"Hegemonic Stability Theory and European Monetary Cooperation: Evaluating the Role of Germany in the EMS and EMU"

This paper takes a preliminary step toward formulating a theory of German leadership within European monetary politics. Its purpose is to examine the constraints to monetary cooperation in Europe. An analysis of the constraints provides a prerequisite for understanding the particular role of Germany within the bargaining process over the rules of European exchange rate cooperation. The paper locates the crucial constraints to exchange rate cooperation in the distributional concerns of its participants. First, there is the necessity to establish macroecnomic consistency among the participants of an exchange rate regime. There has to be one macroeconomic standard that serves as the focal point for all members of the system. The need for a standard leads to another, and ultimately closely related issue, namely the problem of establishing rules for balance of payments adjustments. I argue that Germany has so far been unwilling to compromise on the question of consistency. Following the N-1 logic, Germany has served as the standard setting country for European monetary politics. On the other hand, Germany has made various concessions on adjustment questions. These concessions have proven to be crucial for the implementation and survival of the EMS. However, in the case of a monetary union the ability to shift bargaining from consistency issues to adjustment issues disappears. Given Germany's uncompromising position on consistency issues, the ability of other countries to bargain over the rules of a monetary union is severely limited. The history of all three attempts at monetary union (the Action Programme, the Werner Report and the Maastricht Treaty) support this claim. On the basis of this analysis, subsequent research will evaluate the function of leadership to solve the constraints of cooperation and to allow countries to reap the benefits of exchange rate cooperation.