欧洲解体的前景

I am very grateful to the Aspen Institute for giving me this opportunity to address an audience in Germany, and I have chosen a topic which ought to be of particular interest to people in Germany. My topic is the prospect of European disintegration.

It is a subject that engages me in three different ways. First, I am passionately devoted to the idea of Europe as an open society. Second, I have developed a theory of history which casts light on the process of European integration and disintegration. Third, I am a participant in the process.

Open society means a society based on the idea that nobody has a monopoly on truth; a society which is not dominated by the state or by any particular ideology, where minorities and minority opinions are respected. Using these criteria, the European Community is a highly desirable form of organization. Indeed, in some ways it is ideal, because it has a very interesting feature: all the participating states are in a minority. Respect for the minority is the basis of its construction. The unresolved question is: how much power should be delegated to the majority? How far should Europe be integrated?

The way Europe evolves will have a profound influence on what happens to the east of Europe, the region that was formerly under the sway of Communist ideology. Communism built a universal closed society, but Communism as an ideology is now well and truly dead. The line of least resistance leads to the break-up of the universal closed system into particular closed societies, based on the principle of national or ethnic identity. We can see the principle well advanced in the former Yugoslavia. The only possible escape from this fate is to make the transition from closed to open society. But that is not so easy. It requires time and effort to establish the rule of law, the institutions of civil society, and the critical way of thinking which are characteristic of an open society. Societies devastated by Communism cannot make the transition on their own. They need a Europe that is open and receptive and supportive of their effort. East Germany got too much help, the rest of Eastern Europe too little. I am deeply engaged in helping the rest of Eastern Europe. As you may know, I have set up a network of foundations devoted to this cause, and that is the bias that I bring to the subject of Europe.

My second involvement is that I have developed a theory of history which has guided me both in my activities in the financial markets and in setting up the foundation network. The key to my theory is the role that mistakes and misconceptions play in shaping the course of events. There is always a divergence between the participants’ thinking and the actual state of affairs, but sometimes the divergence is relatively small and self-correcting—I call this “near-equilibrium;” and, at other times, the divergence is large, with no tendency to correct itself—I call this “far- from-equilibrium.” The course of events has quite a different character in near-equilibrium and in far-from-equilibrium conditions. This point is not generally understood. My theory relates to far-from-equilibrium conditions. I have made a particular study of what I call the “boom/ bust sequence,” which can be observed from time to time in financial markets; and I think it is also applicable to the integration and disintegration of the European Community. Since the revolution of 1989 and the reunification of Germany, Europe has been in a condition of dynamic disequilibrium. Therefore it presents a very interesting case study for my theory of history.

And, finally, I am myself a participant in this process of dynamic disequilibrium because I am an international investor. I used to call myself a speculator and I used to joke that an investment is a speculation that has gone wrong but, in view of the campaign against speculators, I am no longer amused. International investors did play an important role in the breakdown of the Exchange Rate Mechanism, but it is impossible to have a common market without international capital movements. To blame speculators is like shooting the messenger.

I shall deal with my subject on the basis of my theory of history. The fact that I am also a participant does not interfere with my ability to apply the theory. On the contrary, it has allowed me to test it in practice. Nor does it matter that I bring a particular bias to the subject because it is part of my theory that participants in a historical process always act on the basis of a bias. And, of course, the same rule applies to the proponents of theories.

But I must confess that my particular bias—namely, that I want to see a united, prosperous and open Europe—does interfere with my activities as a participant in financial markets. I had no problem as long as I was an anonymous participant. Sterling would have left the ERM whether or not I speculated against it. But, after sterling left the ERM, I received a lot of publicity and I ceased to be an anonymous participant. I became a guru. I could actually influence the behavior of markets, and it would be dishonest of me to pretend otherwise. This has created opportunities and imposed responsibilities. Given my bias, I did not want to be responsible for the French franc being pushed out of the Exchange Rate Mechanism. I decided to abstain from speculating against the franc in order to be able to put forward a constructive solution; but nobody thanked me for it. Indeed, my public utterances seemed to annoy the monetary authorities even more than my activities in the financial markets, so I can’t say I am doing well in my new-found role of guru. Nevertheless, given my bias, I must say what I am going to say, even if it is inconvenient for me as a participant.

The important point about my boom/bust theory is that there is nothing inevitable about it. The typical boom/bust sequence is initially self-reinforcing and, eventually, self-defeating, but it can be aborted or diverted at any point. It is in the light of this theory that I shall comment on the boom/bust process of European integration. I shall pay particular attention to the Exchange Rate Mechanism, which is playing such a crucial role in the process. It had worked perfectly well in near-equilibrium conditions, until the reunification of Germany. But the reunification has created conditions of dynamic disequilibrium. Since that time, the course of events has been shaped by mistakes and misunderstandings. The most tangible result is the disintegration of the Exchange Rate Mechanism which, in turn, is an important factor in the possible disintegration of the European Community.

Let me start at the point where near-equilibrium conditions were replaced by a condition of dynamic disequilibrium. This point can be fixed in time with great precision: it was the fall of the Berlin Wall. This opened the way to German reunification. Chancellor Kohl rose to the historic occasion. He decided that reunification must be complete, immediate and achieved in a European context. Actually, he had no choice in the matter, since the German constitution gave East Germans citizenship of Germany and Germany was a member of the European Community. But it makes all the difference whether you take charge of events or merely react to them. Chancellor Kohl exhibited real leadership. He went to President Mitterand and said to him, in effect, “I need your support and the support of Europe to achieve immediate and complete reunification.” The French replied, in effect, “Let’s create a stronger Europe in which the reunified Germany can be fully embedded.” This gave a tremendous impulse towards integration. It set into motion the “boom” part of the boom/bust process. The British were opposed to the creation of a strong central authority; you will recall Margaret Thatcher’s speech at Bruges. Tough negotiations ensued, but there was a sense of urgency, a self-imposed deadline. The result was the Treaty of Maastricht, the two main goals of which were to establish a common currency and a common foreign policy. It had a number of other provisions, but they were less important and, when the British objected, they were allowed to opt out of some of them. All in all, the Treaty was a giant step forward towards integration, a valiant attempt to create a Europe strong enough to cope with the revolutionary changes resulting from the collapse of the Soviet empire. It went, perhaps, further and faster than public opinion was prepared for; but that was a chance that the leaders took in order to cope with the revolutionary situation. Rightly so, in my opinion, because that is what leadership entails.

The trouble lay elsewhere. I shall not dwell on a side deal in which Germany got the agreement of the European Community to recognize Croatia and Slovenia as independent states. It was little discussed and little noticed at the time, but it had horrendous consequences. I want to focus on the internal disequilibrium in Germany which was generated by the reunification because it was that disequilibrium which has turned the boom into a bust.

The German government seriously underestimated the cost of reunification and was, in anycase, unwilling to pay the full cost through higher taxation or a reduction of other government expenditures. This created tensions between the Bundesbank and the government on two levels: one was that the government acted against the express advice of the Bundesbank; the other was that a very loose fiscal policy—that is to say, a huge budget deficit—required a very tight monetary policy in order to reestablish monetary equilibrium. The injection of purchasing power through the exchange of East German currency at par created an inflationary boom, and the fiscal deficit added fuel to the fire. The Bundesbank was charged, by law, with the mission of maintaining the value of the Deutschmark and it acted with alacrity. It raised the repo rate to 9.70 percent. But that policy was very harmful to the other member countries of the European Monetary System. In other words, the monetary policy which was designed to reestablish equilibrium at home created a disequilibrium within the European Monetary System. It took some time for the disequilibrium to develop but, with the passage of time, the tight monetary policy imposed by the Bundesbank pushed all of Europe into the deepest recession it has experienced since the Second World War. The Bundesbank plays a dual role: it is the guardian of sound money at home and it is the anchor of the EMS. It acted as the transmission mechanism for turning the internal disequilibrium of the German economy into a force for the disintegration of the EMS.

There was also a third and deeper level of conflict between the Bundesbank and the German government. Chancellor Kohl, in order to obtain French support for German reunification, entered into the Treaty of Maastricht. That Treaty posed a profound threat to the institutional dominance, indeed, institutional survival, of the Bundesbank as the arbiter of European monetary policy. In the EMS, the German mark serves as the anchor. But, under the Maastricht Treaty, the role of the Bundesbank was to be replaced by a European central bank in which the Bundesbank would only have one vote out of twelve. Admittedly, the European Central Bank was based on the German model; but it makes all the difference in the world whether you serve as the model or whether you are actually in charge. The Bundesbank never openly acknowledged that it was opposed to this institutional change, and it remains unclear to what extent its actions were designed to prevent it. All I can tell you is that, as a market participant, I acted on the hypothesis that it was the Bundesbank’s underlying motivation. I cannot prove to you that my hypothesis was correct; all I can say is that it worked.

For instance, I listened to Helmut Schlesinger warn that the markets are mistaken when they think that the ECU consists of a fixed basket of currencies. I asked him what he thought of the ECU as the future common currency of Europe. He said he would like it better if it were called the mark. I was guided accordingly. Shortly thereafter, the lira was forced out of the ERM.

I don’t want to get into a blow-by-blow account of what happened because I want to establish a broad historical perspective. From that perspective, the salient features are that the Maastricht referendum was defeated in Denmark; it passed with a very narrow margin in France; and it barely squeaked through Parliament in Britain. The European Exchange Rate Mechanism has, for all intents and purposes, broken down and it has done so in several installments, of which the last one, namely, the broadening of the band in August, was the most far-reaching because it loosened the strongest tie within the European Community, the one which ties Germany and France together. What is in the long run even more important, Europe is in the midst of a deep recession from which there is no immediate prospect of recovery. Unemployment is a serious and still-growing problem which continues to be aggravated by monetary policies which are far too restrictive for this stage of the cycle. From these observations, I conclude that the trend towards the integration of Europe has passed its peak and has now been reversed.

The exact moment of reversal can be identified as the defeat in the Danish referendum. It could have brought forth a groundswell of support for the Maastricht Treaty; in that case, there would have been no reversal. Instead, it generated the breakdown of the Exchange Rate Mechanism. Europe is now in a process of disintegration. Since we are dealing with a boom/bust process, it is impossible to say how far it will go. But it may go much further than people are currently willing or able to envisage because a boom/bust process is self-reinforcing in both directions.

I can identify at least five elements which are mutually self-reinforcing. First and foremost is the recession; 11.7 percent unemployment in France, 14.1 percent in Belgium, and 22.25 percent in Spain, are simply not acceptable. They generate social and political unrest which is easily channeled in an anti-European direction. Second, there is the progressive disintegration of the Exchange Rate Mechanism. This is very dangerous because in the medium to long term the Common Market cannot survive without stability in exchange rates.

The ERM functioned perfectly well in near-equilibrium conditions for more than a decade. But the reunification of Germany has revealed a fundamental flaw in the mechanism, namely, that the Bundesbank plays a dual role: guardian of domestic monetary stability and anchor of the EMS. As long as the two roles are in harmony, there is no problem. But when there was a conflict, the Bundesbank gave precedence to domestic considerations to the detriment of its international obligations. This was clearly demonstrated, for instance, on Thursday, July 29th, when it refused to lower the discount rate in order to relieve the pressure on the French franc. It can be argued that the Bundesbank has no choice in the matter: it is obliged by law, the Grundgesetz, to give absolute priority to the preservation of the value of the German currency. In that case, there is an irreconcilable conflict between the ERM and the Grundgesetz.

This episode revealed another fundamental flaw in the ERM, namely, that there is an asymmetry between the obligations of the anchor currency and the currency which is under pressure. All the obligations fall on the weak currency. It will be recalled that, at the time of the Bretton Woods agreement, John Maynard Keynes emphasized the need for symmetry between the strong and the weak. He based his arguments on the experiences of the inter-war period. The current situation is increasingly reminiscent of that period and sometimes it seems as if Keynes had not lived.

This brings me to the third element, namely, mistaken economic and monetary policies. Here it is not so much the Bundesbank that is to blame but those who have opposed it, like the German government, or those who have been the victims of its policy, like the United Kingdom and France. The German government is, of course, responsible for creating the internal disequilibrium in the first place. The British committed an egregious error in joining the Exchange Rate Mechanism on October 8th, 1990 after the reunification of Germany. They did so on the basis of arguments which had been developed in 1985, but were strenuously resisted by Margaret Thatcher. When her position weakened, she finally gave in, but by that time, the arguments which had been valid in 1985 were no longer applicable. So the British made two mistakes—one in 1985 and one in 1990.

They were particularly hard hit by the high interest rate regime imposed on them by the Bundesbank because they were already in a recession when they went into the ERM. Being pushed out of the ERM brought them much-needed relief. They ought to have welcomed it, but they were too dazed to react. They did the right thing eventually and lowered interest rates, but they failed to seize the initiative. This has made it harder to build up confidence and it will make it much harder to reassert control over wages when the economy does pick up.

One would have thought the French would leam from the British experience. But they are proving even more inflexible. One could sympathize with their efforts to defend the franc fort policy because they fought so long and so hard to establish it, and they were on the verge of reaping the benefits in the form of improved competitiveness vis-a-vis Germany when the reward was snatched from their hands by recurrent attacks on the franc. But, once the franc fort policy proved untenable, they ought to have adjusted their approach to the new situation. Instead, they are sticking voluntarily with a regime which proved so disastrous when it was imposed on them by the ERM. I think I understand their motivation: they are concerned with rebuilding their reserves and repaying the debt that the Banque de France incurred with the Bundesbank in defending the parity. But they got their priorities wrong. France is in a serious recession and it needs to lower interest rates. That is what brought on the August crisis. To try and keep the French franc close to the Deutschmark by keeping interest rates high is self-defeating. The only way to have a strong franc is to have a strong economy.

The Bundesbank itself has been remarkably consistent in the pursuit of its objectives, especially if we include institutional self-preservation among those objectives, and amazingly successful. It found itself in an impossible situation after the reunification of Germany: a sudden increase in the stock of money, an enormous budget deficit, and a threat to its institutional survival. Yet it came out victorious. Whether it was worth the cost—a Europe-wide recession and the breakdown of the ERM—is another question.

A few months ago I was convinced that the Bundesbank was following the wrong monetary policy, even for domestic purposes, because Germany was in a recession and monetary policy ought to be counter-cyclical. The Bundesbank stuck to its medium-term monetary targets, but I thought that M3—which had worked well as a target in near-equilibrium conditions—had been rendered irrelevant in today’s far-from-equilibrium conditions; and I thought that the Bundesbank had overstayed its course in following a tight monetary policy.

But that was before the widening of the bands in the ERM. Since then, the Deutschmark has rallied, the German long bonds have strengthened and, on top of it all, the German economy is showing some signs of strength. I must now admit that I may have been wrong and the Bundesbank may have been successful in its pursuit of its domestic policy goals. But, if anything, that strengthens my argument that there is a conflict of interest between the domestic responsibilities of the Bundesbank and its role as the anchor of the EMS. The events of the last two months have clearly demonstrated that the needs of Germany and the rest of Europe are very different. Germany needs low interest rates on long bonds because it borrows at the long end, whereas the rest of Europe needs lower interest rates at the short end because the liquidity of the banking system needs to be rebuilt and lower short term rates are needed to stimulate economic activity. Germany got what it needs, but the rest of Europe did not.

The fact that I may have been wrong on the Deutschmark brings me to the fourth factor. It is not only the authorities who make mistakes, but also market participants. Markets are often wrong. Specifically, they were wrong when they assumed that the path to a common currency would follow a straight line. International investors, particularly managers of international bond funds, went for the highest yields, ignoring exchange rate risks. Helmut Schlesinger was right in warning that the ECU does not consist of a fixed basket of currencies. There had been large capital movements into weak-currency countries like Italy, Spain and Portugal. The movement was initially self-reinforcing but eventually self-defeating. It created excessive rigidity in exchange rates in the first place, and excessive instability in the second. The errors of the market compounded the errors of the authorities in creating dynamic disequilibrium.

Finally, there is a fifth factor that reinforces the trend toward disintegration. It may be called the emotional amplifier. When things are going wrong, especially when mistakes are being made, there is an impulse to blame someone else. Who would have thought that respected officials like Jacques Delors and the Finance Minister of Belgium and the newly appointed head of the Banque de France really believed in an Anglo-Saxon conspiracy to destroy the Franco- German alliance? These attitudes then color subsequent discussions as in the case of the GATT negotiations.

There is also a sixth element which needs to be considered; namely, the instability of Eastern Europe and particularly of the former Yugoslavia. I believe that this factor is working in the opposite direction. The threat of instability and the influx of refugees are good reasons to band together and build a “Fortress Europe.” At the same time, the lack of unity in the European Community has the effect of reinforcing the political instability and economic decline in Eastern Europe. The outcome is going to be a European Community which is a far cry from the open society to which the people whom I support in Eastern Europe aspire.

All this is truly disturbing and depressing. I realize that I sound more like a prophet of gloom and doom than a guru. But let me remind you that there is nothing determinate about the boom/bust sequence; that the direction of the process can be reversed practically at any time. Indeed, a reversal of direction is an essential part of a boom/bust sequence. What I am trying to say is that events are now going in the wrong direction and they will continue to go in that direction until we recognize that there is something fundamentally wrong and we take resolute action to correct it.

There can be no doubt that there is something fundamentally wrong with the European Monetary System as it is currently constituted. First, the domestic obligations of the Bundesbank have proven to be irreconcilable with its role as the anchor currency; indeed, one could argue that the Bundesbank has exploited its role as the anchor currency in order to solve its domestic problems. Second, there is an asymmetry between the obligations of the strong and the weak currencies. And most importantly, there is asymmetry between the risks and rewards of international investors, that is to say, speculators. These structural faults were there from the beginning, but they only became apparent in the course of the last year. Once they became known, it is impossible to return to the conditions which prevailed previously. The best way to eliminate the faults of the ERM is to have no exchange rate mechanism at all. But freely floating exchange rates would destroy the Common Market. Hence the necessity for a common currency. That means implementing the Maastricht Treaty. At the time the treaty was negotiated, the path leading to the common currency was envisaged as a gradual, near-equilibrium path. But the gradual path has run into unexpected obstacles. To continue on a gradual path will now lead in the opposite direction because there has been a trend reversal and we are now in a process of disintegration. Therefore we must find a different path. If we can’t get there gradually, it is better to get there all at once than not to get there at all.

At the emergency meeting on August 1st, 1993 official from Portugal reportedly proposed that the introduction of a common currency should be speeded up. A German participant reportedly reacted by saying, “Surely, you must be joking!” If my line of argument is correct, it is time to take the suggestion seriously. This may sound a little too facile, and it is. My argument will be taken seriously only if I can show a path that would lead to a common currency. Since we are in dynamic disequilibrium, the path has to be a disequilibrium one. At present, the first priority of the French monetary authorities is to rebuild their reserves. In order to do so, they are trying to keep the French franc strong. That is wrong. The first priority ought to be to stimulate the French economy, and the maturity of the French debt to the Bundesbank ought to be extended for, say, two years so that France could lower interest rates now. When I say lower interest rates, I mean three percent. The rate reduction ought to be coordinated with the other members of the EMS, excluding Germany and Holland. The Deutschmark would undoubtedly appreciate. The overvaluation of the Deutschmark would have a negative effect on the German economy, hastening the decline in German interest rates. As the German economy weakened and the rest of Europe picked up, the trend in exchange rates would be reversed and they may eventually settle down not very far from where they were before the bands were widened. The main difference would be in economic activity. The rest of Europe would recover, first at the expense of Germany; but eventually Germany would also join the recovery. When that happened, the dynamic disequilibrium would have been corrected, and the march towards a common currency could be resumed in near-equilibrium conditions. The whole process would not take more than two years. After that, you could move to a common currency directly, without re-instituting the narrow bands. But you cannot get there in a straight line. Right now, you are caught in a vicious circle; you need to turn it around and make it a virtuous circle. This has already happened, up to a point, in Italy. It could be done in the rest of Europe.

I have not dealt with issues of foreign policy, the future of NATO and the fate of Eastern Europe, but I have covered too much ground already. In any case, those issues are intricately interlinked with monetary policy. European monetary policy is wrong and it can be corrected.