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1978 Nov 30 Th
Archive (Bundesbank)

EMS: Bundesbank Council meeting with Chancellor Schmidt (assurances on operation of EMS) [declassified 2008]

Document type:archive
Document kind:Transcript
Venue:Bundesbank, Frankfurt
Source:Bundesbank Archives (N2/267)
Journalist:-
Editorial comments:Translated specifically for this site: translation rights reserved to www.margaretthatcher.org. The original German text can be read here. Schmidt shows the meeting at one point a letter Emminger had written him and which he had annotated: it can be found at the end of the transcript.
Importance ranking:Key
Word count:73pp 5pp
Themes:Monetary policy, Economic, monetary and political union, Foreign policy (Western Europe - non - EU)

Transcript of meeting of the Bundesbank Council, 30 Nov 1978

Dr Emminger:

Dear Federal Chancellor, I would like to welcome you very warmly to the council of the central bank and to thank you for coming here to explain the political and political-economic motives for your European policy initiative for the new monetary system and also to give us in this way the opportunity to express opinions on it and to put questions. I believe it is no exaggeration to say that this is to an extent an historic event, for it is now twenty-eight years since a Federal Chancellor took part in a meeting of the council of the central bank in October 1950 at the peak of the Korean crisis and the associated inflation. It was then Federal Chancellor Adenauer. But now is the first time that a Federal Chancellor has been present at the council of the central bank of the German Bundesbank, for the Bundesbank came into being only in 1958. I may add, however, Federal Chancellor, that this is not the first time that you personally have been in this circle; you were here several times in your capacity as Federal Finance Minister, but that was already five years ago. One can certainly also say that the reason for your visit is of historic significance, for it concerns the preparation or a preliminary discussion for the summit conference next week in Brussels, where either way a historic course will be set. We are all the more pleased and grateful to have the opportunity to hear you here with us before this summit conference. I would like to welcome warmly also Herr Dr Schulmann. He had a great share in the preparation for this historic development, as is known to all of us. I think it would be best, Federal Chancellor, if you would introduce the discussion by explaining your view of things.

Federal Chancellor Schmidt:

Very sincere thanks. Dear Herr Emminger, ladies and gentlemen, sincere thanks first of all for the invitation. I am in a different situation from Adenauer twenty-eight years ago. I have no request to make of you. It lies with me however to put before you the background, the political background, of what we are here together setting in motion, from my point of view, also from the point of view of my friend Giscard, and to bring to your attention also the objectives and hopes that we connect with the whole undertaking. I will speak here just as openly as in Cabinet, which means that much of what I say here must not seep out. For the sake of international considerations, I beg you to have understanding for my request for discretion. The council of the central bank, especially the President and the Vice-President of the Bundesbank, have really contributed decisively to what will be signed and sealed on Monday or Tuesday of next week in Brussels. It will really be extensively a matter – juridically speaking – of an agreement between issuing banks, apart from certain consultation mechanisms within the Treaty of Rome, which have already taken place or will take place on Monday and Tuesday. In essence therefore an agreement between issuing banks, and so, as the draft agreements are now available in writing with two or three open points, on which perhaps a word can still be put to use later, they need not be gone into by me, because I take them all to be soluble without great difficulties and without special sacrifices. If that is all essentially worked out in writing, it is essentially thanks to the work of the Bundesbank or its apex in all its autonomy. The Bundesbank really will also in the future play a major role in the decisions that will have to be made. In any event, in this matter, it can hardly reach the point of international law in under two or, I rather think, in under three or four years. I do not see an amendment to the Treaty of Rome or a special treaty in this decade, and until then it will be quite essentially a matter for the issuing banks. For me, during this time, the independent position of the German central bank stands outside any discussion. I will say that yet again even to the German Bundestag next week on Wednesday, directly on my return from Brussels, when I report on what we have begun.

The first point that I would like to emphasise to you is that this is about saving the Common Market in general. The Common Market is the basis and centre-piece of the European Community. It made possible the huge unleashing of economic potential that has taken place in the last twenty years, not only in the Federal Republic of Germany but also in the rest of the participating countries. The European economy has used the chances that arose to an extent not foreseen in 1957 or 1960. The share of exports in the countries of the Community amounted to only 5 per cent of Gross Domestic Product in 1958. Today it is 12 or 13 per cent, and today the partners in the European Community carry out 50 per cent of their foreign trade within the Common Market. Thus an entirely natural trend has resulted from the Common Market, from the lessening significance of borders. But it is alarming that since 1973, since the monetary turbulence made itself everywhere fully noticeable to firms – at worst noticeable to the small and middle-sized firms, which naturally have infinitely greater difficulties in covering market risks than do, for example, the flag-bearers – the exchange of goods within the Community has grown more slowly than world trade. This is for me a deeply shocking trend, which is now already continuing in its fifth year, because the uncertainties within the Community obviously have a stronger effect than those which extend beyond the borders of the Common Market. This is a far-reaching uncertainty for the middle-sized businesses for whom better calculable, at least stable rates of exchange within the Common Market are a necessary requirement. One took this to be self-evident at the creation of the Treaty of Rome in 1956-57. Nobody - neither on the side of the participating trade and finance ministers, nor the central banks, nor the heads of government, neither Adenauer, nor de Gasperi or whoever else was involved - not one imagined that exchange rates floating against each other could exist within the Common Market.

It is a complete change in the conditions under which the Common Market was created. Should we not succeed in restoring this previously self-evident condition for the Common Market, then the members of the ‘Snake’ and the outside floaters will drift further apart, and that will bring into question not only the economic but also from the long view the political cohesion of the European Community. And I mean what I say with the political cohesion of the European Community. You really only have to look at the internal political development in some member-states. I have a friend in Italy called Giulio Andreotti. I may not relate what he tells me in every time of trouble about his internal political landscape. But the mere mention of his name and the idea of internal political relations there must be enough for each of us to imagine that, if we float further apart, nobody can hold Italy in the political alliance. What that could signify in relation to Yugoslavia and the Soviet Union and to the situation in the Mediterranean, I must not depict here.

The internal political landscape in England looks dangerous in a similar way. How it is going with the will, the firm will to remain within the political alliance of the European Community, you can all gather for yourselves from reading the newspapers. Whoever is in London now and then senses it there. But 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. And the political leaders in England find nothing easier than to make use of this scapegoat ever more often, and one day this could lead to their membership of Europe being dissolved. These are the two countries that cause me the most worry in respect of firm alliance with the European Community. That, by the way, was a remark that I could in no way repeat in public, that I would deny having made. But I ask you to understand that this fills me with deep concern, and not just in the last two or three years. Some time ago, I think it was three years back, encountering at an English party conference a basic mood of deep anti-Europeanism in the governing party there, I was able to get by with a series of bon mots, rhetorical tricks, and friendly empathy that now and again exceptionally succeeded, but one really cannot repeat that every time.

And now concerning the relationship of the two core countries of the European Community, France and Germany, they can only form the backbone of the Community in the long term when they do not belong to two different monetary areas, or, to put it positively: only when they belong to a common monetary area can one expect this political core of stability, the stabilising core of the Community, to retain its efficiency. In spite of all that, the risks of this European monetary system are not to be overlooked, they ought not to be underestimated. There are bad exaggerations around when each views it through national spectacles. One side prattles about an inflationary community, the others, English and Italians in particular, prattle about a deflationary community which would be accomplished there and would disrupt their whole national economy. Those are both bad exaggerations, but I repeat the opening line: the risks ought not to be underestimated, as we here together believe. There are however risks that lie not only in bargaining, there are great risks that lie in not bargaining. And if one does nothing, it will go the same way as the common agricultural market, that there has not been for a long time, that is only so-called, it is a pure fiction. And something similar could then one day happen to the customs union. We have seen the first signs of that, when the economic and monetary divergence led Italy to cash deposits on imported goods, and all that. Those were the first signs of the disintegration of the customs union. And this can come about very quickly. Even not bargaining involves great risks. As for our risk here, if this thing should break down on account of the continuing extent of economic and monetary divergences in the politics of the EC states, then the modest stock of confidence in European economic solidarity, that is now being created through efforts here, will probably be used up quickly and the political set-backs would also be severe. Quite apart from the personal set-backs for the pair who have staked their prestige on this matter, namely Giscard d’Estaing and myself. And both of the governments who are linked with it, and the reputation of the states which come into consideration here. On the other hand, I see that the chances of success are not unfavourable.

And let me make a few observations on that. Along with the Japanese, we have been put under pressure for really quite some time by the American President and American public opinion, largely guided by the White House and the Treasury, that we should kindly be the ‘locomotive’ to pull the whole world economy out of the doldrums, and more of that sort of nonsense. Arguments have gone on with the United States of America which German federal governments could not endure in such density. It started under the Ford Presidency with American attempts to inhibit important Brazilian business for the development of our most important future industries. We resisted that with endless arguments, mostly behind the scenes, but one had to take great care. Simultaneously a struggle against an administration which came newly into office believing that the world could be healed with inflation. Predictions that we made to the American Vice-President and his advisers and the adviser sent to us by President Carter in January 1977 have almost all been fulfilled, namely about the inflationary collapse and about the balance of payments decline of the United States. They have certainly not taken up all the measures that they then announced to us with the idea that we should do something similar. We have only done half of it. In any case, American inflation has developed, as you recognise, and the American balance of payments been so disrupted, as you know, and the dollar rate as well. We have had to accept arguments with the United States of America in other fields, and I do not want to mention them all now, because they are far removed from the monetary sphere. But one must make oneself aware that the United States have reversed under the pressure of the German example and the German argument for stability, for resolute intent to maintain stability, I will say, to be on the safe side. A tremendous development! A tremendous development between spring 1977 and autumn 1978. This, by the way, would not have come about without the determination to say ‘No’ if need be at the Bonn economic summit. I say they have decided in favour of stability. Whether the determination will steadily suffice, when now in the first phase only the negative consequences appear, is something that I cannot predict.

In a similar way, and with no need for great persuasion, our example, with monetary, also budgetary, fiscal, and general social policy means working towards stability, had earlier found a positive echo in France. Quite undramatically, the French President, with whom I was friendly from our common time as Finance Ministers, always basically held the German policy to be right since 1973. He could not say that out loud, however, on account of his internal political position – he was then Finance Minister under Pompidou – with consideration for his later position as President. Even God does not know how secure that was in the first years. Governing France is a tricky business. Internally, it is just as hard as in Germany, not because there are eleven Länder, but because there are more than eleven parties there, bound together in groupings which are hard to balance. It was clear to him and me that, if his party grouping won the elections in spring 1978, so that he would have time to pursue a continuous economic policy of stability for four years, we would then together make an attempt at a greater monetary alliance within the EC. Giscard and I were agreed on that for a long, long time. But what was decisive was whether he would win the parliamentary elections in April 1978. (I say very softly: with Mr Mitterrand, I would not have dreamt of bringing forward such a proposal.) It depends here on the personal trust of the leadership of the French state in the continuity of the leadership of the German state, it depends on the personal trust of the leadership of the French state, represented by both Giscard d’Estaing and Raymond Barre. Without this, the risk would be too great. Certainly, the President will have to stand for re-election in 1981. It looks as if he has a good chance of being elected for another seven years. The French Prime Minister, Raymond Barre, will certainly change sooner. Presently, I find that the French have set in motion a series of things with great courage, and one cannot exactly make out whether and how well, in terms of domestic politics, they will come through the initial negatives that are inevitably connected with them. However, that it will not for the moment lead to the lessening of unemployment in France, everyone knows. And that it will not for the moment lead to the lowering of prices, when they end controls on the bread price and all that sort of thing, that much is clear. But they are courageous steps, and, if the policy is maintained for twenty-four or thirty-six months, the first positive results will show after such a period, and then hopefully they can be kept up beyond 1981.

One really must also say, by the way, that the German example has triggered resolve for greater stability in Italy and even in England too. The struggles fought with the trade unions over nominal wage increases by Prime Minister Heath, unfortunately not successfully, but later by Prime Minister Callaghan, relatively successfully, up to 1978 at any rate, are impressive. You know, of course, that it does not look quite so favourable at the moment. That means, without all these countries or their political leaderships liking it, they have since May 1973 finally adapted themselves to the given German example of stability policy. Not because they have seen that it is theoretically better, but rather because they have found out in practice that we have fared better. That is a quite essential psychological precondition for this whole venture. If they were tomorrow to have a Berlinguer Government in Rome, I would be very doubtful whether one could risk it with the Italians, because I do not know what sort of economic and financial policy such a government would pursue.

Now that there is a general predisposition in favour of greater stability in these European governments of which we are speaking, albeit in some cases still not sufficient, albeit in some cases (due to domestic resistance) not so strong as one would wish it, further incentives will now be added through this EMS – as it is called in the newspapers – in the direction of greater economic and greater economic policy discipline. The most important incentive is this: governments find it exceedingly unpleasant when they have to get together sometime at the weekend in order to announce at nine on Monday morning that they have devalued their currency. The necessity of formalising devaluations once more by government decision hangs like a sword of Damocles over each government. The government is very conscious of this, even the governments of the ‘Snake’ countries, for example, my Danish friend Jörgensen. He therefore wants to stay in it in any event, because he has been able to share and transmit this consciousness to his entire governing team, his union leaders, and his banking world. One of the most important things is that, with fixed exchange rates, the discipline (in the narrow sense of the word) of the balance of payments actually applies to those responsible. The common expression ‘balance of payments discipline’ is mostly meant differently; I mean it here in the literal sense. There is also the opposite case, if you recall the Federal Government of the grand coalition, which could not decide to revalue. Governments shrink from taking public responsibility for a change in the external value of their currency.

Dr Schlesinger:

That certainly remains so.

Federal Chancellor:

I hope it does. The German Federal Government shrinks least of all, because it has had great success on the whole with the monetary policy of the German Federal Republic in the course of the last seven, eight, nine years. Since 1973, though, it has had to express itself on such matters only within the ‘Snake’, while exchange rates for all the other currencies were free and left to the exchange markets. But within the ‘Snake’, Herr Schlesinger, we have never shied away from revaluation. At any rate, not on national grounds, not on German grounds, nor indeed on domestic political grounds; sometimes perhaps it was not quite so useful for others.

I want perhaps to add a few more words about the American dollar. If I see it correctly, you have spent something in the region of $35 milliards [billions] in support of the American dollar since 1970. I do not know how many Deutschmarks that is at the present point in time, at any rate, far fewer Deutschmarks latterly than you put in at that time. The sum resulting from interventions in the ‘Snake’ is incomparably smaller. All the same, when France and Italy come in, this amount will possibly rise, at least theoretically. I think, where the European Monetary System is concerned, it has already triggered in America a quite strong psychological signalling effect. It has become very burdensome, thank God, for the American Government to get told by its own banking community, also by its own industrial community, by its own published opinion: the dollar cannot carry on like this. But after they now also have to read in the newspapers that these Europeans are possibly ready to achieve something like a zone of stable currencies in their area, that is naturally a very strong additional psychological pressure on the American politicians to give up the policy of ‘benign neglect’ on their side. The European system is certainly not directed against the dollar. But if it could make us a bit more independent of dollar fluctuations – something I do not exclude – that would certainly be welcome. If it were successful, as I assume, it would perhaps also provide an example for other regions, south-east Asia up to Japan, I don’t know, I don’t want to speculate.

In any event, it would also be European political progress. Giscard and I have always envisaged that in the same year that we want to have direct European elections – which are indeed taking place in the coming year – we would get this thing started. Always assuming that his own national parliamentary elections give him sufficient freedom to negotiate. The Italian Government would like to join in. The technical advisers of the Italian Government, for example Herr Baffi and others, come up with many doubts; it is not entirely clear to me whether the doubts have been invented in order to extract still more concessions and thus to be overcome. The Italian Government will join in. I am not sure that this especially large margin that they have now negotiated is really in the interests of the Italian lira. I suspect that it is not in its objective interests, when I consider the psychological effects of this special margin. Anyhow, I find that the system can cope with it quite well. The Irish Government would very much like to take part. For the Irish Government, there is a special problem. For the first time in 160 or 170 years they have to detach themselves from pound for pound parity. Irish pound equals British pound. From this parity they must detach themselves. There are reasons for their wanting to do that (they lie in the psychological-political realm), and they have considerable anxieties in respect of the continuing dependence of Ireland on the London money markets. These arise also from continuing dependence on the London capital market, and, apart from that, the economic situation of Ireland is not very attractive. The inflation rates are not higher than elsewhere in Europe. They are reliant on receiving additional capital transfers; this is not really a problem for the Bundesbank, on the contrary, the Bundesbank will welcome it, if the Irish balance of payments will also be stabilised in this way, but it is a problem for the Federal Government to organise such capital transfers. To a small extent, it can be done through the regional fund, and to a greater extent, it must be done through loans from the European Investment Bank, for which the interest must be lowered.

The most difficult problem appears to be to cater for the British. Hitherto the English press has carried the most intelligent discussion that one can read in the European press. For about half a year, every week ten articles, not unintelligent articles in part on this whole complex issue, but they are indeed the only ones in England, these article writers, who understand the problem. The rest hardly understand it, some instead struggling against the aforementioned ‘scapegoat mentality’ which would make of the European Community a whipping-boy for their own deficiencies, while others push forward the ‘scapegoat mentality’. The Prime Minister would certainly be inclined by his political instincts [Instrikten?] to venture taking part in it all right from the start. But if I put myself in his position, confronted by the trade unions, confronted by the Conservatives, confronted by his own party, confronted by this trend in public and published opinion about the EC, then I would almost believe that he will come to the conclusion that he cannot fight on twelve fronts simultaneously. I assume that this in the end will be the one deciding reason for Great Britain’s conduct on Tuesday of next week. That one simply doesn’t fight too many battles at once. On the home front, at home in one’s own country. Nevertheless the English will try, and we will have to help them, to find a position that will later allow them to come straight in belatedly without loss of face, when the preconditions have clarified themselves. 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 Norwegians will associate themselves in a similar way as with the ‘Snake’ hitherto. They would very much like the Swedes to do the same. The Danes would also like that. I cannot judge the presently new Swedish Government and its views. I assume that it will be similar in Austria. With Switzerland, it will basically continue as before. There we really have to deal with the unpleasant psychological problem that the French state leadership – I must be very careful … the best way for me to overcome inhibition is with boyish casualness – is cross with the Swiss, because a French citizen can anonymously set up a numbered bank account there and in this way get around French tax laws very easily.

Dr Schöllhorn:

Charles Aznavour.

Federal Chancellor Schmidt:

That you know a parade of such cases, Herr Schöllhorn, lets me suspect that this parade of cases already been going on for six or seven years. This still always plays a role, but not only this one case, and that is a doubtful matter, on the whole, that unfortunately has a bit of an effect on the prevailing mood, but I assume that things will go with the Swiss exactly as previously in respect of the ‘Snake’. The Nordic countries are meeting in Copenhagen this weekend, by the way, in order to reach formal agreement.

About France, I have already spoken at length. I will only say – and here I come to the foreign policy significance from the German national viewpoint – that, in this matter, as in many other matters, a purely German initiative might not have been ventured. It went naturally only with France and Germany together, and with the express approval of the Benelux partners, and also of the Danes incidentally. Everything that the Germans undertake alone in this field very quickly makes virulent the inferiority feelings of the others, and resistance immediately grows in consequence. What now concerns German policy, I will say in all simplicity, yet all urgency, without an efficiently functioning Common Market, without an economically and politically influential European Community, German foreign policy is not to be conducted successfully. German foreign policy rests on two great pillars: the European Community and the North Atlantic alliance. And the decay of one of these pillars or even the removal or the collapsing in on itself of one of these two pillars would destroy the equilibrium of German foreign policy. That may sound to you like Adenauerian crudeness, and it is. But it is right. The whole game that we have played in the last ten years towards the Soviet Union, towards the eastern European countries, that we have played over Berlin, in order to steady this fateful city in its position, all this would not have been possible without these two pillars behind it. We are doubly vulnerable and will remain so far into the next century. Vulnerable on account of Berlin and also on account of the open flank to the East, on account of the partition of the nation, symbolised by the insular position of Berlin, and secondly we remain vulnerable on account of Auschwitz. The 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. So much the more we remain reliant on these two pillars, of which I spoke, one of which is the Common Market. A European Community without an efficiently functioning common economic market will decay. And how strongly the memory of Auschwitz plays we have experienced many times in the last twenty-four months. When we wanted to extradite from France a lawyer – Croissant, the man was called – who lent encouragement and help to terrorists, what a revolt! When a poor old man – Kappler, he was called – escaped from an Italian military hospital with the help of his by no means young wife, and perhaps a third person helped, what a revolt in Italy, what accusations: rebirth of Fascism. All silly stuff, all nonsense. But here manifests itself this mix of inferiority in respect of the great German success, which then reverts to the memory of crimes that were committed in the name of the German people forty years ago, more than thirty-two, thirty-one years ago, that still represents us. I recently made a quite innocent incidental remark three weeks ago; I was asked by foreign journalists, in the course of a long interview, what the European Parliament should actually be, whether it would still have no significance when it was directly elected. I said, “It has the significance that the Treaty of Rome allotted to it, except it will certainly win further significance, because its legitimacy is now shored up by direct elections, and it is already acquiring its significance.” Pandemonium in the communist and Gaullist press in France! Or I see that the Frankfurter Allgemeine Zeitung today has an article “Adieux germaniques” where the communist party newspaper L’Humanité and Canard Enchaîne excite themselves, from the left or from the right, just the same, because the French Foreign Minister Guiringaud took his leave of Herr Genscher and me the day before yesterday and only then was his removal from office officially announced in France. There you can trace just how thin the ice still always is in all friendship, and it will not get thicker through our being so dreadfully successful.

We are economically the second strongest Western power in the eyes of the world, as we are also militarily, by the way, and most politicians out there in the world know it. With the exception of nuclear weapons, that we do not have, thank God, we are the second strongest military power of the West. The number of our soldiers alone is greater than that of the Americans, without our having increased it in the course of the last twelve years, rather all the others have disarmed so much. By holding firmly to our duties we have grown ever stronger relative to our own Western allies. And we have also attained very great political weight in their eyes. 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.

I take great trouble to show consideration for this sensitivity, growing sensibility, of our partners out in the world. But, as said, when somewhere in Steigenberger at eleven o‘clock in the evening one makes a harmless remark of half a subordinate clause about the role of the future European Parliament, it can go like that. Or three years ago, when at breakfast in a hotel somewhere in America one tells a journalist, who asks if one would give credit to Berlinguer if he now came into government. And one says: “No, I think not, actually,” and he makes a great headline of it, suddenly one is the man who interferes in Italian domestic politics. Very, very difficult to avoid it fully, even with all the self-discipline that one attempts to impose on oneself. The more desirable it is that we are able to lean on these two pillars, which are simultaneously here a mantle for us, in which we can conceal our strength a bit.

On the other hand, I said the European Monetary System involves risks. I repeat: it involves essential chances too, especially if it is successful, the chance for us that the European Community will not decay. It is really a vital precondition for German foreign policy and its autonomy. It offers chances of the economic sort too, which I have not placed in the foreground of this presentation, but which I do not wish to hide. There are still a few problems on the coming Monday and Tuesday of which we must speak later perhaps.

I don’t want to extend the presentation here too long, but still I want in conclusion to come to an exchange of letters that has taken place in the last week between your president, Herr Emminger, and the Federal Government. Dr Emminger, in a communication to me of the 16th November, sought the agreement of the Federal Government on three points, which have certainly been discussed here by the council of the central bank, I assume, so I do not have to quote the points, they are certainly familiar to you. The first two concern the involvement of the Bundestag, under the safeguard of the autonomy of the Bundesbank, in arranging the final settlement. The minister, Herr Matthöfer, has already expressly agreed to that – the telexes have obviously crossed. I have had that confirmed again by State Secretary Schemeüler and have nothing to add today. What interests me here is a part of the third point of your letter. 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 [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. One can also not write down, to give you a relevant example, something else that likewise has to shy away from the light of publicity: what we would do, if need be, if the association, if the new membership of Greece, Spain, and Turkey led to our having at the end of the transition period, instead of four million foreigners in Germany, five or six million. What would be their right on the basis of the freedom of movement set down in the Treaty of Rome since 1957. What we on the basis of the problem that you here – illustrative example Frankfurt-am-Main (Persian) – naturally ought not to let happen, if it comes to the point that we get still more foreigners. What must happen then, one can imagine, one can quietly discuss with each other, one can nowhere write down, for the treaty appears otherwise. I don’t know if I have spoken plainly enough. Such a thing one does not write down. This would be my opinion as the Federal Government.

Yes, I ask you to excuse me, Herr Emminger, for having spoken for so dreadfully long and perhaps also not in a recognizably systematic way. I have however been able to get all the points off my chest. I readily stand at your disposal for questions and observations, to receive criticism of any kind. I have not talked much about monetary technicalities, ladies and gentlemen, that indeed is not my job. I am not the currency minister of the Federal Republic of Germany, but it is not the case that I have failed very carefully to make sure of what has been traded and negotiated in this field during the last weeks and months, from stage to stage, sometimes from day to day. Only I do not think that you expect me to speak here about intervention mechanisms in detail as Federal Chancellor; but if you draw me into conversation about it, you will see that I am not without knowledge in the field.

Dr Emminger:

Federal Chancellor, in the name of all the members of the council of the central bank, I thank you very much for this explanation of your political view of the matter. It was very impressive for all of us. I would now like to make a proposal as to how we proceed further. You know for sure, Federal Chancellor, that there is in this circle a row of members who have reservations or objections about the planned European Monetary System or some details of this system. And I see it as a very important aim of this conversation today that these members of the council of the central bank have the opportunity to put questions to you as head of the Federal Government or even to express their reservations. I regard that as the chief aim, especially as one now stands immediately before the final step to the new system.

I would like, however, before we open the general discussion, to raise one matter for discussion separately, because it understandably lies close to our hearts, namely your statement about the letter that I wrote to you on behalf of the council of the central bank with its prior verbal agreement. First of all, I would like to establish with great satisfaction that you substantially and objectively endorse the third clause of this enclosure, which we have advanced as the basic prerequisite for the whole discussion; namely, that there can be situations in which the intervention obligations of the Bundesbank could assume a scale that de facto made the fulfilment of our statutory responsibility impossible. And I believe, Federal Chancellor, we are all in agreement with what you have said, that herein lies a quite decisive point for the strength of the German position, which you have outlined for us here and which we must cover a bit with the mantle of the Community in order to continue practising our stability policy successfully. For that has had worldwide repercussions. It is decisive for the strength not only of the Federal Republic, but also for all Europe, I believe, that we carry on here. It also lies close to our hearts because it is our statutory responsibility. That is why, before we enter into a general discussion, I would like once again to leave this point to the discretion of the committee for discussion, if that is acceptable to you, Federal Chancellor. I can imagine that there are still questions on it, for example, about what you have especially emphasised, the at least temporary release from the duty to intervene, as it is called in our letter. It is clear that one cannot say it openly in this form. This possibility, however, is mentioned in a report of the monetary committee. There it is stated in Clause 19: “The temporary abandonment of the defence of the margin must be regarded as a precaution for a case of emergency. It is the last resort. For it to be possible for a country to fall back on this procedure, the grounds for its adoption must be fulfilled, that the releasing factors are of a temporary nature. However, a situation could arise in which these factors are irreversible. In this case, the country in question would come back with another level of exchange”. That is exactly the case that we have in view here, namely that there can be a situation where one must temporarily pull out in order then to come back after a few days, perhaps even after a few weeks, in agreement with the others, with a re-alignment, with a new exchange-rate structure. That is actually addressed in this report of the monetary committee, Clause 19. I understand very well that one cannot now lift that into the limelight somehow, especially not just before the summit conference. But I may equally well understand, Federal Chancellor, that the explanation that you have given on this point, is an explanation of the Federal Government to the Bundesbank.

Federal Chancellor Schmidt:

I will show you what I noted on your letter…

Dr Emminger:

Objective agreement then.

Federal Chancellor Schmidt:

I said yes, ever objective!

Dr Emminger:

Now I would nevertheless like to give the ladies and gentlemen of the council of the central bank the opportunity to put questions on this point, and I ask that they be restricted to this point first of all. Herr Härtl.

Herr Härtl:

Federal Chancellor, I believe that one can have a very deep understanding that, in such an attempt at the beginning of a treaty, one does not at once write in that we reserve the right to withdraw at any time. Yesterday evening, the chairman of this committee reported your views to us. I have reflected on how one can nevertheless make sure in a way that all sides save face.

Federal Chancellor Schmidt:

Whose face is in danger then?

Herr Härtl:

The face of both the one who promises the release from intervention without being able to deliver it, because the others will not join in, because he cannot carry it out against the wishes of the others, namely yours in relation to the partners in the agreement, and also, the other way around – I mean that now in entirely technical treaty terms - and also, the other way around, our face in respect of the obligations and the task of this Bundesbank. I think we could perhaps safeguard that in international law by writing fundamental principles into the agreement which contain: first, that it concerns the first phase of an experiment, secondly, that no impairment of national responsibility in the area of monetary policy results from the experiment.

Then we have at least made what you think, here in agreement with us, into a fundamental principle of the agreement, without placing a withdrawal clause or notice of termination in front of the others. It is however made into a fundamental principle of the agreement in the sense of international law - it would be so in civil law in any case – and one could refer to it if relations so change that this impairment does indeed occur or the experiment proves to be not so favourable for all the participants, so that one demands dissolution or withdrawal.

Dr Emminger:

Do you mean withdrawal from the whole agreement? We were speaking only of a temporary suspension.

Dr Härtl:

Or temporary suspension.

Dr Emminger:

In order, for example, to return with a new exchange rate, as I just read out. May I ask for other expressions of opinion on this? Herr Schlesinger.

Dr Schlesinger:

May I broaden the question about the foregoing clause of our letter somewhat? I certainly think that release from the duty of intervention, so to speak, as you put it in the report, is the last resort. Or, to my mind, the last resort short of dissolution. But actually the last resort politically. The normal means by which we free ourselves from a no longer bearable duty of intervention within a stability policy, or rather strongly reduce it, is through the correction of exchange rates. The means that we have applied (or that has been applied) here in the small ‘Snake’. As you know, practically every half year on average, sometimes a bit longer, sometimes a bit shorter, we have had a correction of exchange rates in the small ‘Snake’, and this on the basis of a difference in inflation that was no greater than the one there will be between all the participating countries, when we start the system next year. Therefore my question, Federal Chancellor, is this: what is the view of the Federal Government on the commitment, which it will enter, that exchange-rate correction can take place only by agreement, something that is indeed self-evident, technically speaking, but that juridically actually means only when agreement is reached, when all agree or - to put it another way - when one party opposes, there is no exchange-rate correction under the terms of the agreement? How can one imagine that, so to speak? You said yourself, Federal Chancellor, that actually it is chiefly the debtor countries who probably have to move. On the basis of credit facilities, that really does not seem so certain to me in the future.

Federal Chancellor Schmidt:

I still believe it, Herr Schlesinger, for even in the past the debtor countries certainly did remove themselves from the then ‘Snake’. Long before their lines of credit were exhausted, long before.

Dr Schlesinger:

Removal, yes, but…

Federal Chancellor Schmidt:

Italy, England, France all left long before they took their lines of credit support.

Dr Schlesinger:

But, in practice, exchange-rate corrections without departures – what that is, one should get absolutely clear – as it has actually in recent times been rather the reverse for obvious reasons. From the interests of these countries, they were actually not concerned whether they devalued against the Federal Republic or the Federal Republic revalued against them.

Minister Matthöfer:

Herr Schlesinger, I have done it once, it was in Senningen and it occurred at the express wish of Belgium. The Bundesbank did not ask to invite me there, rather the Belgians very cleverly orchestrated it.

Dr Emminger:

Mind you, this only came about, that we revalued, because nobody wanted to devalue.

Minister Matthöfer:

Generous as we are, we allowed a different impression to emerge, but factually it was so, that the interest lay on the other side.

Dr Schlesinger:

Yes, well I don’t know, I did not altogether realize that, I must say. But it actually concerns the interpretation of this agreement to carry out exchange-rate changes only in harmony, something – as Herr Pöhl has always made clear to us, and I agree with him – cannot technically be otherwise; in the end one has to agree what sort of new combination of exchange rates comes out of it. But what that can actually mean, one must not therefore tell the partners in the agreement clearly enough, that for a country which ought mainly to lie on the one side of the duty to intervene, that for this country, under certain circumstances, limits will be reached, as in the past – if it has gone beyond ten or twelve milliards in interventions, then we could no longer support it here – that one must then do something, and that then the interest of this country must actually be weighed heavily, we then say, against objection by Belgium or by Ireland or whomsoever.

Dr Emminger:

Are there further questions? Herr Kloten.

Professor Kloten:

Yes, for me too the ultima ratio is the release from the duty to intervene, and as the whole system is geared to us, I can actually badly imagine that use could be made of this principle possibility even in an almost hopeless situation. It is all the more important that the correction of parities is embedded as a possibility. As agreement is presupposed – naturally, just as Herr Schlesinger said, without harmony it cannot happen – it is not unimportant for us where the Federal Government stands on this possibility. You have spoken of it, Federal Chancellor, as a possibility of which use should be made if the occasion arose, but one must see the position of this possibility within the entire package. And there this possibility is just pushed very far back onto the sidelines. For us, though, it plays a central role. It is not improbable that already in the first months of next year, judging by the divergence in price trends at any rate, the necessity of at least discussing a correction of parities will be on the agenda, and that already therefore the question will be discussed between the Federal Government and the Bundesbank, whether we should propose a correction of parities to our partners. Given the volumes of currency support, it is actually not to be expected that the debtor countries will point out this possibility very early themselves, let alone press for such a correction. It will therefore be our primary request to get this possibility back into the field of vision. And therefore I think that I indeed understand, when you say, the last two lines, as I had understood your written note, the last two lines cannot be fixed in writing, but what is in the third line from last, correction of parities, is nevertheless something where we should know that the Federal Government not only sees this possibility in principle, but also that it…

Federal Chancellor Schmidt:

But, Herr Kloten, that is self-evident. We have hitherto in recent years, as has been said, corrected the parities every six months.

Professor Kloten:

I know, but that is my point, that was actually my final sentence or final half sentence: that this possibility gets its deserved place as an integral permanent part of the entire system at the meeting of heads of government on 4-5 December.

Dr Emminger:

I ought here perhaps to draw attention to the fact that the changing of central rates is already expressly mentioned in the Bremen communiquéé. But I would not like to anticipate the answer of the Federal Chancellor. Herr Schöllhorn please.

Dr Schöllhorn:

I think that there are two countries who will find it hardest of all to make use of the possibility of opting out, namely the two initiators. Another country can perhaps say that it did not initiate the system, but it is very hard for us to do, and that is why I think that in practice, for the foreseeable future at any event, all other instruments will have to be exhausted before this last resort, and one of my greatest concerns is that it will be more difficult in future to make parity changes. When so big a country as France enters, it will no longer be a matter of a Saturday in Frankfurt, it will be more difficult. My experiences show this, and the persons involved, whom I know, they still work in partly the same way. It will be an affair of serious prestige to have to say “I devalue”. There is an election approaching in Nancy, there is a trade union congress I don’t know where, there are a thousand reasons; and the Federal Government has for a long time found it so hard, there are a thousand reasons to say…

Federal Chancellor Schmidt:

Earlier Federal Governments, not those to which I have belonged.

Dr Schöllhorn:

No, but there are a thousand reasons to say it, up to the point of foreign exchange control. The last resort of exchange-rate correction is put off for good and politically weighty reasons. Are you at one with Herr Giscard that this system, so long as inflation rates remain so high, simply must include the possibility of correction without great political condemnation?

Dr Emminger:

If there are no further questions on this, I would be very grateful, Federal Chancellor, if you could say something more on this very central question.

Federal Chancellor Schmidt:

I would like first of all to remind some gentlemen of my own record in this business. I have now had to make monetary policy for a few years, in so doing I have not let myself be governed by theoretical considerations and models.

There are at least two things that I would like to draw to your attention that you can verify by your own recollection. Messrs. Klasen and Emminger on the one side and Messrs. Schmidt and Pöhl on the other, acting as a foursome, sometimes even only as a pair, out of consideration for domestic economic stability in spring 1973, not only annulled an agreement between issuing banks but also ran up against international law, against current international treaty law, in releasing the Bundesbank from further intervention in the American dollar. And did not once mention it to the IMF in advance, let alone allow it the possibility of influencing the decision. I say again what I have said before. In spring 1973, we ran up against current international treaty law, the IMF treaty, in multiple ways. We neither followed the whole rules of the game, the procedural rules of the treaty, nor observed the substantive legal requirements. We released the Bundesbank from the duty to intervene against the dollar exclusively from the motive of winning room to manoeuvre within our country for a stable, for a stability-directed policy – and that was harmoniously agreed by the apex of the Bundesbank, the then Finance Minister, the then Federal Government, and the then Federal Chancellor. We certainly didn’t give prior notification, when the Federal Republic of Germany entered the IMF, that we would make use of the clausula rebus sic stantibus [a fundamental change of circumstances could make a treaty inapplicable] if the need arose, we never once wrote it down, we did it when matters could not continue otherwise. We even managed to detach the Deutschmark from the dollar, really opening up for us the chance for a stability policy, in harmony with our American friends and without causing conflict within the alliance. And then afterwards we really pursued a truly radical stability policy, beginning in June 1973, you on the monetary side, we on the fiscal side, the budgetary and tax-policy side, cancelled all possible tax cuts, annulled stability loans, what I know we all did. If we had known that the oil crisis would break out six months later, we would not have acted quite so radically. One to say that today. [A brief interjection by another speaker has been deleted from the transcript as released.]

Federal Chancellor Schmidt:

All right, the duplication of the effect was a bit too strong. Anyhow, I summon them both to your recollection. The detachment from the dollar contrary to international law, because domestic stability was too seriously endangered. All of that wasn’t written down somewhere or set down in advance, deposited with a notary, so one must then refer in case of need to this or that in the Treaty of Rome or somewhere, if somebody should have legal objections – in reality it’s never a legal problem, only for Germans are such things legal problems, only for Germans and jurists. German perfectionism may not prevail over political sense. I agree with Messrs. Schlesinger, Kloten, and Schemeöllhorn, what is crucial is that exchange rate corrections are brought about when necessary. We have already done that many times within the ‘Snake’ and it will also come about in the future. I have no doubts about that at all.

I was asked whether I was at one with Herr Giscard on this. Self-evidently, always self-evidently. Mind you, the Federal Republic of Germany will now carry very great weight in such a grouping, in this new system. The standing option – never expressed, possible but indefinite - of no longer taking part has a very great weight. One may not voice it. Nor may one cover oneself in advance anywhere. The French too have not written out in the Treaty of Rome that, if we get violently annoyed with the EC all of a sudden, we won’t take part in meetings of the Council of Ministers any more, but they have done it. I remind you of De Gaulle’s policy of the empty chair in 1965 or whenever it was. The English have twice, no, thrice negotiated their entry into the EC, once in the early 1960s with Ted Heath, who was then Europe Minister, then in 1969, and then Wilson afterwards negotiated yet again, the clever dealer. Nowhere have they given notice that they would, if need be, put in place a fisheries policy adverse to the treaty, but they do it. One does not announce such things, ladies and gentlemen. The crucial point is the exchange-rate correction. Now, one point, mind you, which I know causes you anxiety – and I understand the anxiety very well – can have a positive effect here. We will indeed take on an obligation to intervene when the intervention points are reached. But within those margins between the intervention points lie other points that arise from this basket-indicator. And in any event, reaching the point of the basket-indicator will trigger talks, at any rate between central bankers. And such talks – now comes the positive aspect of the point, Herr Schöllhorn – can then really lead straight away to exchange-rate correction, as recently in Senningen, without urgent need coming into it, inasmuch as these consultations triggered by reaching the indicator point, or what is it now called?

Dr Emminger:

Divergence thresholds.

Federal Chancellor Schmidt:

I’ll learn these new expressions yet – this can lead to exchange-rate changes possibly taking place earlier. What gets me is that we are now, at this stage, loading the whole thing with loud ‘ifs’ and ‘buts’ and ‘howevers’ and ‘boths’ and ‘alsos’. I am very concerned that we create a bit of additional trust in Europe. I believe that this entire business carries a risk for all Europe that you have not so far mentioned. We are all of the opinion, I assume, that the exchange-rate relationship between the Deutschmark and the dollar does not currently correspond to purchasing power parity. If American economic policy really continues for two or three years, as it has now been announced since 1st November, then exchange-rate relations between the Deutschmark and the dollar could be taking place in a different direction from the habitual one to which the world has grown accustomed.

Dr Schöllhorn:

The economic margin for it is there.

Federal Chancellor Schmidt:

Yes, yes, but now I want only to say, what does this signify for us? That is not the only question, Herr Schöllhorn. What does this signify for other Europeans? I do not want to draw their attention to such problems, that they have still not thought about at all; many of them are very short-term in their thinking. But it is nowhere written in the Ten Commandments that the dollar is worth no more than two Reichsmarks or two Deutschmarks. That can again become quite otherwise. In any case, purchasing power parity lies elsewhere, it doesn’t lie at 2.00 DM, it lies perhaps at 2.60 DM or 2.70 DM, I don’t know. And if they adopt a policy that brings their balance of payments into equilibrium or at any rate promises to do so, which would certainly be enough to satisfy the markets, then the exchange-rate relationship between Deutschmark and dollar may move in another direction in the course of the 1980s. That would have consequences for those of us who are tied into this monetary alliance. That means – I want to draw your attention with this comment, which I utter only softly and may not say outside: it carries a whole host of risks for all possible participants. We may not emphasise these German risks too strongly outside, Herr Schlesinger. I only beg; I would like to emphasise that strongly. I earlier made a mistake, my colleague Matthöfer makes me aware of it, in my presentation I perhaps emphasised a little too strongly that I regard the European Community as a mantle in respect of the national needs of this partitioned German nation and its Berlin-exposure, etc. Naturally, I would not have it understood that this is the only reason for our European engagement. I simply did not bring forward the other reasons so clearly, especially not the economic reasons, because I took it to be communis opinion among us all for twenty years more or less, but I think Herr Matthöfer is right to draw my attention to it, so that I don’t in any event leave a white patch on the map here “for the record’, without my expressly filling it in now with many pictures or examples

Dr Emminger:

Many thanks, Federal Chancellor. I would like to take the opportunity to tick off one of the separate points that we should talk about today, usefully if only briefly. You mentioned it, namely the question of the significance of the basket of currencies as an indicator. We have often talked about it here, because it can naturally very much affect us in daily policy. Also the standpoint has occasionally been laid on the table here that it can be useful for us to have such consultations, that it is not only an obligation that falls on us, but also that we could very well be on the other side some time, not always just a country in surplus. But even as a country in surplus we could have an interest in such consultations, in order to trigger certain things. One thing always lay close to our hearts here: namely that a formulation be achieved – the last word on that has not yet been spoken, but some formulation will probably be submitted at the summit conference in Brussels and will gain its blessing – what lay close to our hearts was simply to guarantee that, neither directly nor indirectly, will it be stipulated that there is an obligation to negotiate whenever these deviation thresholds or divergence thresholds, – as the new expression has it – are reached, rather that there even then remains the possibility of doing nothing. That one indeed gives a couple of reasons for so doing, but has no need of a great procedure, that the situation does not require a negotiation. That is all. We do not want a quasi-automatic obligation to come into being or that the thing will be so formul, ated that, when a country is convinced that there is nothing to negotiate, that no special measures are needed, this country must exculpate and excuse itself like a defendant, so to speak, and have to make a big thing of it. If some such neutral formulation were successfully to be found here, which made clear that not negotiating is just as much an option as negotiating, then this point would be resolved to our satisfaction. I just want to use the opportunity to put this on the table, since you have touched on the question.

Federal Chancellor Schmidt:

May I say something about that right away? I remember a midday conversation with Giscard and Barre about three weeks ago, and Clappier was there too, and from our side – were you there, Herr Schulmann? I had been in Italy and on the return flight I wanted to have a look at this Berlin-Paris exhibition which was really worth seeing. Giscard had heard about it and said, I’m taking part in that, and you must come and have breakfast with me beforehand as well. There at breakfast we naturally talked about monetary policy. Clappier said in conversation – I mentioned to him once again for my own part this reservation that you bring forward. I said I would not let that be negotiated with me. This basket-indicator cannot turn into an obligation to do something, that’s not on. To that Clappier said, well, the basket-indicator leads to consultations, as you, Schmidt, certainly want. Then I say, I want that too. At the consultations, there are four possible outcomes, he said: 1) to do nothing, 2) the monetary policy of the country in question must change a bit, what do I know whether they do it with their discount rate or lombard, reserve-obligation or whatever, or 3) intra-marginal intervention, or 4) change of exchange-rate. All four must stand at their disposal, as possible outcomes of such a consultation. In first place: “To do nothing” – and we will certainly get that expressed.

Dr Emminger:

I would like to think that, if that comes to be expressed in some form, then we could live with that formula. May I establish this as the view of this circle? Then we need not continue a separate discussion of this point. I have however a request to speak from Frau Dingwort-Nusseck. Was that on this point?

Frau Dingwort-Nusseck:

Fundamentally.

Dr Emminger:

Please, Frau Dingwort-Nusseck.

Frau Dingwort-Nusseck:

Federal Chancellor, if someone accentuates more strongly than you have just done the risks or, as you just said, the ‘ifs’ and ‘buts’ of the whole system, it certainly isn’t because he fails to see the even greater risks of not negotiating, nor is it from provincial egoism or an arch-conservative attitude either, rather it is because he believes that other ways to integration are perhaps less risky than this way, in which we see certain dangers and a jeopardising of German stability that could turn out to be an explosive device for economic policy strains with the partners. When he therefore sees other ways in which preference could be given, for example, an essentially massive transfer of resources, then he really finds himself in agreement with exactly what you previously formulated for many years up until 1976. And if, as you quite rightly say, the political data have been given for many years, and bilateral consideration with the current French President has existed for many years, then the really big question is naturally, what has changed so fundamentally in the last two years to give this way precedence over other conceivable ways? If you will permit me to make a tiny statistical comment – the disintegration in trade is certainly not verifiable by numbers – there has indeed been one runaway year, 1974: explosion of nominal world trade after the oil-price explosion, but in every subsequent year trade within the Community has clearly grown stronger again – permit me, I happen to have copied it out. Some of us naturally view the second premise with some reserve, namely, the improved calculability especially for middle-sized businesses. One thing very frequently said in relation to these businesses is exactly the consideration that makes it hard to respect some of these reflections: the exchange rate has a strongly political quality for the other partners, exchange-rate changes are therefore carried out less frequently but very much more brusquely, very much more abruptly. The chief question: what has led to this radical change in thinking in the last two years?

Dr Emminger:

Many thanks. You also proposed yourself, Herr Pöhl. Did you want to say something about this point?

Herr Pöhl:

I wanted to say something, if we have closed the topic of exchange-rate policy and release from the obligation to intervene.

Dr Emminger:

Then, may I ask, who would still like to put questions on the point of exchange-rate policy, on this central point?

Professor Duppré:

I have a technical question. What will be done on 4 and 5 December in a juridical sense? An agreement. And on that are then based the known draft decrees, resting on 235. Is that the formal sequence of events?

Dr Emminger:

Actually, I would like first of all to bring the exchange-rate theme to an end. In my opinion, one doesn’t need the decrees for the intervention arrangements. Any further questions on exchange-rate policy?

Herr Wertz:

Mr Chairman, I think that that “in some form”, as you put it, cannot do. It must rather be captured with certainty that the divergence thresholds, that the reaching of these divergence thresholds can also produce “non action”.

Federal Chancellor Schmidt:

That will be done in Brussels.

Herr Wertz:

The chairman formulated it differently and said “in some form”. I referred to the chairman.

Dr Emminger:

I may hereby establish that it is not my statement that counts but the statement of the Federal Chancellor.

Herr Wertz:

I am grateful for this confirmation.

Dr Emminger:

Anything else on the question of exchange rates and the question of indicators?

Dr Irmler:

Only what Frau Dingwort has really said already. We have to establish that the flexible rates, just because they are flexible and don’t change abruptly, have affected world trade and also intra-European trade less, it has developed well with them. It would have developed quite differently if unrealistic rates had been defended. The new system takes up – even if with the reservations just formulated by the Federal Chancellor: clausula rebus sic stantibus or ultra posse nemo obligatur – the new system expressis verbis takes up again the rule, I would like to speak in simplified terms, of Bretton Woods with fixed exchange rates. How can that work better and advance European integration further than a recognition of the fact, which may obviously continue further and till now has not receded, namely that very different inflation rates exist in the individual countries. I have a strong suspicion and cannot rid myself of the uncomfortable feeling that with the very construction as it now is and is being discussed: an intervention mechanism, credits, and so on, actually a certain softening of the stability policy here in the Federal Republic will inevitably come about, without involving a guarantee that the others, the partner countries, will now be forced onto the path of stability. To be sure, they have certain intentions, we have all heard them verbally. But that is all really nothing new. I therefore ask myself why – you said it previously, Frau Dingwort, the change of will that one should henceforth move away from the flexible system, from recognition of the realities, namely the variously situated economic and political relations of the various states, and virtually make something, Federal Chancellor, that in outcome, so long as the exchange rates remain fixed – and they really should do in principle – that in outcome will look and act as if sovereign states of the most varied sort had adopted a single currency by means of intervention mechanisms. I regard that as a danger, for which I am inwardly not yet really ready.

Herr Pöhl:

I can perhaps combine what I wanted to say, Mr Chairman, Federal Chancellor, ladies and gentlemen. In view of time, I would like to present the four or five points that I wanted to mention in combination, since one cannot really separate one from another at all. Federal Chancellor, you have said that, as the anticipated outcome of the conference of heads of government on Monday and Tuesday, the governors of the issuing banks will presumably be instructed and requested to work out an agreement that will hopefully come into force on 1st January in which the rights and duties of the member of this new system will be established. It is quite clear that the negotiation of this agreement will still cause considerable difficulties, even when the heads of government have reached agreement on the principles. One really cannot expect the heads of government to have already decided all the details that are then to be settled. That is really not their job. I would just like to make a request, and to put in somewhat concrete terms, that, at the conversations which you will have on Monday and Tuesday, you will very clearly tell your partners the points where the Government and the issuing bank agree, which present the German position, and perhaps also convey that the central bank has made extensive concessions on this question, as I believe, for example, on the question of credit facilities, but also on a whole row of other questions, in the consciousness that these concessions have been necessary in order to make this system a success, at any rate so far as it lies within our power to make it a success. You would naturally very much strengthen the backbones of those of us who will afterwards have to negotiate the agreement if you expressed very clearly, in the still seriously disputed points that I would like briefly to enumerate, that the Government also stands behind the issuing bank here, and that the Bundesbank is not, so to speak, negotiating on its own account or at its own peril.

The first point concerns the question of exchange-rate changes. I think that one does not need to say very much on this, for the question is clarified for us very satisfactorily in the report of the monetary committee. There it comes exactly under Point 9: the European Monetary System should help to narrow differences in economic development, yet it should not prevent remaining real disparities in exchange rates being reflected, and so on, and so on. Exchange-rate changes, when they are necessary, ought not to be so long postponed that too much speculation occurs in the foreign exchange market, etc., etc. There it is all set out satisfactorily, so far as it can be satisfactorily set out in advance. For, unfortunately, one cannot really establish the rules for exchange-rate changes in advance – we discussed that in detail back in 1973-74. But one must also make clear – I believe – and indeed make clear if possible on the political level, that the transition period in the creation of a European monetary fund really is only a transition period and an experimental phase, i.e., that the final stage of the system ought not to be prejudged already in this transition period. That is a great danger in my opinion, and I think we have a common interest in not getting tied into things at the start which possibly don’t at all prove their worth afterwards, but which can only then be changed with great difficulty. In my opinion, this is not in the first place a juridical question, although it is also a juridical question, but not just a juridical question, but rather in the first place it is a very material question, and this most especially applies to the character of this new means of payment called ECU. We must prevent, I think, Federal Chancellor – and it must also be made clear to our partners, because there are in part quite unclear ideas about it – that this new means of payment is not right now to be established definitively, rather that its character and the manner of its use must come to light in the course of time, that it is first of all simply a matter of an instrument for the settling of balances between issuing banks and may be nothing beyond that. I don’t want to get into details here. Naturally we are not against its being used for other purposes too perhaps in its final state at some later time, but it must be prevented – to say quite practically what our concern is - that we for example accumulate a great pile of ECUs here which are, so to speak, of no further use to us. There must be a clause in the agreement that we can also give the ECUs back again.

Federal Chancellor Schmidt:

That is certainly in there.

Herr Pöhl:

No, no, the agreement is not really yet in place. It is really quite a contentious point. But I don’t want to bore you with the details now.

Federal Chancellor, I tell you, it is quite a contentious question, I would predict; one of the most difficult questions among the issuing banks, the so-called reconstitution clause. But I don’t want to bore you with the details. Only it must be made clear that, in the transition phase, we are dealing with an experiment, i.e., we must always have the possibility still of changing things in the course of time and leave a door open for ourselves if the system does not function. Of course, one cannot write that into an agreement, I understand that perfectly, but the possibility must exist in the concrete details that nothing is being established here definitively for all time, for example, even about the deposition of our currency reserves. I believe that we can find a form, a juridical form, that will allow us, if the system simply doesn’t function - which none of us hopes or desires, but it cannot be ruled out – that then we would still have the possibility of getting back again the 20 per cent of our reserves that we have deposited there. After all, that would really be not unimportant.

Third point in the combination: the indicator. You have explained that you regard it simply as an instrument that triggers consultations. We have already gone somewhat further in the negotiations.

Federal Chancellor Schmidt:

Whereby consultations can definitely lead to exchange-rate changes. They can also lead to autonomous monetary measures.

Herr Pöhl:

We have certainly always said so. But the demand of the others naturally goes very much further, and already we have fundamentally made rather far-reaching concessions. We have said that we are prepared for this to be a ‘presumption to act’, that there exists a supposition that one will do something. Only what one must in any case prevent, and I believe it must be said clearly at your level, is this giving rise to some sort of automatic obligation to intervene. You have again made that clear to us in commendable fashion, but it is an essential for us that we are not obligated to intervene – not obligated, we are certainly prepared to do it, but we want to decide it ourselves, we want to keep it in our own hands, when to intervene, and we don’t want it prescribed for us. Above all things, we don’t want to be obligated, not de jure but de facto, to be obligated to intervene in the dollar. For then we would really get into a situation even worse than before 1973, and that brings me to the next point – and this is a point that will certainly play a big role at the summit conference, certainly with some at any rate – namely the demand for what is somewhat euphemistically called a co-ordinated dollar policy. What that naturally means in German, however, is that, so long as the dollar is as weak as it is – perhaps it won’t stay so weak for ever, I could imagine that things will change again sometime – the members of the system will expect us to stabilise the dollar, because they are not prepared to revalue their currencies against the dollar to the same degree that the Federal Government is perhaps prepared to do. Here, I think, we must be very careful not to get ourselves into a situation where we assume obligations which overstrain us, which we are later actually not able to fulfil. We might then not be able to buy these dollars at all, even if we wanted to or if we were obligated to do it. That would actually bring the system very quickly near its end. A further point in the combination, that indeed appears very technical but, in my opinion, has considerable fundamental significance, is the question of whether the deadlines for settling balances should be extended from 30 to 60 days. One can say that this is hardly a question over which one should allow the whole business to break down, but that argument, I believe, Federal Chancellor, applies to both sides. I find we have made so many concessions in the negotiations, in the various committees, we have really worked very intensively since August, that one could now in such a question perhaps expect the other side to make concessions too. And I am of the opinion that we have no ground for departing from out position here. What we can do, however, what one can perhaps bring into view, and where the council of the central bank would probably be quite ready to join in, is to make a kind of goodwill declaration, so to speak, and say what we have already previously done in such situations: When is it sensible and advisable, we are prepared on occasion, in one case or another, to go beyond the 30 days. De facto we have already a considerable lengthening of the deadline for settling balances anyhow, de facto in that we really will increase the credit facilities massively, and anyhow make possible, within the framework of these credit facilities, these very much increased credit facilities, a stronger demand for these automatic credits.

Last point: on the question of credits, a fortnight ago here the council of the central bank – not all my colleagues, but a whole row of colleagues – really jumped out of their skins, I would say, and not without consideration. But in order to make possible the success of the negotiations, we did here approve a line of negotiation that is known to the Government and which goes very far in our opinion. I have the impression that this has come to the knowledge of our partners in the EC with great satisfaction, and that this has created for the first time the conditions for a successful conclusion of the whole matter, so that no additional concessions are necessary in this area, I believe. I also have the impression that they will not now be expected from our side. In no circumstances, in this respect at any rate, where credit facilities are concerned, should one go beyond what we offered in Brussels a week ago now, perhaps with insignificant modifications, with which I don’t want to detain you now though, quotas, extensions, and so on, as one can imagine certain allocations that would meet some desires. In no circumstances should we accept any unreasonable demands, such as special treatment for “debtors against their will”, but the topic will play no great role in earnest, if the English do not join at any rate. In any event, Federal Chancellor, you will make life very much easier for us, when we have to negotiate after the agreement, if you have already at this summit conference conveyed to our partners the impression that this is not just the stance of the Bundesbank, but that the Federal Government stands right behind it, and that full agreement exists between the Federal Government and the Bundesbank, as is indeed the case.

Dr Emminger:

Many thanks. We now have on the table all the points that will presumably once again come onto the table at the summit conference. I have from earlier a request to speak from Herr Hörtl.

Herr Hörtl:

I withdraw it.

Dr Emminger:

Then I next ask Federal Finance Minister Matthöfer.

Minister Matthöfer:

Just a few words, as I would not like to anticipate the Federal Chancellor, but I would like to say something perhaps from my observation of the negotiating situation, because I had the advantage over the Federal Chancellor, or the disadvantage, to be present not only at the negotiations at the apex, but also at the negotiations at the lower levels. We have the English to thank for a large part of the difficulties that have arisen and that been reflected also in your doubts, but I think they will cease to be relevant the moment it becomes clear that the English do not want to enter but will seek only to extract as many advantages as possible from the system and from their membership of the European Community. For example, two points: First the question, what happens when the divergence thresholds are exceeded? On that there is actually a very strong British position. With the French, the party political make-up of the Government seems to me to be a big difficulty. Because the President is indeed authorized to issue directives to his Finance Minister, but I don’t think there is quite the firm solidarity and agreement between those two as between us two. So no open opposition there, but it will nevertheless prolong technical difficulties brought forward by the English, who will play no role in Brussels, I bet. Then the greatest surprise, for the officials of my ministry at any rate, if I may name Herr Dr Weber, was the outcome of Aachen.

Federal Chancellor Schmidt:

They considered it impossible.

Minister Matthöfer:

The clear and unambiguous French admission of the parity-grid, and then, at the level where we then had to deal with it, the belated attempt to interpret it away as an indicator. But that will play no further role in Brussels, I tell you, because we will then have the Aachen constellation and not the Monory-Healey level. That is my view. Herr Pöhl, you were at one time even more intensively involved than I, because you always talk to central bankers too, and Herr Emminger together with his colleagues, but that will be settled. I also think that the conversations which Herr Lahnstein has had with Herr Clappier concerning the function of the basket-indicator have brought about so strong a convergence that one meeting of the heads of state and government will clearly and unambiguously settle it. To be sure, something must still be done there, but nobody can be compelled to negotiate against his will on account of any indicator-development. I am quite sure of that. On the extension of very short-term assistance, in contrast to Brussels, there has actually been a strong convergence of the French towards the German position, which is even better, I believe, than the Dutch compromise offer produced there. I think there will be agreement on that too. The distinction between short-term and medium-term assistance, whether 12.5 or 15 milliards of ECUs be allotted to short-term assistance, there, I suspect, one will enter into some tariff negotiations in Brussels and reach agreement in with them. That, I think, is not a matter that ought to cause us any huge concern. It simply comes down to how the access is regulated and when and how the settling of balances must take place. Taking the wider view, after the great progress that we have made and on the basis of the experiences that we had in Aachen, I see no reason for any anxiety that any of the concerns of the council of the central bank cannot be properly settled in Brussels on Monday. We will all see the result. It will be so that we will make an important step in the direction of Europe, that we will again get a bit of forward movement, and not just always see how it [Translator’s note: original reads “unter den Händen erfällt”]. We need that not only on political grounds, we need it on economic grounds, and I believe that we achieved a breakthrough in Aachen and that we will conclude in Brussels in the spirit of Aachen. All the people who were doubters in the meantime are really against it for quite other reasons than the monetary system itself. The Federal Chancellor has already pointed out how sensitive reaction was in France to the entirely self-evident observation that an elected parliament will have a different self-awareness from a delegated one. The most natural, most banal thing in the world was blown up and produced such strong internal pressure in France. One also sees that resistances to a European solution are to be overcome here, and they naturally make themselves noticeable in technical reservations. But the two people who will each represent the German and French states in Brussels, not only represent but also stand in for them, that they will overcome these technical reservations in the spirit of a rational settlement is beyond doubt.

Dr Emminger:

Many thanks, Herr Matthöfer. I have now on my list Messrs. Kloten and Wertz. Herr Schlesinger?

Dr Schlesinger:

A little interjectory question on the exposition of the Finance Minister.

Dr Emminger:

Please, Herr Schlesinger.

Dr Schlesinger:

Do I correctly understand you to have said that it still depends on how the final arrangement for the settling of balances turns out? I believe, just as Herr Pöhl has set out, that we are really of the opinion that one cannot deviate any further from our formal standpoint on the arrangement for the settling of balances.

Minister Matthöfer:

Not how, but when. Whether after 30 days, or 60 days, or as stipulated. This is certainly still to be settled in Brussels.

Dr Emminger:

I will have something more to say about that at the end, because I just had to represent the standpoint of the Bundesbank at the last ministerial conference in Brussels. But I would first like to allow Herr Kloten a word and then Herr Wertz. Please, Herr Kloten.

Professor Kloten:

Mr Chairman, I heard with complete satisfaction what Minister Matthöfer say in response to what Herr Pöhl brought forward and at the same time proposed. I would nevertheless like to emphasise that I entirely agree with the proposals of Herr Pöhl. It was not always the case in the past, Herr Pöhl, that I could agree with you about everything at our discussions of the progress of the EMS. But I emphasise my agreement with what you said and what you have proposed for two reasons.

The first reason is that the impression has been able to emerge outside the Bundesbank that a denial of proposed solutions or even an insistence on certain proposed solutions is the expression of a general rejection of the new monetary (and thus European) policy initiatives. That need in no way be so, and is in no way so. The profession of Europe and European policy initiatives, including monetary policy initiatives, is one thing. Clear judgment of the envisaged initiatives and, with it, possibly critical distance from such initiatives is another thing. This circle had very many, or perhaps I should put it better, not a few strong reservations, simply because they see the extraordinary monetary policy risks which the new solution brings with it. But that does not signify a general reservation. What concerns me, and I would like to emphasise this here, just as I already pleaded here several months before the Bremen resolutions, is that we should deal with the new monetary policy initiative ideas, which have been worked out in various places, and also develop our own ideas if need be. What makes the new system so questionable are not the elements of individual solutions undertaken for it but its configuration as a whole. Thus the co-operation, the composition, how it will submit to the role actually played by the currency basket solution and to the allied intervention regulations, to the ideas moreover of concerting monetary policy with regard to third currencies, above all with regard to the dollar, and finally in respect of the increase in monetary assistance. And from there come the anxieties that we have in respect of the role or even non-role of revaluation and devaluation. Here we come to the status of this proposed solution, which one would certainly like to do without, if it succeeds in achieving what is indeed generally striven for, namely a convergence in the direction of more stability. And, when one so looks at the thing, when one further takes into consideration that our European partners negotiate extraordinarily hard, how hard, Herr Emminger, is again clear from your latest memorandum on the points still open. One sometimes has the impression - does one not? – that some of our negotiating partners are not prepared to retreat a single step, even on issues that we ourselves would see as peripheral were they not in this context. And that is why this insistence on our side on elements of the complete solution is not the expression, and I would say even this with some emphasis, of petty thinking, but rather of the anxiety that these elements in their total correlation could carry greater weight than they should carry in our opinion. Therefore one must see that the system, as afterwards presented in its totality, is simply executable, and we are certainly those who will have to execute it. It is quite clear to me that concern for monetary stability is not our concern alone, but we are for the present primarily responsible, and, to this extent, Federal Chancellor, I ask for understanding when we must insist, yes, insist, on some points, where outsiders, even the politicians perhaps, think that there is room for somewhat more generosity. But where negotiations are concerned, one must always see – respice finem - how one will be finished with it later and one must also take into consideration the insistence of some of our partners, even our French partners, on points where we believed, according to our information, that a better solution, namely one more convenient for us, could have been reached. Hence my request that what Herr Pöhl has presented as our position – and I identify myself with it when I say our position – be shown to advantage on the coming Monday and Tuesday, for, like Herr Pöhl, I am of the opinion that is essentially easier to negotiate the details then, and also because this could make it easier for us to finish the system later. It will be hard enough anyhow.

Dr Emminger:

Many thanks. I now still have requests to speak from Messrs. Wertz and Köhler.

Herr Wertz:

Mr Chairman, Federal Chancellor, even when one sees the facts in your grand foreign policy scenario just as you do, with all the particulars as they were presented, that still doesn’t rule out one’s coming to a different opinion on the conclusions in important instances. Since the council of the central bank is not the place and members of the council of the central bank are not absolutely entitled to discuss foreign policy here in this room today, I would like to restrict myself to one comment, taking up one of your special formulations. You said that the ice will not get thicker through our success. That point of view has occasionally come up in our internal discussions. One could combine that point of view, as it has arisen here, with the remark: “Will the ice get thicker through inputs of money, financial help in whatever form, or through financial help in the form put forward here and now?” I would like to be allowed to put that question generally. The whole system and its precursors stand and fall by the domestic economic stability of one of the individual partner countries. It will be expected that this country will take more trouble than hitherto, and the first signs of this can be seen. The partner countries have been obligated to pursue a stability policy since they signed the Treaty of Rome, Article 104 is rather explicit on that. The results are disturbingly negative, when one sees that the three largest partners exhibit inflation rates getting on for 10 per cent. One of them a couple of points under, another two per cent over at present. As reported by the board of directors, the Italians conveyed here a few weeks ago that, on their plans, they believe the inflation rate can be lowered to 9.X per cent in about three years.

Federal Chancellor Schmidt:

But look at the balance of payments if the Italians in the last twenty-four months.

Herr Wertz:

But this, Federal Chancellor, if I may be permitted to reply, could very quickly change if the dollar then stabilised. With regard to the disciplinary effects, in the last surge of speculation, caused by one partner – as reported here, by the Belgians - we had to take up around 1.5 milliards on Friday before the last small realignment. We have the impression that they not only need a lot of pressing but also label somebody in our position of strength as weak and cynically ask: “Well, collect again, take in again, what has been spent on Deutschmarks”. And how hard that is, I need not tell you, neither you nor the Federal Finance Minister. The basket-indicator, originally designed, according to the interpretations in the annex of the Bremen decisions – according to the interpretations, I say expressly – like a perfect inflation-machine, will now only give us cause for consultations. When the divergence threshold is reached, a manipulated divergence threshold for the larger countries, principally for the Federal Republic, this forces us into consultations, with the possibility of non-action. Mr Chairman, I believe you have a white or a red telephone and communicate daily with your colleagues in the other national banks. I would suggest that you have the technical possibility and take care, certainly according to your reports, to come to agreement with the governors of the issuing banks off the cuff. It hasn’t hitherto been because of possibilities for consultation or consultations. There has only ever been a lack of agreement. And there we come to the real question. You have said with commendable clarity, Federal Chancellor, that the anxiety can certainly be dispelled that non-action might not de facto be a possibility. But there comes our anxiety that the possibility remains, I would say, our anxiety rests on the insight, based on experience here in this circle, that there is a rule which affects us alone, that we cannot alone constantly say “No”. We sometimes had to communicate on that, and indeed on very grave questions. Between the last sitting of this body and today, my anxieties have again been strengthened anew. One can indeed say, Federal Finance Minister, that this took place again in the depths, if I may say so, in which you also have to act, the depths of the committee for economic policy of the EC.

Minister Matthöfer:

But that is still a level below.

Herr Wertz:

I just ask myself, on what level must the Bundesbank fight hereafter?

Federal Chancellor Schmidt:

You certainly don’t need to go to the economic policy committee of the Landtag of North Rhine-Westphalia.

Herr Wertz:

No more, Federal Chancellor. I also know how to evaluate this circumstance.

Federal Chancellor Schmidt:

You also don’t need to go to this committee of which you just spoke.

Herr Wertz:

Only it has formulated thus, if I may quote a sentence: “The necessary condition for the harmonious durable functioning of the EMS is an alignment of inflation rates at the lowest possible level without thereby giving rise to deflationary effects”. That always faces us in all the papers, and the question is really whether all these restrictions and interpretations will make so strong a mark on the small print afterwards – I am very grateful to Herr Pöhl for his clarification and I would like expressly to endorse Herr Kloten’s point – that we, the competent gentlemen of the competent ministries and heads of department of the board of directors respectively, have to put up with this. Federal Chancellor, I know that you once vainly sought to help France in a difficult situation, and that, according to reliable newspaper reports at any rate, other sources not being at my disposal, Herr Pompidou refused to accept financial help from the Federal Republic.

Federal Chancellor Schmidt:

After his Finance Minister was happy. And his President made it impossible for him; it is fully accurate, what you say.

Herr Wertz:

I thank you for this explanation from contemporary history, for one reads it only in the newspaper.

Federal Chancellor Schmidt:

We may not publish it, nor can I say it openly.

Herr Wertz:

So we know exactly how high the truth-content is. However, after the United States of North America accepted swaps from Japan, from Switzerland, and from us in the known combined efforts to support the dollar, I would regard it as thoroughly satisfactory for European policy and for foreign policy, if we were to lend not-very-binding help to our French neighbours, the French Republic, in the same way, if it came to it. So a full agreement on the goals, in the attempt. Great anxiety where the model, where the resolutions are concerned. I believe, Federal Chancellor, even if we arrive at such general reflections at the end of this meeting, it was the duty of one of the representatives of the ‘dissenting-vote group’, of one of the nonconformists, to tell you what considerations have led us to disagree.

Dr Emminger:

Many thanks. I now still have Professor Köhler, and I think that we must then close the list of speakers, because time is running out. Herr Köhler.

Professor Köhler:

Federal Chancellor, we wanted and want to bring our criticisms and anxieties to you today. But perhaps it is useful if, before you go, you also hear a voice that sees a very great chance in this model. Not only that we are certainly at one about the goals, as Herr Wertz just said, of having greater monetary stability in Europe and, on the other hand, that it is clear to us that this can only be achieved with monetary policy discipline in Europe. When one now draws conclusions from the ‘Snake’ and Bretton Woods, one actually comes automatically to the realisation that, if we are going to be serious in Europe about economic policy discipline, we need some sort of indicator that will automatically, as it were, bring the Governments and central banks to consultations at one table and make an attempt to tailor economic policy to the intervention system, just to avoid big interventions. If this indicator causes us anxieties, then in my eyes they are above all anxieties about the transition period, about a time in which we have still not managed to bring our partner countries to more price stability. In this time there really is the problem for us of avoiding the danger, which has been outlined, of having to go down the route of heavy interventions and ultimately price rises. But we ought not, I believe, fail to appreciate that there really is a great chance here in the co-ordination of economic policy with the help of this indicator, and the model before us is something entirely different from a mere broadening of the ‘Snake’. And, in my eyes, it also counts that we will have this artificial monetary unity, which indeed, though it may be a further aspect, which indeed shall perhaps lead us away from having a national currency as a lead-currency. Basically, I can only say that is more a request, to the Government too, that the whole system naturally only functions when basically it is credibly managed. And that, at the moment, while this credibility is not inherent in the system, there naturally exists a very great danger, with all the consequences, that the system will not hold up. But I still wanted to emphasise that we have here in this general model something different from the ‘Snake’ and Bretton Woods and that here is a chance to achieve co-ordination in economic policy.

Dr Emminger:

Many thanks. With a glance at the clock, we must now bring the discussion to an end. I would like quite briefly to try and summarise what has arisen here from our standpoint, before the Federal Chancellor for his part says the closing words of this debate.

First the points which especially concern the relationship between Government and Bundesbank. I would like once again to repeat that, on the decisive Point 3 of the conditions that we formulated together last time in the council of the central bank, the Federal Chancellor has quite clearly explained that he objectively agrees with us, even though it is not possible for good reasons to confirm in writing especially the last two or three lines of this Clause 3. I need not say more about that, I think, for the objective agreement has really been fully and totally established. That also applies to the attitude to exchange-rate policy concerning the Deutschmark. There was complete agreement that here perhaps some things will have to be done in future. It was also made clear that, in the new system, sometimes on reaching the divergence thresholds, an exchange-rate change could be up for discussion. I believe we can rely on the formulations on exchange-rate policy that are contained in the relevant paragraphs of the report of the monetary committee on this matter. If negotiated accordingly, I think the reservations and objections brought forward here will be taken fully into account.

Now I want quite briefly to enumerate the points which will presumably be put on the table at the summit conference in Brussels. Here I would first like to repeat what Herr Pöhl has already said, that we are naturally very interested in these questions being decided by the heads of government as has always been expressed as a unified standpoint in the relationship between Government and Bundesbank. We will then in due course have to negotiate the agreements with the issuing banks, and some of these points will again come up there. I repeat this once more.

One thing which must be settled, not by the issuing banks but now by the heads of government, is the role of the indicator. It has rightly been said that the duty to consult is also a chance for us, not only a burden, and I believe that full unity has been reached here today to the effect that non-action, i.e., not negotiating, must be quite as justified as negotiation. I want once again to enumerate the possibilities for negotiation, apart from non-action: monetary measures, intra-marginal interventions, exchange-rate measures; but under no circumstances obligatory dollar interventions.

Federal Chancellor Schmidt:

Neither dollar nor other intervention obligations.

Dr Emminger:

I would even say, Federal Chancellor, that one should not cite dollar inventions at all here but rather say in a general formulation, as it was once expressed in a compromise paper, “diversified interventions” and leave open what that is, so that the impression in no way at all arises that one could be put under pressure here.

Federal Chancellor Schmidt:

I think I can promise that we will not talk of dollars. But we also ought not to incur the duty to intervene in other currencies.

Dr Emminger:

No duty, readiness, to consult here.

The next point: credit mechanisms. I can only confirm what has already been said: At the last negotiations in Brussels – Herr Matthöfer will confirm it – there was a certain sigh of relief from other delegations when we made known our readiness to go as far as we had arranged. We could even go on here with “an idea” corresponding to what we arranged the last time here as lines of negotiations. But we have always said that one should only do that if it is absolutely necessary as a bargaining point, in order to settle other matters our way. So with our current offer of 12.5 milliards of units of account short-term and 12.5 milliards medium-term, Federal Chancellor, it really corresponds closely to what is set down in the Bremen model. There it was said that a major part of the newly created credit lines would be supplied with economic policy conditions, and only the medium-term credits are supplied with economic policy conditions, while the short-term credits, though indeed requiring a resolution, are nevertheless quasi-automatic. Therefore I think one has here a very strong argument on our side.

Then comes the question of deadlines for settling balances. That was always an important point for us, because it is the only case where there is an obligation to hold still at unlimited levels. That is something very unusual for an issuing bank, and we never thought of it as a credit facility, but only as a deferment of payment which is necessary until one accepts the balance at the end of the next month. So something unusual. We can refer here, Federal Chancellor, to the fact that nowhere in the Bremen model is there to be found anything that justifies the demand for an extension of the deadline beyond 30 days. If we stay with the 30 days, there arises from the addition of the then available possibilities, the automatic though limited prolongation to three months together with the nine months of the short-term monetary assistance, a deadline of nearly thirteen months, i.e., more than a year, that stands in the Bremen model as a short-term credit possibility. I think then that we also have very good arguments on our side here. Above all: it is quite alien to an issuing bank to carry on during the deferment without any limit. There is an automatic prolongation to three months, but with a limit on the debtor’s quota and, since the debtor’s quota in the new model is almost tripled, that is really a very marked expansion.

Last point: the general point which Herr Pöhl put on the table, namely that in this initial phase, it is a matter of an experimental phase, of an experimental stage, and one cannot set down everything now (for example, with the ECU) in a way that will prejudge the final outcome. It is certainly right, what Minister Matthöfer said, that naturally the lines of development must be in there. We don’t want to obstruct further development in any way. But there are things that one should not tie up now so that one cannot then carry out changes in the light of experience. I don’t want to go into details.

That was the commentary that I wanted to make on all these points from our side, and I may assume that the council of the central bank agrees with this general line. I have heard to my satisfaction that several members of the council of the central bank have said: if this line is achieved, as we certainly assume, then they would withdraw their other or formerly remaining reservations, and I believe, Federal Chancellor, it would be very desirable if we could reach one big general agreement here, for we want to bring this matter positively to a good end, i.e., to a success.

Federal Chancellor Schmidt:

To a good beginning!

Dr Emminger:

Naturally! To a good beginning, not end. To a good beginning and to a really durable new system. I would be very grateful to you, Federal Chancellor, if your time would still allow you to say something.

Federal Chancellor Schmidt:

I think I still have a quarter of an hour or sixteen minutes. Yes, great thanks for your closing remarks, which you made as a résumé, Herr Emminger. Perhaps I may for my part speak about that in conclusion. But I would like to be permitted also to give direct answers to some, to Frau Dingwort-Nusseck and some gentlemen, and not pass over with benign neglect what they have said. Frau Dingwort-Nusseck had a look at the statistics, I think we will agree on this point; I indeed do not have the statistics before me. The trend of the development of the Common Market in its first fifteen years, namely that intra-community trade grew significantly faster than external trade beyond the borders of the Common Market. This trend has been broken in the last five years. That is what matters to me. That it is in single years a bit less, a bit more, is not decisive; what is decisive is that the trend of earlier very much faster growth of trade within the Community, relative to trade outside the Community, that this trend has been broken, that is what I consider decisive. You said that one could imagine another way: massive transfer of resources. Certainly I too can imagine this, only in which Parliament will you get that through? Already the capital markets are limited, if they then want to go into the budget, we must first abolish democracy, if we would give six milliards from the Federal budget to Italy, Scotland, Wales, and Ireland every year. I mean, here are the limitations of a democracy; even within a different economic system, incidentally, namely the COMECON, the Soviet Union often only gets these transfers of resources through with very many tricks under the table and not by transferring capital from budgets. So that is extraordinarily difficult in democracies, the possibilities are limited, will unfortunately only be used in limited measure, but they will be used. The way that is pursued here and now, in addition to all that previously existed, the way of a monetary alliance, there you asked: what has actually changed? What’s changed essentially is a) the newly emerged stability-consciousness in Rome, above all things in Paris, and the will. One of the most important pre-conditions. And another thing b) has naturally changed, that the American benign neglect, concerning the dollar balance of payments, in the meantime became a malign neglect under Messrs. Carter and Blumenthal. And it was urgently necessary that the Europeans say to the Americans, that’s not going to carry on. I come right back to America once again. I see Herr Blumenthal tomorrow, I think, or next week, and once again have something to say to him about that. The third way that is always talked about in such committees, as Herr Wertz mentioned to you earlier, but that has hitherto remained only on paper all the same, harmonisation of economic policy, we need talk no more about that. It will only happen with the discipline that is forced on the government, when they themselves have to take the responsibility for decisions about revaluation and devaluation in the face of public opinion and can no longer leave it to the foreign exchange markets.

By the way, this harmonisation of economic policy also does not function, because the freeing of the exchange rate has released the governments from responsibility. That has played a role. The freeing of the exchange rate has released the government from responsibility. Currently apparent. In the domestic policy relationship with their public opinion, apparently and currently released. That has also relieved them from the pressure to manage their economic policy correctly. This applies quite especially to the United States of America. I think if they had wanted to devalue, Bretton Woods would not have had to break down. And if they had wanted to avoid devaluation, then they would have had to change their economic policy. They wanted to do neither. That’s why Bretton Woods is broken. And that then leads me straight to Herr Irmler. I would not compare this thing that we are starting here with Bretton Woods. Bretton Woods is broken because the ‘anchor power’ of the Bretton Woods system, the United States of America, has not fulfilled its duties. The anchor power of the new system is the French and the Germans together; let us hope that it will not be said that it is the Germans. But in any event the Germans, Herr Irmler, will really never ever manage such a neglect of the balance of payments and neglect of inflation as did the supreme power of the Bretton Woods system, the USA. And for that reason I would really not want to draw the comparison with Bretton Woods. The United States of America needed until 1st November 1978 to draw the obvious conclusions from a neglect which started in 1968, so ten years. One still doesn’t know whether the conclusions now drawn are definite. I myself have never been, if I may say this to Herr Irmler, a supporter on principle of freely floating exchange rates. I am also no supporter on principle of fixed exchange rates. I think one must get along a bit pragmatically. I warn, however, against wanting to judge the verdict between one system or another only on diverging inflation rates; if they alone were decisive, it would be hard then to see why the yen has actually climbed so against the dollar. But here all sorts of factors play a role, especially the current account and the expectations that people have with regard to the development of the current account. In addition, the capital account also plays a role; many factors play a role, the inflation rate too, certainly. But the inflation rates of the yen and dollar were not so far apart that the yen had to climb so and the dollar to fall so.

To Herr Pöhl, I would like fundamentally to say that the Federal Government has made extraordinary use in the last weeks and months of the argumentation of the Bundesbank and its council acting in full autonomy. It will also be put to such uses in future. Even soon, in the next days in Brussels. Now is the opportunity for me actually to have occasion to recall with gratitude this outstanding collaboration between Federal Government and Bundesbank since July 1972, that is now six and a half years, while I have been Finance Minister and Federal Chancellor. Those who have represented the Bundesbank in relevant consultations of the Cabinet in Bonn, be it Herr Klasen, be it Herr Emminger, be it Herr Schlesinger, also Herr Irmler or Herr Pöhl on occasion, will certainly for their part have reported here how hard we have tried in contemporary economic decision-making to listen to the advice given us by the Bundesbank. Herr Pöhl, the ECU 1 will certainly be a unit of account first of all and nothing else, and how you cope with the reconstitution clause, there you are right, that is your business, but I have no fear at all that you will not cope with it. You will manage that all right. I speak expressly to Professeor Köhler about the ECU 2. That is namely what he meant, if I understood him correctly. In the first place, that really comes later and not now, rather when the international legal constructions will be in place, which really still require the experiences of the next two or three years, in order to be brought to the table anyway. But when it does come, there will then be a great unfolding possibility for the future and the sole chance to prevent the German mark becoming in growing measure a reserve currency along-side the American dollar. The sole chance to prevent the Deutschmark gaining more and more weight in the world as a leading currency, with all the dangers that that brings with it. This chance lies with the ECU 2. Without one having to say it out loud today; otherwise the English will say, there one really sees it again, the whole thing is born of German egoism; but that lies with the ECU 2.

Herr Pöhl also spoke of the basket indicator or the divergence threshold, we have really now talked about that repeatedly. Herr Emminger mentioned it again in his summing up. I will enter into no obligation to intervene, neither in the dollar nor in other currencies, because of the divergence threshold. Have never even had the intention. And as for the special treatment of debtors against their will, Herr Pöhl, that is a contradiction in terms. These potential debtors against their will cannot on the one hand demand that we intervene at the divergence threshold, and on the other hand not want to bear the costs of it afterwards. Well, we will be ready for that, we will manage that. I very much wanted to reassure you on this point. As for the purely short-term assistance – Dr Schesinger spoke of it and others – I have the impression that the French will stand by us there, so the deadlines don’t get out of hand.

Dr Emminger:

There is nothing at all about it in the Bremen communiqué.

Federal Chancellor Schmidt:

Herr Kloten had voiced reservations on account of the concentration of monetary policy. There I want only to say once more, please do not underestimate the weight of Germany, also the weight of the German Bundesbank. Also the weight of experience that you have. There is no issuing bank in Europe - I will except Switzerland for the moment – with this degree of experience over the last ten years. Do not underestimate your own weight.

You have made a remark which leads me to a footnote. You have said that the Bundesbank is responsible for monetary stability. That is an error. The Federal Government feels itself every bit as responsible for that as you do, ladies and gentlemen.

Professor Kloten:

But I said that, Federal Chancellor.

Federal Chancellor Schmidt:

Then I misunderstood you. There is no exclusive responsibility of the Bundesbank for monetary stability, rather the Federal Government is every bit as responsible for that, and it is also responsible for it to the voters, unlike the Bundesbank, and has to stand for election every four years. Then a remark by Herr Wertz, who once again referred to risks. I would like to leave no doubt that I see risks. I even said that at the start. I see several risks. You have fleshed all that out a bit further. In connection with the opinion of Herr Wertz, I would just like to refer to an observation made by me in a book that I wrote and published nine and a half years ago, at the time of the grand coalition, a book dealing with German foreign policy. Unfortunately, it had a misleading title. People thought that it was about military strategy, it was called Balance of Power. There you will find the observation: monetary policy is foreign policy. In one brief sentence, it has only five words, and that is still my view today, very much more than previously, on account of the experience of the last nine years; it is not only domestic policy, but also definitely foreign policy. Herr Wertz wondered whether putting in money now makes the ice any thicker. To that there is a twofold answer. Bilaterally, the answer is: no, it doesn’t, because it is unpleasant for the debtor, and because of the psychological reaction to the creditor – in the case of Italy we have seen it with the credit of five milliards ($2 milliards = DM 5 milliards), in the case of France we didn’t have to go through it, thank God, as Pompidou prevented it, as you rightly recalled. Bilaterally, I would say: it doesn’t make the ice thicker, but rather thinner. Therefore we also refused towards the end of 1976 to give a big bilateral credit to the United Kingdom. Because we had this Italian experience behind us. We therefore took care that it was made multilateral through the IMF, which had the double advantage that it could be provided with conditions and that the Germans did not appear as the chief creditor, although the Americans and Germans were essentially the creditors of this loan. Multilaterally, it makes the ice thicker, Herr Wertz. Made multilateral and given through institutions, it makes the ice thicker, because the people don’t have to feel obliged to Germany. In my view, the decisive risk for our currency is anyway not what happens in Europe, but the decisive risk for us is the United States of America, its balance of payments, its inflation policy, its exchange-rate policy. And even in the future there will be risks that we will be pushed into interventions, in deutschmarks against foreign currency in the dollar sector directly in respect of the USA, as always much more than in respect of European currencies. You really need only add together the national products of this pair of EC states and compare with the national product of the Americans in order to see that the greater risk remains there.

Here there are limits even for us, ladies and gentlemen. We cannot intervene ad libitum in favour of a dollar that is treated like a football by its own government, by its own treasury, by its own Federal Reserve Bank. We cannot do that. But if we then sometime have to say: this is the end of the line, we will then need allies here in Europe. For that is not so easy to do to the chief military member of the North Atlantic alliance. Then we will need comrades who will stand by us and say: yes, indeed, the Germans are right and it’s not in our French interest that European currencies constantly be sacrificed in market intervention in favour of a dollar badly treated by its own country. I intend to say this very clearly to Herr Blumenthal when he comes next week. I have also made Herr Carter aware of all that has come from the German side in favour of supporting his stability policy. As ever, the actual danger to the German stability policy lies more strongly with the dollar than with anything that can happen here in Europe. I ask you to see that very distinctly. And when I see how narrowly the Federal Government and the council of the central bank declared themselves prepared for further swaps for the USA this autumn, and what a dreadful heap of reservations we have about doing it, if it involves monetary assistance to France and Italy, things are not in the correct relationship to each other. I must say that very clearly.

As for the basket, that emerged first of all, Herr Wertz, as French-invented - now again I say something that may not be made public – façon de parler, swimming trunks, make-up, since the French are entering for the third time into a European monetary alliance that they have already twice left, and they very much wanted to demonstrate – and they can do it now too, not only because of the basket-indicator, but on many grounds, Herr Köhler alluded to them – that it is not the same as what they have already twice left. That is actually how this whole basket originally came about. It was not the French motive to crank up in this way – how did you put it? – automatic inflation-financing. That was certainly not the motive of my friend Giscard. There you interpret him falsely. I took recognisably the same line with Herr Köhler. Therefore I am thankful for Herr Emminger’s summing up. As for the famous last two lines, I will once more say it in all clarity. What I set out earlier on that score, I said in agreement with the French President, but I am also in express agreement with him that it may nowhere be proclaimed to the world.

Dr Emminger:

There is the reference in the report of the monetary committee. But we don’t need to draw any particular attention to it in public.

Federal Chancellor Schmidt:

No, it doesn’t depend on the agreement. The normative power of the fact is crucially afterwards, and the fact will bring into harmony either the council of the central bank or the Federal Government or both together. The legal side is not so important. Simply, we were agreed that naturally such a possibility must exist, but that one should not say it outside. Of deadlines for settling balances we have always talked.

In conclusion: I have been pleased to note that my principal political considerations, in which for me the whole thing has been embedded from the start and remains embedded, foreign policy considerations, European policy considerations, have apparently produced no far-reaching doubts here.

Second concluding remark: The start of this new system is hugely important. Markets could become nervous because somewhere a finance minister has made a remark. To imagine a conceivable case, comical but not wholly grasped out of the air: it could be a finance minister in another continent who triggers nervousness, and so my plea is, keep your nerve and don’t let yourself be made nervous by any stories which are conceivable but don’t necessarily have to arise. Third concluding remark: I ask you to understand that I have a political position to lose, not only in this country, but secondly in Europe, and thirdly in the whole world. You do not need to confirm that here and now but when you travel out to other states, to other continents – you also do not need to induce the Minister-President of your Land to repeat what I now say - then you will see there that I have a position to lose. It depends on German success in maintaining stability, measured indeed in the widest sense of the word: currency stability, social stability, domestic political stability, currency stability I mentioned at the start, intentionally. I have no intention of allowing this success in maintaining stability to be endangered. I have no intention, namely, of sacrificing my position. On that you can rely. I’m no gambler. I feel myself responsible for the fate of a people sixty-million strong, and I say in other places with a certain pride that I do not believe that the success in maintaining stability, even where currency stability is concerned, has since May 1973 been exclusively the success of the German Bundesbank. It would not have been possible without the Federal Government.

Dr Emminger:

This illusion I have never had.

Federal Chancellor Schmidt:

Very good. I hear this with great joy. The Federal Government created the pre-conditions for it by breaking away from the dollar, and then we used the freedom gained together; you through monetary policy, we through tax policy and budgetary policy and, in addition, through massaging the soul of the German public. We have used it together and we must also protect it together. I am grateful that today I had the opportunity after so many years to pay a visit to you here and to get my own back for the many visits that the leading gentlemen of the Bundesbank have made to the Cabinet in the course of the years. I am grateful for the discussion. I have made seven pages of notes here that will help me in Brussels next Monday and next Tuesday. Perhaps one should consider sometime some form of reciprocal invitation, Herr Emminger. Not in the sense of your coming to the Cabinet, you do that relatively regularly in any case, and that should continue, but perhaps one should sometime bring your whole council of the central bank together with a row of members of the Government for an evening meal or something of the sort later in the winter, when we have the initial nervousness about the new monetary system behind us and are pleased with how beautiful the weather is.

Herr Emminger:

Federal Chancellor, I don’t want to say much in conclusion. I would like once again very sincerely to thank you in the name of all the members of the council of the central bank, and I very much hope that this last thought, which you have just suggested with the reciprocal invitation, will materialise sometime. I am sure that we would all be delighted about it, and I would like above all to hope that we will then already be able to look back on a good beginning of the new system. Many thanks, Federal Chancellor, for coming to us at this so important, I would like to say, historic moment.