This week I am spending a few days in London, before coming home to vote in the Irish General Election.
In London, I have been invited to give some lectures to students in the London School of Economics about the euro, which is the centre piece of the project to achieve Economic and Monetary Union in the  EU. To prepare my presentations for the students, I have done some research on  the history of the  project that culminated in the  euro, the common currency  of the EU.  Some of our mistakes were foreseen long ago.
The first serious outline  of a plan for a  single  currency for Europe was done as  far back as in  1971, in a paper prepared, at the request of  the  other five heads of Government of the   Common Market, by the then Luxembourg Prime Minister, Pierre Werner.
 Pierre Werner’s report was prepared  before  either Britain or Ireland joined  the  Common Market, but we were  both put on notice  by his report that this  was the direction the  body we were joining  was heading,  and we were free not to join at all if we did not  want to go in the direction of a single currency, and accept what it entailed.
The Werner Report was quite specific that being part of the euro currency would mean   EU interference in domestic economic policy making.  Here is an extract from the Report, written  back in  1971
“To facilitate the harmonization of budget policies, searching comparisons will be made of the budgets of the Member States from both quantitative and qualitative points of view. From the  quantitative point of view the comparison will embrace the total of the public budgets, including local authorities and social security.  “
It  was clear that EU scrutiny would extend beyond narrow  public finance, to include  impacts on the broader economy. It said
“It will be necessary to evaluate the whole of the fiscal pressure and the weight of public expenditure in the different countries of the Community and the effects that public receipts and expenditure have on global internal demand and on monetary stability. It will also be necessary to devise a method of calculation enabling an assessment to be made of the impulses that the whole of the public budgets impart to the economy”
It is quite clear from this extract that the framers of the project foresaw the sort of  that  arose  thirty five years later, namely  
Some members running excessive underlying budget deficits and building up unsustainable public debts( as in the case of Greece),
 and others  over stimulating internal demand through excessive private credit, and thus destroying their competitiveness  within the single  currency zone( as in the case  of Ireland).
 But when the Euro eventually came into being , the EU institutions did not  really try very  hard to harmonise budgetary policies , nor  did they  try seriously to control  the “impulses to the whole economy” either.
A few token efforts were made, but when these encountered political resistance, there was no effective follow  up.  It was as if we wanted the benefits of a single  currency, without paying the price. The first countries to break the borrowing rules were  Germany and France, and once they were allowed to get away with it, it  was inevitable we were heading for trouble, because the  basic ground rules, laid down as long ago as 1971, had been ignored and broken with impunity.
In 1989, a second report was prepared with the goal of reviving the project for  Economic  and Monetary Union, which had had to  be shelved because  of the  oil crisis  of the  1970s.  This time the report  was prepared by a group chaired by Commission President, Jacques Delors , and  on which Ireland  was represented by Maurice Doyle.
This Delors report  was even more specific in  envisaging the dangers  that inconsistent economic  policies within the single currency area could give rise to.
It said
“Monetary union without a sufficient degree of convergence of economic policies is unlikely to be durable and could be damaging to the Community. Parallel advancement in economic and monetary integration would be indispensable in order to avoid imbalances.”
It went on to predict exactly what went wrong in Ireland’s case.  Recalling that financial markets are very bad at predicting crises, and  go on lending  long after they should have stopped, it said
 “Experience suggests that market perceptions do not necessarily provide strong and compelling signals and that access to a large capital market may for some time even facilitate the financing of market forces might either be too slow and weak or too sudden and disruptive. Hence countries would have to accept that sharing a common market and a single currency area imposed policy constraints. “
This warning was given in a report co authored by the then  Second  Secretary of the Irish  Department of Finance and future Governor of the   Irish Central  Bank! It would appear that neither institution paid much heed to  this warning in the years between  2000 and 2008.
 It would  also appear that  other member states of the  Euro paid little attention to it either, because I understand  it has been obvious from figures in the statistical appendices to Irish Central Bank  reports since  2003 that big imbalances were building up in the Irish housing and credit markets.
 The European Commission and the Finance Ministers of the Euro area countries could read this data about excessive credit build up, but their reports on the situation in Ireland and Greece were anodyne and circumlocutory. The European Central Bank was not very good at fulfilling its Treaty mandate of coordinating the monetary policies of member states either. 
The truth is that we have, as a result of ignoring the  warnings of Delors and Werner  reports,  facilitated a  European banking crisis, because  by removing  capital controls to facilitate the single currency, we  allowed European  banks to  become totally dependent on one another, so that if one fails, all may fail.
Now at meetings next month,  the  Heads of  the Governments of the European Union  have got to find a European solution to this European banking crisis,  in part by taking seriously the words of Pierre Werner and  Jacques Delors, even if  it is  nearly  forty  years  late!

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