Abstract

A Public-Choice-Approach to the German Monetary Union

The decision for the German Monetary Union in early 1990 was mainly dominated by politics, so was its subsequent shaping concerning the union’s timing and the adopted exchange rate. The extensive objections brought forward by economists were by and large dismissed. This constellation suggests the use of the analytical instruments of Public Choice theory for further research. As the main actor, the federal government of West Germany had to operate on three political fields: In foreign policy the federal government’s main aim was to unrope the German Democratic Republic from its ideological ties to the USSR and the Warsaw Pact. At this time, this option was considered to present only a temporary “window of opportunity.” For this purpose the federal government changed its strategy of assistance to the GDR increasing at the same time the maximum possible assistance with the offer of a monetary union. The participation of West German parties in campaigns prior to the election of the East German parliament, the Volkskammer, in March 1990 suggests the perception of structures of an all-german domestic policy before both countries were legally united. The major East German parties offered almost similar proposals for a monetary union in their election platforms, monetary union being the perceived main interest of the median voter. The landslide victory of the conservative CDU can be interpreted as a vote for the West German federal government, led by the (West-)CDU. Because the monetary union depended mainly on the decisions of the federal goverment, East german voters faced an incentive to vote strategically in favour of the (East-)CDU, which could offer a higher enforcement-factor for its election platform because of its ideological closeness to the federal government. As a prerequisite for the credible offer of a monetary union the federal government had to overcome the Bundesbanks outspoken criticism of any plans for rapid monetary integration in the early discussion. A perfectly independent central bank, whose administration maximizes prestige via (successful) inflation-control, would face no incentive to put aside its misgivings about inflationary dangers of governmental policies. The Bundesbank is independent in its monetary policy, but dependent on parliament and goverment in questions of monetary constitution and fixed exchange rates. Thus the administration of the central bank had to decide how it wanted to maximize its prestige. One alternative was to uphold the resistance to monetary union, thereby maximizing inflation-control prestige. The other alternative was to give in, thereby not endangering its image of independence, which has become an autonomous source of prestige in forty years of successful monetary policy. This image would have been severely damaged, if the federal government had pushed monetary union through regardless of the central banks critical stand. This no-win-situation may explain the Bundesbank’s quick (and surprising) approval, when the federal government announced its own plans for monetary union.