EMS: President of the Bundesbank to Chancellor Schmidt (seeks assurances on operation of EMS) [declassified 2008]

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GERMAN BUNDESBANK
THE PRESIDENT
FRANKFURT AM MAIN
16 November 1978

To the
Federal Chancellor of the
Federal Republic of Germany
Herr Helmut Schmidt
Adenauer Allee 144
5300 Bonn

Re: Statements of the council of the central bank on the future EMS

Dear Federal Chancellor,

The council of the central bank has today after extensive discussion agreed the enclosed statements (Enclosure 1) on important basic principles of the future European monetary system (initial phase). They concern the use of the currency-basket as an indicator, the provisional commitment of 20 per cent of gold and foreign exchange reserves to the already existing “Fund for monetary policy co-operation”, and the increasing of short- and medium-term monetary assistance in the initial phase of the EMS. This third point, which includes an authorisation for the Bundesbank representatives in the negotiations with the EC-partners, should certainly - so it can be brought in as a concession in a final compromise - be handled very confidentially at first.

I am confident that these resolutions of the council of the central bank provide a good basis for an agreement in the end-phase of the negotiations beginning on 20 November in Brussels.

The members of the council of the central bank have agreed the resolution-proposals contained in Enclosure 1 on the assumption that agreement exists between Federal Government and Bundesbank with regard to the legal bases and also with regard to the future possibility of a temporary “opting out” in special cases. With regard to the legal bases, a telex received today from the Federal Finance Minister (Enclosure 3) was very helpful.

I would be very grateful to you, dear Federal Chancellor, if you could confirm for me as soon as possible that full agreement exists between Federal Government and Bundesbank with regard to the principles contained in Enclosure 2.

In the meeting of the council of the central bank today, a lively desire was expressed by a succession of members as to whether you could not more closely inform the council of the central bank, when the opportunity arises, about the political motives for the construction of the European monetary system, just as the desire exists on our side to be able to explain to you more closely our general monetary policy considerations in this question. I would therefore like to take the liberty of inviting you - if your schedule allows - to the next meeting of the council of the central bank on 30 November.

With courteous greetings,

Your very obedient servant,

Otmar Emminger

Enclosures

P.S. I have taken the liberty of sending a copy of this letter with enclosures to the Federal Finance Minister.

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Enclosure 1

Frankfurt, 16 November 1978

Confidential!

Resolution

1. The council of the central bank approves the use of an EMU-divergence-indicator in the limited sense described in Enclosure 2 of the report of the committee of the Central Bank President of 14 November 1978, whereby compulsion to take measures is excluded.
2. The council of the central bank agrees that 20 per cent of gold and foreign exchange reserves be transferred fiducially and temporarily (e.g., by swap-arrangements) to the fund or monetary co-operation towards European monetary union, as soon as the legal pre-conditions are created and the European monetary system enters into force. In one agreement to be concluded about the fund it is intended, among other things, that the arrangement be prolonged each time to three months, and that the Bundesbank will be placed with regard to the returns and the exchange-rate risks as with a mortgage.
3. The council of the central bank authorises the negotiators of the Bundesbank to agree to an increasing of short- and medium-term monetary assistance in accordance with the proposal of the chairman of the committee of issuing-bank governors, if this should prove necessary and expedient in the course of the negotiations. It should thereby be made clear that in all cases the to-be-increased medium-term assistance via credit facilities, later to be created, is to be charged against deposits of national currencies (EMU II). The council of the central bank assumes that the duration of very short-term financing remains 30 days in the event of an increase of this sort.

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Enclosure 2

16 November 1978

1. The council of the central bank of the German Bundesbank has inferred with satisfaction from the telex of the Federal Finance Minister of 16/11/1978 that Federal Government and Bundesbank are agreed that a definitive regulation for the EMS can only be considered under Article 236 of the EEC Treaty (or through an international agreement requiring ratification). This especially affects the construction of a European monetary fund and a possibly conclusive transfer of currency reserves to this.
2. The German Bundesbank further acknowledges that the Federal Government will agree at the starting of the European monetary system only to such regulations under Article 235 of the EEC Treaty as guarantee the autonomy of the German Bundesbank. They also assume that the fund for monetary policy co-operation will include no right of disposal or management authority over the currency reserves put into the fund during the transition period.
3. The monetary policy autonomy of the Bundesbank can be endangered in certain ways, if excessive intervention obligations arise from severe imbalances in the future EMS whereby internal monetary stability is threatened. This would make impossible the fulfilment of the statutory task of the Bundesbank. With reference to several verbal assurances from the Federal Chancellor and the Federal Finance Minister, the Bundesbank assumes that the Federal Government will protect the Bundesbank in such a case from a predicament of that kind, either by a correction of parities in the EMS or, if necessary, by an at least temporary release from the duty of intervention.

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Enclosure 3

Hans Matthöfer
Federal Minister of Finance
Bonn
16 November 1978

To the
President of the German Bundesbank
Herr Dr Otmar Emminger
Frankfurt am Main

Urgent

Dear President,

I refer to our conversation with the Federal Chancellor on 7/11/1978 about legal questions in connection with the creation of a European monetary system, especially the problem with Article 235 of the EEC Treaty.

I would like to assure you that the Federal Government agrees with the Bundesbank that a definitive regulation for the EMS cannot be considered on the basis of Article 235 of the EEC Treaty. This requires much more an inter-state agreement (under Article 236 of the EEC Treaty or through an agreement analogous to the IMF). This inter-state agreement then requires a parliamentary consensus as well as an eventually necessary revision of the Bundesbank Act.

Further the Federal Government will agree at the starting of the European monetary system only to such regulations under Article 235 of the EEC Treaty as guarantee the autonomy of the German Bundesbank.

With friendly greetings,

Hans Matthöfer