From EU to EPU: back to the future

We know where we are: eurozone experiences a payments’s imbalance that caused the debt’s crisis, public and private, and the suffering of fragile states, called to return from their exposure with strong countries.

We know that there is a correction of these imbalances that is causing fibrillation and strong desire in many to break the monetary union, accused of being the cause of these imbalances.

We know that at the same time at the supranational level is proceeding the Banking Union, which aims to correct imbalances by acting on certain factors considered of instability, such as the deep connection that exists between the banks and the sovereign debt, and giving confidence to European banks through a profound process of assessment and possible resolution.

A project still nothing metabolized by European public opinion, as it is confined in specialized knowledge, which are engaged in the battle that aims to return to the states monetary sovereignty, while Brussels is preparing the next stage of the European Union : fiscal union.

In essence, crisis has showed dialectic, so far silent, between nation states and supranational institutions, and nobody knows how it will end.

Let us ask ourselves a simple question: what should the eurozone do?

Everyone says: need to growth.

And how should restart?

Since the future is uncertain, rewind the tape of history, as history is (or should be) a teacher of life.

Europe found itself in conditions far worse than those in which he is now, and yet has been able to invent a tool that in a few years create the economic miracle of the 50s.

It is worthwhile, therefore, to return to tell this story.

1947. Europe is broken by the war. Cities and production systems are destroyed. The countries are heavily indebted. The United States finds itself in the opposite situation: they have an industrial system intact, even strengthened the war economy, and have become the major creditors of the Western world.

They have a lot of credits, which threaten to become uncollectible if European countries will not recover, and a lot of goods to be sold to someone who has no money to pay them.

In this climate has its origin the Marshall Plan.

In June of that year there was the famous speech on the steps of the Marshall Memorial Church at Harvard that ended then, a month after the opening of the conference on the Plan of Paris. The Americans, who at the end of the four-year term of the plan poured European states about $ 17 billion at the time, insisted on the need for a long time that the European countries would use the aid not only to buy food and gasoline, but also to develop freedom of trade and European integration.

A year later, in 1948, Truman signed the decree imposing the ECA, Economic Cooperation Administration, which had to take care of administering the Marshall Plan aid.

At the same time was founded in Europe the OEEC, an organization that would develop economic cooperation in Europe, as well as control the distribution of the funds managed by ECA. OEEC, which in fact was the first supranational institution of our continent, join now 16 European countries: Austria, Belgium, Denmark, France, Greece, Iceland, Ireland, Italy, Luxembourg, Norway, Netherlands, Portugal, United Kingdom, Sweden, Switzerland and even Turkey. A year later he joined anchela Federal Republic of Germany.

And they were just the OEEC countries of the protagonists’ “invention” technique that revolutionized the fate of Europe: the European Payments Union, EPU.

The UEP was founded in 1950 with the specific aim of developing trade between European countries. The basic mechanism involved the use of a clearing house, which was identified in the Bank for International Settlements (BIS), at which the acceding countries had opened accounts which kept the cash flows from exports and imports of individual countries. Each month, the bank calculated the amounts and inflicted an interest payment within the countries in debt and a recognition of profit to those in surplus.

But the best asset was the multilateral mechanism of compensation. Until then, the European countries had concluded a number of bilateral agreements – he counted more than 400 from ’47 onwards – but these agreements revealed their limit in the fact that the claims of a country could not be offset against amounts due to a third country. All this, at a time of great scarcity of capital and reserves of the central banks, made trade flows anemic and unable to revive the fortunes of European industry.

The clearing house, however, was provided with sufficient funds to finance temporary deficits in trade balances of countries in deficit for the time necessary to return, thanks to their exports of their debts. These funds came right from the Marshall Plan, and maybe those were better spent.

This first experiment of genuine monetary cooperation in Europe had another feature that made it unique: as well as discourage the debtor to accumulate deficits, imposing an interest on overdrafts, at the same time the lender discouraged from accumulating surplus. The creditors, in fact, were entitled to be reimbursed for EPU only part of the surplus and if they wanted more they had to ask for an exception to the board of directors of the EPU, which consequently possessed a formidable instrument of pressure to push the country to creditor liberalize their trade or increase imports.

In practice, the system tended to the natural balance of payments.

And it was this balance the main objective of this system.

In a secret memorandum of 14 December 1949 written by the British delegation in Paris, entitled “The future of intra-European payment”, the author criticizes some measures which, he writes, “maintain a state of imbalance “and urges the delegation to take responsibility for changes that would require” the borrower to improve his position relying on the deficit without any obligation on his part, “while it was necessary to make sure that the creditor country could” import more and more freely by his debtors. ”

Similar concepts are reiterated in another memorandum of March 1950 presented by the Belgian delegation OEEC, which emphasizes that the fundamental objective and immediate EPU is to “restore the financial balance of internal and external consequence, the participating countries the system to act as a stabilization fund that contains in itself the tricksneeded to oppose that both inflation to deflation. ” Other objectives: “The enlargement of the internal market, increased productivity and total output” (also there should sound familiar) and then “complete liberalization of trade and transactions” and “reconstitution of the reserves of central banks “.

To adjust the compensation, of course, it was necessary that there was a fixed parity between national currencies and the international unit of account, which was set in grams of gold based on the gold value of the dollar. At the end of each month they proceeded to compensations that were welded in gold or credits at the EPU.

To give an idea of ​​the success of EPU we can read some data from international studies. After the EPU intra-European trade increased by 130%, exports to the U.S. are as much as 206%. Employment increased by 10%, the real gross national product by 48%.

It was the beginning of the boom.

Just what we would today.

The fact is that December 28, 1958 the EPU was closed. States, and their central banks, now felt to be strong enough to deal with the fixed exchange rate with the dollar as had been expected at Bretton Woods. His place was taken by the EMA, European monetary agreement, which would mark the beginning of the convertibility of European currencies and which was signed on 1955 in order to establish a European reserve fund for those countries whose balance of payments showed a deficit, a system of compensation as well as an equalization system based on exchange rates in order to keep them as stable as possible.

The AME would replace the EPU, but in the end it did not work because unlike the EPU, the multilateral clearing system and the granting of loans between countries was not mandatory nor automatic.

The pendulum of history had moved from supranational entity to nation states, now gallantly returned protagonists of the story.

Exactly the opposite of what is happening today .

The question, therefore, that it would be appropriate to ask is: can we borrow a few lessons from our past?

An affirmative answer I found in a book published last year by two economists and economic historians, Massimo Amato and Luca Fantacci (How to save the market from capitalism, Donzelli). According to the two researchers not only need a new European Union of payments, but we already have the financial infrastructure to implement it. The clearing house, look, now called TARGET2, the payment system used by the ECB to manage the regulations between central banks of the Eurosystem. Target 2 is used to finance the deficits of the countries affected by the crisis, through their central banks.

As we know these balances are still unbalanced , then it would be enough to apply a system of symmetrical EPU charges for adjustment  to transform Target 2 in the new European Payments Union. In tribute to this logic, you should impose limits on the accumulation of deficits and surpluses, as well as fixing a rate of interest out on each other, and the ability to adjust real interest rates, if not nominal, in the event of persistent imbalances.

In this system, the existence of national currencies is a detail, provided that the exchange rates are fixed or adjustable but not unilaterally, and thus could participate in the new EPU also countries outside the euro. Turkey itself, as it was sixty years ago.

A jump in the past.

And back to the future.



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