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7.2.1.  The 1971 Resolution

    In view of the enlargement of the Community [see section 1.2], the six original Member States felt the need to tighten the monetary links between them. To that end the "Barre Plan" (of the Commission) of 4 March 1970 and the "Werner Report" (of the Council) of 8 October 1970 proposed the attainment by stages of economic and monetary union within the Community. As mentioned above, this was decided by a resolution of the Council and the Representatives of the Governments of the Member States expressed of 27 March 1971. But Europe had not foreseen the reaction of the rest of the world to its intentions. In the two weeks following the Resolution of the EEC countries to put their monetary affairs in order, some of those countries were faced with an influx of short-term capital, creating inflationary pressures. To face this situation, they were obliged to take emergency measures that were at variance with the intentions expressed in their Resolution, especially as regards the narrowing of the margins of exchange rate fluctuations between the currencies of the Community.

    The most serious blow to the monetary union of the EEC was to come five months after the March 1971 Resolution. On 15 August 1971 - an historic date for the international monetary system - the United States Administration announced its decision to suspend the convertibility of the dollar into gold, to allow its exchange rate to fluctuate and to protect the US market against imports from the rest of the developed world. The United States thus delivered the coup de grace to the Bretton Woods system. Simultaneously they were delivering such a severe blow to the economic and monetary union of the EEC that this union had to be postponed for thirty years, even though the Member States were loath to admit it.

    In accordance with the invitation from the Council of 21 March 1971, the Governors of the Central Banks of the Member States decided, in fact, to reduce, as from 24 April 1972, the margins of fluctuation between the Community currencies to 2.25%. This was how the Community's monetary snake was born, that is to say the narrow band of fluctuation of participating currencies, with its intervention and short-term support mechanisms. The snake was to operate in a tunnel represented by the fluctuation margins of 4.5% between Community currencies and the dollar. But the snake did not stay in the tunnel for long. On 12 March 1973 the Council, noting the difficulties in complying with the fluctuation margins of Community currencies against the dollar, decided to leave the central banks free not to intervene when the exchange rates for their currencies reached the margins of fluctuation against the dollar. One would then speak of a "snake without a tunnel".

    The international monetary crisis increased the structural differences and imbalances within the newly enlarged Community. Speculators were the masters of the game. It only needed a large number of them to be sellers, at a given moment, of a currency deemed to be the weakest in the snake for that currency to reach its floor. It was for the monetary authorities of the country under fire from speculation to stop the fall in their currency by buying it in against their cash holdings in foreign currency. The fate of the currency under attack then depended on the volume of the foreign exchange reserves, which its central bank had at its disposal and could sacrifice. Thus, most European currencies joined the floating exchange rate system one after the other. Initially that arrangement brought a degree of relief by alleviating the central banks of the impossible task of supporting their weak currencies. In due course, however, there being no mechanism obliging the Member States to pursue stringent, convergent monetary and economic policies, those States sooner or later resorted to the currency creation anticipated by the speculators and became more and more engulfed in inflation, social pressure, economic stagnation and unemployment [see also section 6.1].

    Thus the objectives, which had been set for the first stage of economic and monetary union, could not be attained, and the transition to a genuine second stage, envisaged for early 1974, never took place. Although the first attempt to create an economic and monetary union failed, the experience acquired in that attempt was valuable to the Community. The instruments introduced in 1972, viz. the monetary snake, the European Monetary Cooperation Fund (EMCF) and the European unit of account were tried out successfully, improved and passed on to the European Monetary System (EMS).

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    Your roadmap in the maze of the European Union.

    Based on the book of Nicholas Moussis:
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