'The Generous Utopia of Yesterday Can Become the Practical Achievement of Tomorrow': 1000 Years of Monetary Union in Europe
Einaudi, Luca, National Institute Economic Review
Luca Einaudi [*]
Monetary unions have been a recurring element in European history, driven by the need to overcome obstacles to trade caused by the fragmentation of political authority. Between the 14th and the 19th centuries, a series of coinage unions were set up in the German speaking world, which served as models for the Latin and Scandinavian monetary unions in 1865 and 1872. With the growing size of participating states and the transformation of money, thanks to the end of bimetallism and the wider use of bank notes and deposits, the objectives and the practical management of monetary unions became more complex and more political. Monetary union became strictly associated with European federalism and required new common institutions after the end of the classical metallic standards in 1914.
European Monetary Union has been one of the most contentious issues of the last decade of the20th century and continues to be a controversial subject in many countries, particularly in the United Kingdom. Seen in the context of a much longer span of European monetary history, it is not a sudden and unexpected episode, without precedents in its objectives, in the instruments used to achieve it, or in the level of enthusiastic support and acrimonious hostility caused by it. The quest for a stable and common monetary instrument is as long as the history of currency. It belongs as much to the history of ideas as to the history of monetary diplomacy and of nation building.
The episodes discussed in this article range from the 14th to the 20th century. Until the advent of the euro, existing supranational monetary unions have always taken the form of multiple common currencies; that is, a fixed exchange rate between currencies. Monetary unions, or rather coinage unions with single currencies, have been proposed repeatedly throughout the centuries, defined as 'universal', 'international' or 'European', but until 1999 they have remained purely theoretical.
A fundamental distinction has to be made between supranational monetary unions agreed on by sovereign states (such as the German, Latin and Scandinavian monetary unions), and the national political unifications followed by the introduction of a single currency (the establishment of the Swiss franc, the Italian lira and the German mark). The latter have been occasionally quoted as relevant precedents for the euro, but they are not, since they lack most of the difficulties of intergovernmental negotiations, particularly the matter of vetoes, and will be discussed only briefly.
The institutional architecture of international monetary arrangements depends on the prevailing monetary standards. As long as money was a commodity (gold and/or silver coins) and paper money was absent or very limited, exchange parities were close to the relationship between the intrinsic metallic content of the various types of coinage in circulation. Therefore few rules and no common institutions (central banks) were needed. In the main countries of continental Europe the role of paper money became dominant only during the second half of the 19th century and the gold standard disappeared only during the 1930s. The wider discretion in monetary issue offered by paper standards required more rules and institutions to manage monetary unions. This explains why the number of practical experiments declined while new theories of monetary union boomed. The large monetary unions, or rather coinage unions, of the 19th century disappeared in the 20th century, while increasingly elaborate projects, taking into account the new difficulties of money, flourished in the 20th century until the birth of the euro.
Early projects for monetary union were not connected with the idea of a European political union. The driving force was the obvious convenience of a reduced number of currencies for economic activity in natural areas of trade, often legally defined by free trade agreements, customs unions or common markets. …