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2

1958–73 ¹

The explicitly federal implications of the EEC made it superficially unattractive for the rest of Europe.² A variety of political, economic or security reasons confined the supranational course initially to a limited group of countries, albeit a group that comprised more than half of western Europe’s output and foreign trade. Nonetheless the outsiders still constituted a sizeable market of considerable sophistication, one that had shared with the Six the same pan-European movement towards commercial liberalization and growing interdependence. Among these smaller trading economies, in particular Denmark, Sweden and Switzerland, there existed the same drive towards a further relaxation of protectionism that had motivated the Benelux countries, and this drive was reinforced by the fear of what might happen once the mutual preferences, implied by the formation of the customs union by the Six, began to take effect. The government of the United Kingdom was particularly concerned about the possibility of an economic division of Europe and, at the end of 1956, tried to neutralize the effect of EEC preferences with a proposal for a wider industrial free trade area to be constructed inside the OEEC.

The initiative was launched at a particularly testing moment for the Six, since the common market negotiations had still to be concluded and then ratified by national parliaments. The Commission of the EC itself did not begin work until January 1958. If the free trade area offered non-member states a solution to their dilemmas, for the Six it posed a distinct threat. Distrust of British motives suffused the following negotiations but there were more prosaic reasons why the Six were reluctant to embrace the UK initiative. For example, the French, in the final stages of the common market negotiations, obtained a set of favourable conditions and safeguards that they could not replicate in the free trade area. Moreover, the French, Italians and the Dutch had obtained some ‘compensation’ for the opening of their industrial markets through the prospect of a common agricultural policy, but agriculture was exempted from the British plan. Finally, those who hoped that the Community institutions would rapidly develop in a federalist direction were worried that their energies might be dissipated by the Free Trade Area.

The Free Trade Area negotiations dragged on for nearly two years, before finally being terminated by the French in November 1958. Under de Gaulle, France had decided to embrace the Treaty of Rome without recourse to its opt-out provisions. This commitment was worth infinitely more to Adenauer than the dubious prospect of a free trade area and thus the move received German acquiesence, if not support. The Commission, especially under its first president Walter Hallstein, had never liked the British plan and was generally pleased to see the back of it. Indeed by the end of the year, among the Six, only the Dutch government and the German economics minister, Ludwig Erhardt, could be numbered amongst its supporters. In the face of the opposing coalition there was little they could do.³

The failure of the free trade area negotiations left the UK without any coherent strategy towards the Common Market. In the absence of an alternative, the idea of forming a smaller free trade area amongst the ‘outer Seven’ (Britain, Denmark, Norway, Sweden, Switzerland, Austria and Portugal) rapidly took over. With the exception of Austria and Portugal, these were already relatively low tariff countries which shared a desire to maintain tariff autonomy towards third countries. They therefore preferred the concept of a free trade area to solve Europe’s trading problems, rather than the more restrictive principle of a customs union. Formal negotiations started in June 1959 and culminated, in January 1960, in the Stockholm Convention establishing the European Free Trade Association (EFTA).⁴

EFTA’s ambitions and its structures were simpler from the start than those adopted by the EEC. It was essentially designed to ‘build a bridge’ to the EEC, thereby obtaining through bilateral negotiations en bloc what the previous multilateral negotiations had failed to deliver. The differences can be summarized as follows:

* The EEC wanted a customs union, EFTA did not.

* The EEC had to build a common external tariff, EFTA did not, but did require instead a ‘certificates of origin’ regime. The common external tariff meant that the EEC needed a common commercial policy, whereas EFTA did not.

* The EEC wanted to eliminate the cause of trade distortions at source and required the machinery to do so; EFTA instituted a procedure to deal with complaints if and when different national practices were felt to have distorted trade.

* The EEC wanted a common agricultural policy; EFTA excluded agriculture but relied instead on bilateral agreements to expand agrarian trade.

In a way, EFTA was almost designed to disappear in the form in which it had been cast. It was only the subsequent failure of the ‘bridge-building’ strategy that forced it to assume the identity of an individual trading organization in its own right.⁵

Even before the establishment of EFTA, the Macmillan government had begun to consider applying for full membership of the European Community. By late 1959, it had become increasingly apparent that the UK would be unable to negotiate a settlement which aimed at a parallel removal of barriers within the EEC and EFTA and between the two blocs. The ‘Hallstein Report’ of 1959 which outlined the EEC’s foreign policy perspectives left little room for a purely commercial settlement in Europe. Moreover, the United States, faced with a mounting balance of payments problem, made clear that it would not accept the discrimination implied by an interim settlement unless it conformed with GATT rules. That meant that any solution ended in a forseeable time and according to a fixed schedule, with the complete abolition of trade barriers. At the time the most that was on offer was a Benelux plan for the mutual exchange of the next scheduled tariff cut.⁶

Throughout 1960, the number of voices from the press, business circles, and certain politicians calling for a reappraisal of the UK’s relations with the Six, grew considerably. However, the strongest statement seeking a drastic change in course came in May 1960, from an interdepartmental committee headed by Sir Frank Lee. It advanced the view that Britain should abandon attempts to negotiate loose economic agreements with the Six and instead seek full membership of the EEC. The Committee’s arguments, based more on political than economic considerations, can be summarized as follows:

* The offer of a purely commercial ‘bridge’ between the EEC and EFTA would never be acceptable to the Six.

* The UK would face a relative decline in its political significance if it remained outside the EEC.

* The danger of a European federation would be mitigated if the UK joined while de Gaulle, who was notoriously anti-federalist, was still in power in France.

* Special arrangements for UK problems, such as Commonwealth trade and domestic agriculture, could be negotiated.

Macmillan was anyway predisposed to accept these arguments. Although he had been its victim, he had been impressed by the power and influence of France and Germany within the EEC. He saw in it the reinforcement of traditional great power diplomacy within which Britain could easily function, somewhat missing the point that the attraction of these arrangements to both Adenauer and de Gaulle was their exclusivity. Yet it was more than a year later before a formal application was made. This was primarily because of the daunting array of individuals and organizations which had to be persuaded of the desirability of EEC membership (from the party to the parliament, the press and public, not to mention the Commonwealth and EFTA). Macmillan also faced the ‘presentational difficulty of explaining why a policy which had been repudiated inflexibly since 1948 had now become both desirable and necessary’.⁷

In July 1960, Macmillan appointed Edward Heath as lord privy seal, with special responsibilities for Europe. His major task in the ensuing year was to appraise the attitude of the Six, and France in particular, to the prospect of British entry. There would be little point in even considering a membership application if the French remained determined to keep Britain out. However, by summer 1961, it was evident that the French would not discuss possible concessions to UK interests prior to a formal commitment to negotiate. Indeed many, including President Kennedy, felt that de Gaulle had no desire whatsoever to share French leadership of the Six with Britain.

This placed the Macmillan government in an extremely difficult position. Speculation in the press and business circles had already anticipated an announcement on Britain and Europe. Thus, rather than make an open commitment to EEC membership, it was decided to open negotiations with the Six to see whether suitable arrangements could be made. It was hoped that this fine distinction would put an end to public uncertainty, and keep Britain’s options open in Europe. The formal announcement was made in the House of Commons on 31 July 1961.⁸

The three major problem areas of negotiation with Brussels were the Commonwealth, EFTA, and British agriculture. In each case, Britain held outstanding commitments which, in the absence of special arrangements, were incompatible with EEC membership. The negotiations that opened in October 1961 proceeded extremely slowly due to a mutual unwillingness to offer concessions. It was not until May 1962 that the first specific agreement was reached on Commonwealth industrial goods. By the end of July, arrangements for most Commonwealth countries had virtually been finalized, although these often fell short of Commonwealth demands. However, it was the issue of agriculture which finally brought the negotiations into deadlock. The British system of guaranteed prices and deficiency payments to farmers was manifestly incompatible with the artificially inflated prices of the Common Agricultural Policy (CAP). Disagreement on the best means to reconcile the two dragged on into December 1962, when the EEC Commission appointed a committee under the direction of Commission vice-president, Sicco Mansholt, to explore possible solutions.

In the meantime, de Gaulle had become increasingly concerned about the political consequences of British membership. Although Macmillan was aware of these views, neither he nor any of the delegations in Brussels anticipated de Gaulle’s unilateral statement, at a press conference on 14 January 1963, that Britain was not yet ready for the full commitment of EEC membership and that therefore there was no point in prolonging the negotiations. De Gaulle referred to the deal with the United States on Polaris nuclear weapons as evidence of Britain’s ‘special links’ outside the Community structure. However, it is now clear that such objections were used to mask underlying fears of a British challenge to French leadership of the Six. The veto came as a monumental blow to British aspirations in continental Europe and the wider world. It also generated considerable illwill and mistrust between the Six, which in turn impaired the prospects of further political initiatives. Finally, it also served to repudiate the approaches of other states for membership or association with the EEC.

The applications of Denmark, Norway and Ireland⁹ for EEC membership had been essentially a reaction to Macmillan’s decision to negotiate with the Six. Denmark was the strongest supporter of this decision, as it provided the opportunity to bring its two largest customers, the United Kingdom and West Germany, together in a single market. The breakdown of the British negotiations was crucial to the Danish position. Although de Gaulle had offered prime-minister Otto Jens Krag membership for Denmark separately, this was turned down after consultations with the British.

Norway was somewhat less enthusiastic in applying for EEC membership. Einar Gerhardsen’s goverment was uneasy about opening Norwegian fisheries and agriculture to foreign competition but the simultaneous application of important trading partners like Denmark and Britain led many to the view that Norway could not afford to remain outside. Before any application could be made, the constitution had to be amended to provide for the transfer of sovereign powers to an international organization. This amendment was passed without difficulty by the Storting in March 1962, followed soon after by the EEC announcement opening negotiations. Only one meeting at ministerial level had taken place, however, when the collapse of the UK application brought the Norwegian case to an equally abrupt end.

Ireland’s membership application was perhaps even more closely linked with that of the United Kingdom. Ireland had not taken part in the EEC/EFTA split of the late 1950s, but had special trading arrangements with Britain dating back to the time when it formed part of the United Kingdom. Edward Heath specifically mentioned Ireland in his opening speech to the EEC governments in October 1961, expressing the hope that their trading relationship would be ‘subsumed in the wider arrangements of the enlarged Community’. The EEC Council of Ministers signalled the start of negotiations with Ireland in October 1962 but, as in the case of Norway, substantial negotiations never actually opened.

The return of de Gaulle to power in France on 1 June 1958 was decisive for the EEC’s development. Given his long antipathy towards the integration efforts of the Six, nobody expected him to look favourably upon the new supranational organization emerging in Brussels. After all, he viewed France’s participation in the ECSC, the EEC and EURATOM as the humiliating policies of a previous regime ‘more concerned with pleasing others’. Thus it was with considerable relief that ‘Europeanists’ saw his early recognition of the Rome Treaties. In part, this reflected the support in French industrial and especially agrarian circles for the EEC. It also marked an appreciation of the usefulness of the Treaty, and its safeguards, for the liberalization of the French economy upon which the regime embarked at the end of 1958. However, it soon became evident that the General had his own concept of ‘Europe’ which differed markedly from the federalist ideal.

At a press conference in May 1960, de Gaulle launched his proposals to develop political cooperation among the Six. He announced his intention ‘to build western Europe into a political, economic, cultural and human grouping organised for action and self-defence … through organised cooperation between states, with the expectation of perhaps growing one day into an imposing confederation’. The use of the phrase ‘une cooperation organisée des Etats’ was particularly significant and reflected a desire to ensure that any future political integration of the Six would not be at the expense of French national sovereignty. De Gaulle obtained the support of Adenauer for this position on 29 July at a meeting at Rambouillet. Central to the plan was the establishment of a permanent political secretariat of the Six in Paris, responsible to a Council of the Heads of Government. It would comprise four permanent directorates; dealing with foreign policy, defence, economics and cultural affairs. There would also be an assembly of delegates from the national parliaments.¹⁰

The scheme ran into strong opposition from federalists such as Walter Hallstein and Paul-Henri Spaak who feared that the inclusion of defence and economics within the competence of the new organization would tend to undermine both NATO and the existing Economic Community in Brussels. These problems were discussed by the heads of government of the Six in Bonn in July 1961. The outcome of the meeting was the ‘Bonn Declaration’, which tried to allay doubts about the plan by including references to political union as a means for ‘strengthening the Atlantic Alliance’ as well as an affirmation of the intention to ‘continue at the same time the work already undertaken in the European Communities’. However, the Declaration had been cleverly drafted to conceal the many points of disagreement, and the illusion of consensus proved to be short lived.

The preparatory work was entrusted to a new commission, chaired by the French ambassador to Denmark, Christian Fouchet. Its brief was to submit ‘concrete proposals concerning meetings of the heads of state and the ministers of foreign affairs, as well as all other meetings that might appear desirable’. In November, the French government presented a draft Traité d’union d’Etats which became known as the Fouchet Plan. The Fouchet Plan adhered firmly to de Gaulle’s earlier position and, as such, represented some backsliding from the text of the Bonn Declaration. Most notably, the draft treaty included the key issues of defence and economics within the scope of the Political Union, despite the earlier protests by France’s partners. Negotiations among the Six on the Fouchet Plan commenced in early 1962, with numerous redrafts of the treaty submitted by the Five. However, as the negotiations progressed, a further point of disagreement emerged among the Six, over the issue of British participation in the Fouchet negotiations.

At this time, simultaneous negotiations were being held in Brussels on Britain’s application to the EEC. The Dutch, in particular, were adamant that the UK should also be included in the discussions on political union. Their foreign minster, Joseph Luns, saw British participation as essential to ensure the primacy of NATO and to keep a check on French ambitions. This was in stark contrast to the French position, that Britain would have to make a separate membership application to the Political Community, if and when it came into existence. Throughout the spring of 1962, this divergence of opinion became an ever greater source of antagonism among the Six. Meantime, the British themselves had begun to take a more active interest in the Fouchet negotiations, which, after all, coincided with Macmillan’s preferences for Europe’s organization. In April, at the Council of the Western European Union, Edward Heath made a long statement indicating Britain’s desire to participate directly in the discussions. Coming at a crucial stage in the Fouchet negotiations, his announcement had the effect of rallying Belgian support for the Dutch position. Spaak now declared that he would not sign any proposed treaty until after Britain had been admitted to the EEC. The negotiations were then formally ‘suspended’, and the Fouchet Plan was abandoned.

The failure of the Fouchet Plan represented the first of many political complications to emerge among the Six in the 1960s. Moreover, by stiffening French resistance to British intervention in continental affairs, it had a marked effect on the atmosphere of the Brussels negotiations on British accession. Four weeks after the suspension of the Fouchet discussions, de Gaulle held a press conference in which he defended the Fouchet Plan and delivered one of his most scathing attacks on European federalism. His response to Belgian and Dutch intransigence was to proceed with negotiations on a political treaty with Germany alone. The summer and autumn of 1962 were marked by a number of high profile meetings and state visits. This process culminated, a mere fortnight after the collapse of the first British membership application, in the signature of the Franco-German Treaty of Friendship and Cooperation – a treaty which has also been described as a ‘bilateral version of the Fouchet Plan’.

Despite these external threats, and perhaps partly even because of them, the early years of the EEC were startlingly successful. In 1958, it had yet to start its day-to-day operations and still had to recruit its staff. Although its president, Walter Hallstein, was welcomed in Washington almost as if he were a head of state, his position as the head of the secretariat of Europe’s smallest and newest international organization meant he was virtually shown the tradesmen’s entrance in the United Kingdom. Nonetheless, the Commission quickly became a formidable force in European politics. This was partly because it was remarkably well-staffed. For example, Walter Hallstein himself had been involved in European affairs since he had led the German delegation in the Schuman Plan negotiations. Sicco Mansholt, an ardent federalist, had served as an agricultural minister (not usually a post renowned for its length of political tenure) for over a decade. Hans von der Groeben had already served as his country’s representative to the High Authority of the ECSC. Each of these men recruited highly skilled and experienced personal staffs.

Its success, however, was more than a question of personnel. At an organizational level, the Commission was quickly able to establish its own priorities and, still more importantly, to implement them. This, in turn, was facilitated by the compactness of the Commission itself, as evidenced by its small number of portfolios. Only later, when the EEC was merged with the ECSC and EURATOM, did its focus become blurred; it was then further diluted by the addition of new commissioners to satisfy new members in 1973. It is also undeniable that political factors played an important part. Early support from the Americans had certainly helped to increase the legitimacy of the new organization. Additionally, foreign policy challenges, an area in which the Rome treaties had given the commission an important role, presented themselves in the form of GATT trade rounds and in preparing the response to UK initiatives. Finally, the favourable economic climate provided new opportunities in the shape of an accelerated creation of the common market and thus created new areas for the Commission to exercise its influence at an early stage.

I once asked a senior official with a lifetime of service in the Commission, what the difference was between an inter-governmental organization, with a large and efficient secretariat, and a supranational community, controlled by a Council of Ministers (often voting with unanimity) and a large and efficient Commission. He replied that often there was no discernible difference, especially if there were sources of disunity within the group. However, if the political or economic constellation were favourable, a supranational community could respond more quickly and effectively to issues to which an inter-governmental agency might not be able to respond at all. He argued that the first Hallstein Commission was fortunate to find itself in such a situation.¹¹ Small, uncertain, and untried, the new Community soon found itself basking in a golden age, and inspiring a whole branch of theorizing among political scientists into the bargain.

The Six’s first step in economic integration was the building of a customs union for industrial goods. All tariffs and quotas on trade between members were to be reduced gradually to zero and a Common External Tariff (CET) installed. The first 10 per cent tariff cut on intra-EEC trade took place in January 1959 and, according to schedule, bilateral quotas were multilateralized, while those quotas that were extremely restrictive (less than 3% of output) were expanded. At the same time, the benefits of the tariff cuts (other than those on tariffs already below the planned CET) were extended unilaterally to other GATT members. This was partly to anticipate criticism in the GATT that the EEC would develop into a closed organization and partly to cool the row that had erupted after the failure of the free trade area negotiations, which would have been aggravated had the Six immediately begun tariff discrimination against the rest of Europe.

The next two tariff cuts of 10% each were to take place in July 1960 and December 1961. Hallstein suggested accelerating the schedule, ostensibly to take advantage of the favourable economic climate but also to accentuate the EEC’s own identity at a time when there was still an active interest in subsuming its commercial arrangements into a wider European grouping. As a result, in May 1960 the Council of Ministers decided to proceed, on schedule, with the July reduction but to make the next cut a year early, in December 1960. Similarly, in May 1962, the Council decided that the state of the economy allowed the 10% cut scheduled for July 1963 to be brought forward a year. Due to these accelerations, tariffs between the EC members were dismantled completely by July 1968, two years ahead of schedule.¹²

The creation of a customs union by the Six also implied a common level of tariff protection towards the outside world. This too was completed ahead of time. The first problem was to define the tariff itself. The CET should have been calculated as the unweighted average of tariffs in four areas, but for a number of products (mostly in the semi-manufactured and petro-chemical sectors) this formula was opposed. Due to lack of time in the Treaty of Rome negotiations, these goods had been consigned to List G and left to be decided by January 1962. Because of the need for a complete tariff schedule before entering GATT negotiations, this operation was completed by March 1960 and the outcome, moreover, was far less protectionist than had originally been anticipated.¹³ Because the timetable of internal tariff cuts had been accelerated, so too was the realignment of national tariffs. In January 1961 and July 1963, the margin between national and projected rates was reduced by 30% each time, and the gap was finally closed in July 1968.

Although the Commission boasted that the level of the CET was moderate and its incidence considerably narrower than the British tariffs, Paxton stresses that ‘in practice, the common external tariff as originally fixed was higher and more restrictive than the average incidence of the 1957 tariffs.’ Germany had already in the mid–50s been concerned that their first post-War tariff had been fixed at too high a level and had already engaged in some unilateral reductions of their own. The Dutch too had been alarmed at the upward revision of tariffs on semi-manufactured goods especially. Neither country had been happy with the upward drift in protection that the CET implied. They therefore welcomed the call in 1958 by US under-secretary of state, Douglas Dillon, for a new multilateral tariff round in GATT. So too did the Commission. The Treaty of Rome had constituted a single bloc from four, already large, trading entities. Under GATT rules which applied to negotiations between major suppliers, this enhanced its importance and its international recognition, especially in relations with the United States. Moreover, since the Treaty also allocated the Commission a specific role in preparing and negotiating foreign commercial policy, the Dillon Round immediately promised it a prominent role in the national policies of the Six.¹⁴

The Dillon Round was delayed by the need firstly to construct the CET and then to get it approved by the GATT. Once underway, the Commission suggested a 20% ‘linear’ reduction in the CET, subject to reciprocal concessions by other countries. This idea foundered on the inability of the US to react to an offer framed in this way, but it is far from certain whether it would have been endorsed by the Six anyway. Thus the negotiations proceeded bilaterally on a product-by-product basis. No less than 4400 bilateral deals were made covering trade worth $4.9 billion and resulting in tariff cuts of about 7%. This outcome, however measured, was twice a good as that of the previous ‘round’ in Geneva in 1956 but was still considered disappointing. However the Dillon Round did have one important side-effect in that it convinced the Kennedy administration, in framing the 1962 Trade Expansion Act, not only to reopen tariff negotiations but to empower the US to negotiate across-the-board tariff cuts.

The Kennedy Round lasted from May 1963 to June 1967 and resulted in the largest tariff cuts in modern history, although the across-the-board method was not employed, since the EEC argued that the disparity in US tariffs, compared with those in Europe, would lead to inequitable results should that method be used. Nonetheless, over 8000 deals were made with a trade coverage of $40 billion and an average reduction of 35%. In over two thirds of cases, with the steel and chemical sectors especially heavily represented, tariffs were reduced by more than half. Textiles, on the other hand, recorded only minor gains. Equally, little progress was made in grains, meats and dairy produce which were rapidly being embraced by the Common Agricultural Policy (CAP) and where the French, especially, were reluctant to make concessions. The need to conclude the CAP, and the ‘crisis’ that had accompanied it, served to delay progress. More importantly, it prevented the tradeoffs that might have made deeper cuts possible elsewhere. Nonetheless, despite the tensions that inevitably accompanied the process of establishing a single position, the Commission emerged from the exercise with its international status considerably enhanced.

The Commission also suceeded in making the EEC the focus of international relations with the wide range of African territories that had made up the previous French and, to a lesser extent, Belgian and Dutch empires. These countries were overwhelmingly dependent on Community markets for both exports and imports, and on the metropolitan countries for much of their capital. Their future had been introduced at a late stage into the Treaty of Rome negotiations as a way of reducing the burden of their upkeep on the French budget in return for France’s renunciation of its bilateral preferences (or, more to the point, the multilateralization of those preferences). Thus the Six would remove tariffs and quotas on imports from these areas in the same way as those on intra-trade. By March 1963, tariffs had been reduced by 50% for manufactured products, by 30% for most of the liberalized agricultural products and 35% for the remaining agricultural products. It was not foreseen that these reductions would be strictly reciprocal, but protection retained by the overseas territories had to be applied equally to the Six.¹⁵

After a five-year period, the association agreements were put on a new basis with Yaoundé I, negotiations for which lasted from mid–1961 to July 1963. These negotiations were difficult insofar as many territories had ambivalent feelings towards their colonial and excolonial masters and towards the prospect of neo-colonialism on a European scale. Moreover, the European member states were far from identical in their views of these countries. Whilst France shared with the Commission a desire to renew and extend the association, the Dutch were rather critical. Large Dutch economic interests in Commonwealth Africa led them to demand an agreement that could accommodate these territories and they linked the outcome of Yaounde I to the question of British accession. Only when the French veto blocked this possibility could real progress be resumed. The principles of the agreement were:

* Free trade area, dismantling of tariffs and quotas

* Technical and financial aid payments and capital liberalization

* Freedom in rights of business establishment and services

In 1969, after only six months’ negotiations, Yaoundé II was concluded to govern the relationship for another five years. These talks were much easier since many of the earlier problems had passed, though not without traumas: in essence, France and Belgium had accepted their post-colonial status. The issue of widening the association had been resolved by the Arusha Convention of July 1968 which put relations with Kenya, Tanzania and Uganda on a new footing. Finally, and most tellingly, the agreements had had positive effects on the development of the African territories concerned.

The preferences established by the association clauses and by Yaoundé I and II have prompted much criticism. Non-associated countries in Africa, Asia and Latin America were opposed to the arrangements. So too were the United States and the United Kingdom. From the very beginning, the arrangements were condemned as incompatible with GATT and this discussion remained alive throughout the period. George Ball, then US secretary of state, suggested that it ‘tends to result in a poor use of world resources’. What he said was true, but efficiency in the global allocation of resources had not been the Commission’s main objective. Its first General Report defended its association policy in unambiguous terms:

It was the duty to promote the economic and social development of the Overseas countries and territories associated with them by letting these countries and territories share in the prosperity, the rise in the standard of living and the increase in production to be expected in the Community.

The trade-off between access to industrial and agricultural markets had been a central cornerstone in negotiating the EEC. Yet there was so little chance of agreeing on the form of the policy or the level of protection during the negotiations that, unlike the sections on the customs union, the clauses on the Common Agricultural Policy remained largely procedural. Ehrard, who was anyway opposed to much of the Treaty of Rome, argued that the vagueness of the clauses proved that they were designed to be forgotten. The key to ensuring that this did not happen lay not in the paragraphs concerning agriculture but in article 8 which made progress through the three stages towards the customs union contingent upon equivalent progress in agriculture.

As commissioner in charge of agriculture, Sicco Mansholt started his work by rallying national agricultural pressure groups behind a European policy. In June 1960 he submitted his first proposal to the Council of Ministers. This foresaw free trade in agricultural products within the Community but with uniform target prices and variable levies on imports. In addition there would be structural policies designed to raise productivity. In 1962, after intense negotiations, market unity, Community preference and financial solidarity emerged as the principles of a future CAP. However, this still left important issues such as the level of support prices and the financing of the system to be settled before the CAP could become operative. Meanwhile a regulation was passed establishing the FEOGA (Fonds Européen d’orientation et de garantie agricole) whose provisions extended until mid–1965.¹⁶

The level of common prices as well as the financing of the CAP proved to be very controversial and the fierce negotiations almost brought the EEC to the brink of collapse. It took until the end of 1964 before German reluctance to accept a target price for grain below their prevailing national level could be overcome and before a common price level for cereals could be introduced. Proposals for common financing of the CAP were submitted in March 1965. Since these envisaged augmenting the EEC’s institutional powers, through increasing the budgetary competences of the European Parliament and the introduction of majority voting, France flatly opposed the move. In summer 1965, it withdrew its representation from all EEC meetings and, with this ‘Empty Chair’ policy, precipitated a major crisis within the Community which was only resolved in January 1966 with the Luxembourg Compromise – usually described as an ‘agreement to disagree’.

The Luxembourg Compromise stipulated that the Commission would consult with governments before adopting any important proposal, notwithstanding its rights of initiative enshrined in the Treaty of Rome. More significantly, it stipulated that if a country felt its vital interests to be at stake, even on issues normally decided by majority, the Commission was bound to continue discussion until unanimous agreement was reached – or drop the proposal altogether. Although at the same time the financing of the CAP was resolved, with a fixed scale of contributions agreed to run until January 1970, these events emphasized that the balance of power lay not with the Commission, but with member states.

Relatively high price levels within the CAP soon led to serious problems. Besides raising the cost of living, high guaranteed prices contributed to a rapid growth of agricultural surpluses. By the beginning of the 1970s, the EEC had turned a deficit in wheat and barley into a surplus of 10% above requirements. An equilibrium in butter had been transformed into a surplus of 16%, and a 4% surplus in sugar beet had been bloated to closer to 20%. Mansholt responded in 1967 by calling for more emphasis on structural policies that would allow a reduction in prices, but this appeal foundered on violent oppostion from agricultural organizations. The Council of Ministers capitulated to pressure by rejecting any consideration of price cuts and by diluting considerably the proposals for structural policies.¹⁷

One of the principles of the CAP was that the same price and marketing conditions prevailed throughout the Community. Thus, when the CAP began, unified support prices were expressed in units of account (u/a), a measure of value equivalent to the US dollar. However, changes in exchange rates between currencies would also require an alteration in producer prices expressed in the national currencies concerned. Thus, when the French franc was devalued in 1969, domestic producer prices should have been raised by an equivalent percentage. Similarly, domestic returns for German producers should have been reduced to make allowance for the revaluation of the deutschmark. However, governments were reluctant to adjust farm prices in the direction of, and to the degree indicated by, fluctuations in exchange rates. As a temporary solution they therefore established a system of Monetary Compensation Amounts – i.e., subsidies and levies for imports and exports – to bridge the gaps that had emerged between domestic and ‘common’ European prices. Later this ad hoc provision was virtually institutionalized by the introduction of special exchange rates, the so-called ‘green’ rates, that applied exclusively to agriculture and allowed the agricultural support prices expressed in national currencies to diverge.¹⁸ This procedure increased the costs of the CAP, perpetuated and aggravated distortions in competitive conditions in national markets, returned effective control of agricultural prices to national governments and undermined the entire logic of having a ‘common’ policy. Indeed, divergences in national prices sometimes exceeded those experienced before efforts at price harmonization began in 1967.

On balance, the major achievement of the first fifteen years of the CAP was the removal of arbitrary quantitative controls that had characterized intra-European trade since the late 1920s and early 1930s. It also erected an external regime that created an EEC preference zone (although this could also have occurred without common policies). Finally, it attempted to implement a single system and level of protection throughout the Community. All these factors generated a sizeable increase in intra-European trade, but at considerable cost. Nobody in the post-War period questioned whether agriculture should be protected and all economic protection has to be paid for in some way. The ‘consumer pays’ principle chosen for the CAP was, in its nature, a regressive tax on food that augmented the cost of living. The effect of this was compounded by the increasingly high price levels that repressed domestic consumption whilst stimulating output. As production swung towards structural surpluses, so the costs of intervention, buying and storage increased and ate into the funds intended for structural renewal. The solution of disposing (or dumping) the surpluses on the world market also served to undermine relations with external trading partners who had already been disconcerted by being squeezed out of EEC markets and who now had to sustain the impact that the sporadic sale of large commodity stocks had on the fragile levels of world prices.

The removal of tariffs and quotas ahead of their original schedules was, as we have seen above, a milestone in the histories of both the EEC and EFTA. Since EFTA, too, had in 1961 and again in 1963 decided to accelerate its own timetable, within the blocs of the Six and the Seven tariffs had vanished completely by 1969.¹⁹ Yet, as it was understood at the time, the dismantling of tariffs and quotas was a necessary but not sufficient condition for ensuring free competition:

* Both organizations allowed the retention of some quotas for cultural and similar reasons.

* Both faced customs formalities for the restitution and reimposition of indirect taxes (and EFTA also had to contend with certificates of origin).

* Both saw individual administrative and technical obligations assume a more restrictive character.

* Both had to confront the effects of methods of levying taxes on business, incentives for investment and the granting of subsidies – which all acted to distort competition.

* Both still had to tackle the problem of cartels and restrictive practices.

EFTA ducked many of these issues by only investigating complaints made by governments (and there were not many), whereas the Commission dedicated itself to eliminating these sources of trade distortion in principle. Yet the EEC only really started to address these problems at the end of the 1960s and even then made very slow progress. Even discounting the new protectionist measures introduced after the 1973 oil crisis, the Commission’s own judgment in 1981 is revealing: ‘The customs union, the implementation of which is intended to ensure the internal market, is proving to be increasingly inadequate for the achievement of this aim.’

As tariffs and quotas were dismantled, so the impact of non-tariff barriers became more apparent. Some argue that their incidence became more prevalent as business turned to new protective devices to compensate for the loss of traditional forms of protection. However there have been no historical studies to substantiate or deny this. The Treaty of Rome stressed the need for a general system to protect competition from distortions (art.3(f)) and developed the areas of policy, the competences of the Commission and Council, and the rules and procedures in articles 85ff. Articles 85 and 86 declared that agreements between enterprises, together with dominant market positions capable of distorting trade, were incompatible with the Common Market. Furthermore, they prohibited dumping and state subsidies (though the latter came with a long list of exceptions). Lastly, state monopolies (art.37) should be reshaped, and fiscal as well as legal dispositions should be adjusted.

All these provisions remained sketchy, however, and it was the task of the EEC institutions and Commissioner, Hans von der Groeben, to flesh them out. Given the different interests and perceptions in this field, the problem was formidable, but it was by no means the only one. Competition policy was ambiguous as a concept, and the possible negative sides of a stringent competition policy were much resented. On the other hand, it could be articulated in more positive terms by suggesting that what Europe needed was more, rather than less, concentration in the interests of maximizing efficiency.²⁰

On the question of state monopolies, the Commission could, after the first stage, recommend measures for reshaping them, which it did in several cases, usually by proposing gradual modifications which increased imports, eliminated the disparity of margins and adjusted to market conditions. There is insufficient evidence available to judge the impact of these rulings but in some cases, such as tobacco, it was shown that imports from other member states increased considerably. Yet given the facts that the Commission tried to work with, rather than against, member states, and that these had often and publicly voiced firm opposition, analysts generally agree that the policy of the Commission in this field was rather cautious. Moreover, celebrated successes such as tobacco need to be counterbalanced by equally significant setbacks: the reintroduction of a French petroleum monopoly represented a de facto break of the standstill agreement of art.37, to the effect that no further state monopolies should be introduced.

State subsidies also presented a thorny and difficult problem, the more so since subsidies were poorly and ambiguously defined in the Treaty. Generally, subsidies were deemed incompatible with the Common Market since they could distort trade between member countries. Yet industrial or regional policies were seen as necessary adjuncts to a mixed economy – and this implied financial aids. Thus it was necessary to distinguish between ‘adjustment’ and ‘unfair government aid’ and the Commission had the power to scrutinize existing state subsidies. Should they distort trade, it could ask that they be abolished or amended. It could also rule that the subsidy was compatible or necessary. Similarily, new ‘other’ subsidies could be introduced with a qualified majority vote of the Council.

The Commission became active in this field early in 1959 and demanded information on the financial aids in use among the member states. Following this, it had some success in persuading governments to amend and/or end subsidies – as in the case of German synthetic rubber, or on the more rapid depreciation allowances for French producers buying French equipment – together with similar practices in Italy. Moreover, considerable progress was made in the early 1960s in completing the inventory of existing aids and agreeing on information procedures. Yet as late as 1974, so Cairncross and Giersch argue, the praxis of state aid was still not transparent and, on the whole, EC policy failed adequately to tackle the problems of state aid. Matters grew worse after the Luxembourg compromise, when the Commission’s attitude can best be described as pragmatic awareness of the difficulty of successfully challenging determined member governments. Difficulties with financing subsidies from the EEC’s own funds contributed, though this problem diminished over time. Not surprisingly, the level of government subsidies showed little inclination to decline. What is more, the Community had still failed to define uniform criteria and conditions for judging the admissibility of aid.

The Treaty of Rome empowered the Commission to submit proposals on restrictive business practices and dominant positions which were able to distort competition – i.e., cartels and imperfect competition. It did so in 1960, and in 1962 the Council adopted Regulation 17, which was called by Swann/McLachlan ‘an obscure legal document’. It reaffirmed the prohibition on restrictive business practices (art. 85 (1)) and ruled that they could be dissolved. It also subjected the firms concerned to a fine. First of all, though, it provided a notification of such agreements and a procedure to determine the action taken. This succeeded in attracting the notification of more than 35,000 restrictive agreements, most in the hope of securing acceptance and many involving fairly innocuous trading practices. By the end of 1962, however, Commission officials had isolated almost five hundred as constituting serious impediments to international trade.²¹ Even so, many of the ‘traditional’ cartels had not registered at all.

After some struggles with the Council, which initially refused to give the Commission regulating powers, a policy emerged via a combination of exemptions, rulings of the EJC and Decisions by the Commission; which tried to ban price fixing, market sharing, production quotas, vertical distribution agreements, certain aspects of the exploitation of commercial property rights, and collective exclusive dealing. Implementation of this policy, however, remained fraught with difficulties. Obviously, restrictive agreements which the participants felt unlikely to be accepted were rarely notified. The villains of the piece were secret, large, international, horizontal producer agreements where the Commission had problems in securing evidence and prosecuting cases. Progress on this front was halting and sporadic but, since there is still no assessment of the prevalence of cartels in the 1960s, it is difficult to assert the effectiveness of the Community’s efforts. The contemporary merger boom and the spread of multinationals in these same years complicated matters; and to some extent these new commercial arrangements built on tacit measures of cooperation existing earlier.

The Spaak Report (1956) had argued that the advantage of a Common Market ‘lies in the fact that it reconciles mass production with the absence of monopoly’. It was assumed – and hoped – that European enterprises would adapt to the new situation by becoming bigger entities, enjoying economies of scale and enhanced productivity. Herein lay the route to improved competitiveness, above all, through the example of US firms. Throughout the discussion on the ‘technological gap’ and the ‘American challenge’, the size of US enterprises was seen as the main reason for their superiority over their European counterparts. On the other hand, the Treaty of Rome hoped to avoid dominant positions – or at least their abuse (cf. art. 86) – and to ensure competition. The European Communities had to find some way through this dilemma to define their policy.

The Commission initially adopted a largely passive stance: in 1963, the question of ‘concentration’ was handed to a group of experts who produced a first memorandum in 1966. Although this reiterated the need to preserve competition, it laid more stress on the positive aspects of concentration. The Commission’s first aim was to reduce impediments to certain forms of merger. The reason may have been the poor results of cross-frontier mergers within the EEC (only 257 in the period 1961–9) compared with domestic mergers (1861) and those involving third countries (1035). At the same time, the Commission demanded powers to control mergers that threatened to acquire a dominant market position. It did not acquire these powers then, and when it did, in 1973, it was only in the form of rights to prior notification. The intervening years had been marked by complex legal arguments on the way in which the relevant articles were to be applied, arguments that could have been avoided, ‘if there had been any real political will amongst the member states for a merger policy’.

It was obvious that the dismantling of tariffs by both the EEC and EFTA, as well as the EEC’s introduction of a CET, was going to have some impact on the international pattern of trade. Modern customs union theory predicted two effects from the dismantling of tariffs and the introduction of a CET: trade creation, that is a shift from higher-cost producers to other EEC sources whose goods had become cheaper with the dismantling of tariffs; and secondly, trade diversion, that is a shift from lower-cost foreign sources to higher-cost EEC sources that benefited from tariff preferences whilst the external tariff was maintained. Intra-area trade would expand; in the first case because of a more optimal use of resources and in the second at the cost of less optimal sources. Much empirical research has been done to determine the balance of advantage.²²

Trade within the blocs rose considerably. That of the EEC increased from $7530m to $49,830m between 1958 and 1971 and within EFTA in the same period from $28oom to $ 11,190m. In both cases, trade between bloc members grew faster than their trade with the rest of the world. EEC exports to EEC countries rose from 32.1% to 49.4% in these years while the percentage share for EFTA exports to EFTA countries rose less dramatically from 17.5% to 24.3%. Before trying to apportion the balance of advantage, one has to consider that increased intra-bloc dependence is not exclusively a function of the manipulation of commercial conditions. In a period when the growth centre of world trade lay in the exchange of increasingly sophisticated manufactured goods, it would not be surprising to see developed economies in close geographical proximity doing particularly well. Equally, performance within groups may be determined by differential growth rates. EFTA, which included the relatively sluggish UK economy, may appear less ‘successful’ than the EEC, with the rapidly-expanding German economy at its core. For example, EC exports to EFTA fell from 21.1% to 16.6% whilst the share of EFTA exports to EEC countries rose from 22.8% to 25.4%, despite the maintainance of tariffs or the deflection of agricultural trade.

Singling out an EEC-effect is not easy and the various attempts that have been made to do so have been much discussed. The so-called ex-post models cover a period when the EEC was in operation, and try to find out what the world would have been like if the EEC had not existed. To estimate trade in such cases, one has to rely on some ceteribus-paribus assumptions, so that the findings are always problematic. Hence Sellekaerts’s warning ‘that all estimates of trade creation and trade diversion by the EEC are so much affected by ceteribus-paribus assumptions, by the choice of benchmark year (or years), by the method to compute income elasticities, by changes in relative shares and by structural changes not attributable to the EEC but which occurred during the pre- and post-integration periods (such as the trade liberalization among industrial countries and autonomous changes in relative prices), that the magnitude of no single estimate should be taken too seriously’. Notwithstanding this destructive comment, it has to be admitted at, despite the different methodologies employed, most studies suggest that trade creation outweighed trade diversion, so that a net gain was achieved. Furthermore, Davenport has stressed the fact that ‘the divergence in estimates is relatively limited, with the majority clustered in a range going from $7.5bn to $11.5bn for trade creation and from $0.5bn to $1bn for trade diversion.’

Very few estimates break this ‘gain’ down into individual national components. Two studies that do this come to broadly similar conclusions. The Benelux countries benefited least, since they already had the lowest tariffs and because the mutual Benelux preferences had to be diluted in the common market (a case of trade erosion). There is a noticeable gap between these countries and the other three. Despite having the next lowest tariffs, Germany benefited the most, reflecting both its export structure and its ability to make inroads into the markets of partner states. France and Italy followed close behind.²³

Some authors contend that these calculations underestimate the impact of trading blocs. They stress that increases in market size and the impact of certainties in irreversibly reduced frontier barriers to trade induced a favourable investment climate and economies of scale, at least in sectors engaged in trade. Indeed, in the Italian case, the difference between a hyper-efficient export sector and a more backward domestic sector had led to the economy being analysed in terms of ‘economic dualism’, even before the full impact of the EEC was felt.

Growing commercial interdependence especially among the EEC states prompted concern among their governments over whether or not to tie their currencies closer together. The implications of moving to convertibility in 1958 quickly became apparent because the US balance of payments deficit remained acute. In the 1950s, this had been the main source for replenishing reserves. By the early 1960s, however, central banks in the EEC member states held about all the dollars they wanted. Yet the inflow of dollars continued unabated, attracted by the investment opportunities offered by the rapidly expanding EEC economies, or seeking a quick return by exploiting the relatively high interest rates on offer in Europe. Some of these funds were exchanged for US gold, some remained in the vaults of European central banks, and some were held by the private banking system. The latter formed the basis for the so-called Eurodollar market and provided a growing wash of international liquidity highly responsive to changes in, or rumours of changes in, market conditions. International speculation in foreign currencies became a daily fact of life. In such circumstances the desire for some preemptive, collective defence mechanism assumed a higher place in the aspirations of the Six.²⁴

Unfortunately, as Tsoukalis has pointed out, the Treaty of Rome provided ‘very little, if any, guidance with respect to monetary policy’. This was hardly surprising since conventional wisdom at the time assumed that the multilateral arrangements enshrined in the Bretton Woods agreements could be fulfilled – and did not envisage their imminent demise. Expectations were high, but the Treaty’s provisions for monetary integration or cooperation (arts 104ff.) were rather pale and dim, stipulating the liberalization of payments on both current and capital accounts. Within a framework of overall equilibrium in the balance of payments, member states were enjoined to pursue policies directed at high employment and stable prices. To accomplish this, it was seen as necessary – and apparently sufficient – that there should be a loose coordination of economic policy accompanied by the creation of an advisory monetary committee to observe, report and comment on current problems. Although exchange rate policy fell within the purview of this body, it remained a national prerogative. Should countries face difficulties, the Community could offer financial assistance in addition to making recommendations, but no fund for this was created.

The first decade of the EEC’s existence brought various proposals but few achievements. It was characterized by almost uninterrupted balance of payments surpluses for the EEC-members and a parallel decline in the position of both reserve currencies, the dollar and sterling. After the devaluations of the French franc in 1958, the payments situation within the Community attained some equilibrium. The small, five-per-cent revaluations by the deutschmark and the guilder in 1961 stemmed largely from the size of their respective surpluses with non-members. The only internal EEC crisis was the Italian deficit in 1963–4 which was resolved by non-Community credits and without recourse to changes in exchange rates. Several initiatives for institutional change and closer monetary integration came from the European Parliament and the Commission.²⁵ Suggestions for closer consultations and the creation of a separate committee of central bankers were accepted in 1961 and 1964 respectively. However, more radical proposals, if not rejected outright, found little positive support among the member states, partly because monetary reform was seen as an issue that required the involvement of the USA and the UK, and partly because the ever-open question of British membership of the Community made several members reluctant to press ahead with more drastic schemes.

Nonetheless, the increasing outflow of dollars and the need for a common line by the ‘surplus’ countries (which included all the EEC states) kept the issue of regional monetary reform on the agenda. In 1964 the French finance minister Giscard d’Estaing proposed the creation of a new reserve unit to eliminate use of the dollar and to serve the needs of intra-European trade. This idea was killed by a combination of the point-blank refusal of the US to contemplate such arrangements, the reluctance of some EEC partners, and a policy conflict within the French government. Jacques Rueff, architect of the French reform programme of 1958, favoured instead an attack on the pre-eminence of the dollar, through using the ‘rules’ of the international system rather than through changing them. Since the dollar was convertible into gold, France decided in 1965 simply to do just that; a decision that provoked d’Estaing’s resignation. Although member states shared France’s underlying concern, they were uneasy about these tactics; and varied in their degree of susceptibility to American diplomatic pressure. On this last point, West Germany was particularly sensitive to US pressures, since the country depended upon the large American troop presence for its security.

A further impetus towards creating a Community attitude on monetary problems came from the decision in 1964 to adopt a common ‘unit of account’ for determining national prices. This implied that domestic prices would need to adjust proportionately to any future change in exchange rates. Although such adjustments were considered unlikely, the Commission wanted mechanisms to reduce the chances further still. At this point it faced opposition on the grounds that tying down one part of the monetary equation made no sense without tightening other components – a line of argument which had already been voiced by German delegations at various international gatherings for over a decade. They demanded economic policy coordination as a prerequisite for monetary union.

The essential underlying assumption that international parities were somehow immutable was punctured by the crises of 1967–8. When sterling devalued in November 1967, a two-tier gold market was introduced in March 1968. As speculation built up against the franc, France introduced exchange controls in spring 1968. Germany provided a safe haven for funds but the government denied that an overvalued DM had caused the problem. Instead, in autumn 1968, it imposed extra taxes on exports and took fiscal measures to encourage imports. The Bundesbank’s stubborn refusal to revalue, despite massive pressure, worried all concerned and pressure for a realignment of exchange rates could not be avoided. But it was a symptom of the depth of the conflict that when the decision was made, the action was not coordinated. France, unilaterally, devalued by 11.1% in September 1969. With German honour thus satisfied, the DM was allowed to float that same month and was formally revalued by 9.3% the following month.

These events produced a surge of interest in regional solutions. The Commission tabled two memoranda in the course of 1968, and in February 1969 the so-called ‘Barre Report’ was submitted. Although the reports differed in emphasis and tactics, they agreed on creating a new reserve unit, improving policy coordination and a establishing a mutual aid system. The Council of Ministers responded, since it also ‘recognized the need for fuller alignment of economic policies in the community and for an examination of the scope for intensifying monetary cooperation’. Even so, there was no immediate follow-up. Meanwhile, the need for some initiative was underlined by the situation created by the 1969 currency realignment. Since neither France nor Germany had wanted national farm prices to change in line with the new exchange rates, (rather than allow the CAP to collapse) the Commission had to produce a system of ‘green’ exchange rates to preserve the fiction of common price levels.

It was some relief when, prompted by the German chancellor, Willi Brandt, the Hague summit of December 1969 endorsed the aim of ‘Economic and Monetary Union’ (EMU) and set up the Werner Group. Although Brandt’s proposal seemed a major departure from the usual German line of insisting on the primacy of prior policy coordination, the Werner Group very soon found itself embroiled in old conflicts. Two schools of thought prevailed: the ‘monetarist’, which saw fixed exchange rates as a means of forcing policy coordination, and the ‘economist’ school, represented by Germany and the Netherlands, which saw the maintenance of fixed parities as impossible without convergent economic policies. The Werner Report, submitted in October 1970, adopted a compromise position. It called for the realization within ten years of complete and irreversible convertibility, closely aligned exchange rates, the full liberalization of capital movements and the creation of a common central banking system.

To achieve these ends it recommended a narrowing of the margins of fluctuation (from 1.5% either side of par) and a better organization of policy cooperation, especially in the area of foreign monetary policy. It took until March 1971 before the measures were approved. Although the French endorsed the monetarist approach, they wanted to avoid at all costs any discussion on the political and institutional aspects of EMU. But it was exactly a commitment on these aspects that Germany and the Netherlands saw as the price for their concessions. As a result, the resolution approving the goal of EMU left the questions of the transfer of power and institutional reform undecided.

Thus nothing was in place when the Bretton Woods system experienced its next, and ultimately terminal, crisis. In 1970 the USA, still experiencing mounting balance of payments deficits, had eased its monetary policy; consequently, speculative funds flowed back to Europe and, in particular, to Germany. The thinking of the German Bundesbank now moved quickly in the direction of a DM revaluation as a means of reducing the attraction for foreign funds, but there was still the question of how to reconcile this with maintaining parities within the EEC. In spring 1971, the German finance minister, K. Schiller, apparently against the feelings of the majority within the Bundesbank, proposed a joint flotation of all EEC currencies against the dollar. This was resisted by those countries that did not want their currencies dragged upwards in the slipstream of the DM. Instead something reminiscent of the 1966 Luxembourg ‘agreement to disagree’ was decided. The DM and the guilder floated, while other countries introduced capital controls. The decision by Nixon to suspend dollar convertibility in August 1971 only reinforced the divide. Italy now joined Germany and the Netherlands in advocating flexibility of exchange rates, while France, Belgium and Luxembourg preferred a system of exchange controls. Action was further delayed by a general agreement that the key to a global currency realignment lay in a dollar devaluation and not in a revaluation of other currencies. Thus another four months elapsed before the Smithsonian Agreement validated a change of most EEC rates against the dollar of between 7.5 and 16.9%.

The Smithsonian Agreement also allowed currencies to float by 2.25% on either side of the new central rates, which implied that EEC currencies could diverge by as much as 9% before triggering intervention to stabilize the exchange rate. This prospect produced a compromise whereby European currencies would maintain a tighter rein on their rates with each other, whilst moving jointly against the dollar: the so-called ‘snake in the tunnel’. The system was also briefly joined by the aspirant members. However, there was still no mechanism to produce convergent policies, nor were convergent policies adopted. Soon the new rates appeared as unrealistic as the old ones they had replaced. In June 1972, sterling left the snake and floated downwards. Ireland and Denmark, heavily reliant on the UK market, immediately followed suit, although Denmark rejoined after four months.

These mutations notwithstanding, the ‘success’ of the system prompted new moves, agreed in October 1972, to reinforce EMU but, significantly, no agreement was reached on the second step towards attaining the ultimate goal. Meanwhile divergent policies continued to exact their toll. Attempts to get the UK to rejoin the float in January 1973, when it joined the EEC, were rebuffed by a government that did not want to sacrifice recovery for exchange rate equilibrium. The following month, the Italian lira was forced out of the system. The fact that Sweden joined was little consolation. However, the final blow to the system (and to the chimera of economic and monetary union by 1980) was the fate of the French franc which in January 1974 was also left to float. As Tsoukalis comments, by this stage a group comprising Germany, Benelux and Scandinavia had to be understood as ‘little more than a DM Zone’.

The 1966 Luxembourg Compromise had allowed the Council, and thus the EEC, to resume its work by postponing the introduction of majority decision-making and allowing the right of national veto. For many observers who had looked for further progress towards supranationality and contributed to a body of neo-functionalist literature to rationalize their aspirations, the Community appeared interesting but no longer exciting. Moreover, the issue of UK membership again strained relations among the member states. The second British application in May 1967 – followed by applications from Norway, Ireland, Denmark and Sweden – was again aborted by a negative French vote in December 1967. It was clear that on this particular question France was immune to the feelings of its European partners. The Five tried to maintain pressure on France by using the WEU for initiatives to extend cooperation to the political as well as monetary field. This ‘rebellion’ could only be prevented by de Gaulle’s intervention, using the so-called ‘Soames Affair’ (in which the British had leaked details of confidential conversations with the General that suggested a revival of a free trade area to include agriculture) which produced another ‘Empty Chair’. The mood deteriorated further: if the Community were ever to be enlarged to embrace the UK, something in France itself would have to change.

In fact French attitudes shifted surprisingly fast. It is possible that there were objective factors behind the change. For example, new concern about German economic power emerged, especially as France’s balance of payments weakened. Germany’s refusal to revalue during the monetary crisis of 1968 reinforced the fear about the balance of power within the Community which may have produced a feeling that the UK could serve as a countervailing force. Secondly, the Warsaw Pact’s invasion of Czechoslovakia had led de Gaulle to repair relations with the USA. It has been argued that this made it senseless to persist in seeing the UK as an Anglo-Saxon ‘Trojan horse’ in the Community. Although both of these arguments are plausible, until evidence is provided to the contrary it seems most likely that the contemporary view, which attached the greatest importance to the shift in power from de Gaulle to Pompidou, was closest to the truth. Although the government was still ‘Gaullist’, under Pompidou it contained four ministers who were members of Monnet’s Action Committee for a United States of Europe. Whatever the ultimate reason, in July 1969 Maurice Schuman announced that France was willing to countenance some European rélance. Proposals linking the completion, strengthening and enlargement of the EEC would be forthcoming at the Hague summit in December.²⁶

The Commission quickly wrote the Hague summit into its hagiology calling it a ‘turning point in its history’ (EEC Bulletin, 1/1970). It would be churlish to deny that much was accomplished, although different countries laid different emphasis on different parts of the package. France was most interested in completion of the Community and, specifically, the financing of the CAP. The others were primarily committed to enlargement. Nevertheless the decisions at the Hague, taken together, represented an ambitious programme for future development. It was agreed to find a definitive financial arrangement for the CAP by the end of 1969. By July 1970, ministers had requested a report to deal with possible developments in the field of political unification. By December 1970, they wanted a further report on Economic and Monetary Union (EMU). Last, but undoubtedly not least, it was agreed to open negotiations with candidate-countries.

Implementation of the agenda began immediately after the conference. Between 19 and 22 December, agreement was reached on financing the CAP and on the EEC’s financial resources. The latter involved allocating to the Community all receipts from levies and customs duties, as well as national contributions to cover any deficits, and their gradual replacement by receipts to be calculated on the basis of an assessment of harmonized VAT. Committees were installed to draft the requested reports. Two major reports were published in 1970: July saw the publication of the Davignon Report on political unification, while October saw the Werner Report on Economic and Monetary Union. The fate of EMU has been dealt with in the previous section, but the cornerstone of Davignon’s recommendations was foreign policy coordination, described as ‘European Political Cooperation’ (EPC), which rested upon regular meetings of foreign ministers and high officials. Its first achievement was to produce a concerted position during the Conference on Security and Cooperation in Europe that produced the famous Helsinki Accord in 1975.

However, the Hague summit’s main achievement was to re-open enlargement negotiations. Within the UK, a range of studies had attempted to balance a calculable economic ‘loss’ (attributable entirely to the structure and funding of the CAP and the structure and direction of UK foreign trade) against potential economic gains (as the economy benefited from both the static and dynamic effects of customs union). Most managed to arrive at a favourable result. Nonetheless, the negotiations did result in the adoption of new policy areas, noticeably in the creation of a regional fund, from which the UK was likely to emerge as a net beneficiary, in an effort to redress at least part of the transfer problem. These measures, however, stopped short of any automatic redistributive mechanism. No such problems arose with Denmark or Ireland, which were expected to emerge as net beneficiaries from the system.

The membership negotiations were sucessfully concluded in June 1971, following a top level meeting between Edward Heath and Georges Pompidou the previous month. Negotiations for a series of industrial free trade agreements with the remaining EFTA states ran in parallel and were concluded in subsequent months. January 1973 thus represented not only the moment of the first Community enlargement but the closing of a passage of history that had begun in 1958 with the failure of efforts to secure industrial free trade in western Europe. The moment was marked by an optimism scarcely dented by nagging differences on monetary policy. However, 1973 was also the year in which the inflationary boom of 1971–3 was savagely punctured, one of the immediate casualties being the prospects for Economic and Monetary Union. But although it was not immediately apparent, other treasured assumptions that had marked the 1950s and 1960s were destined to be discarded: economic growth, full employment, efficacious Keynesian economic management, technological leadership, to name but a few. It was in these new conditions that the Community had to absorb its three new members.