayed birth & AFTER SHOCKS
Everything now seemed set for the EMS to launch on 1 January 1979, following endorsement by the European Council in Brussels 4/5 December. Britain would participate in joint arrangements for reserves and the other components of the EMS, but we would stay out of the fixed rate system at its heart, the "Exchange Rate Mechanism", alone among the Community, a quarter-in/three quarter-out status apparently devised by Sir Michael Butler, a future British Permanent Representative to the EC. The Governor of the Bank of England begged for this much involvement at least, writing a cri de couer privately to the PM. Future membership of the ERM was not ruled out, but Callaghan deleted a phrase in his draft speaking note suggesting that we hoped to join later
Yet all did not go to plan. Callaghan announced the UK decision to stay out, but to everyone's surprise Giscard obstructed the resource transfers demanded by the Italians and the Irish, with the result that Schmidt - chairing the Council at the end of the German presidency - was unable to secure an effective starting date. (A British note on press handling begins with the words "No gloating".) The ice of Franco-German friendship had indeed proved a little thin. Even a close and sympathetic observer of the situation like Jenkins found the French motivation hard to fathom, finally putting it down to ill humour, morosité. In fact Giscard was under some domestic attack for having conceded too much to the Germans, from Chirac among others: for many in France the EMS was all too obviously a version of the snake (an impression that would have been greatly strengthened if they had overheard Schmidt's conversation with the Bundesbankers). Delay won Giscard advantage because it demonstrated that France was fighting its corner, and it ensured as well that the EMS could not come into operation before the French six-month presidency, conclusion of major initiatives during one's term conferring a certain prestige.
For a short time after the débâcle in Brussels it was doubtful whether the Irish and Italians would participate or stay out with the British (we would have preferred the latter outcome, and worked for it). During this period MT gave the Conservative response to the scheme, replying to Callaghan's Commons statement on the Brussels Council. She carefully avoided any endorsement of the new system - just as she had after Bremen - treating our decison not to join as an admission that we were now among the "poorest and least influential members of the Community" and asking whether it was economic weakness or Labour party divisions that had kept us out? An ad hoc group of Conservative shadow ministers (under the chairmanship of Geoffrey Howe) had evolved a similar tactical line at the end of October, in a frankly minuted discussion, though they also wanted to pronounce explicitly in favour of the system. Nigel Lawson had been the strongest advocate of membership, as he was to be in government, urging that it would provide a useful anti-inflationary discipline and that everything should be done to help Labour join so they could share responsibility for the hard decisions the EMS would impose. Howe accepted that the system was a good thing for economic policy, but argued that the decision could best be left till the Conservatives took office and sounder monetary policies were put in place. None at the meeting showed any inkling of the huge increase in the value of sterling just around the corner.
Howe reported the outcome of the meeting to MT by letter. Doubtless he knew already that she was fairly negative about the EMS. Like Callaghan, she had a strong sense of the political damage that fixed exchange rates could do, having come into politics at the time of the Cripps devaluation in 1949 and watched the 1967 crisis from a close vantage point as the Shadow Chancellor's deputy, before serving as a member of the Cabinet when Britain was ejected from the 'snake' in 1972. Her annotations on Howe's report show she was also sceptical of the goal of "economic convergence" between European states and saw no political case for joining whatever (whereas Howe feared us being "at the foot of the Franco-German High Table"). In fact the only element in his line she warmly endorsed was the notion that we would only ever join with "qualifications and transitional provisions". Chatting to Jenkins a few months earlier, Carrington had judged shrewdly that the pro-European grouping in the Cabinet would be insufficiently powerful to overcome her hostility (Jenkins diary, 4 Sept). The Conservative manifesto the following year made no reference to the EMS, although the party acquired along the way the position that membership was desirable in principle and that the option would be kept under regular review, a fluid position committing it to nothing. Future Conservative lines of division on the EMS were already clearly drawn, all three of the principal players recognisably dug into the positions they were to occupy for a full decade, till the issue finally destroyed their collaboration.
In the end Britain was alone in staying out, isolation in the Community on monetary matters thus predating the Thatcher era. After a brief period of reflection the Italians accepted the terms on offer (which gave the lira a 6 per cent rather than 2.25 per cent margin), and the Irish followed them (ending for good the punt's historic link with sterling). The French problem with agricultural prices somehow fell away, set aside rather than resolved, allowing the new system to come into operation on 13 March 1979, seven weeks before MT arrived at No.10.
For the architects of the EMS, Giscard and Schmidt, events in following two years were full of ironies, some with a bitter aftertaste. The 'benign neglect' of the dollar, against which the Germans so often railed, began to end in November 1978 and was emphatically reversed when Paul Volcker became Chairman of the Federal Reserve in August 1979. But German critics found this scarcely to their satisfaction: in the early phase of the EMS, the Bundesbank felt obliged to raise rates to defend the DM, making life difficult for its EMS partners, notably the French and Italians who suffered multiple devaluations, and deeply upsetting Schmidt. The oil shock of 1979 compounded the problem.
The discussion of the EMS in Giscard's memoirs is brief, much of it taken up with his triumph in the naming of the ECU. In the French presidential election of May 1981 he lost power to François Mitterrand, the man with whom Schmidt would not have done business. By the mid-1980s Mitterrand's people saw the EMS much as their predecessors had seen the snake, as a DM-bloc, and were beginning to promote the idea of a single currency as the only way to tie down the German leviathan.
In 1982 Schmidt himself fell victim to recession and high interest rates, as US policy tightened further in the early Reagan years, making way for Helmut Kohl, who dominated German politics for more than a decade and presided over unification and the birth of the Euro. Schmidt blamed the Bundesbank for his fall.
The site editor acknowledges generous help from David Marsh, who shared research he had undertaken for his study of "The Euro".