Padoa-Schioppa and the Icing on the Cake that Marked the Birth of the Euro*

Alfonso Iozzo
President of the Centre for Studies on Federalism and Vice President of Robert Triffin International, former Chairman of Cassa Depositi e Prestiti

In Memoriam.

Tommaso Padoa-Schioppa had an outstanding ability to analyse facts and situations, identifying the economic, political, and social problems that society had to tackle.
I have been his friend since the end of the 1970s, and have always shared his ideas and assessments, mainly on the European unification process from the federalist perspective. Here, I will limit my recollections to a few things where I have lasting memories of his fundamental contribution to the creation of the single currency.

After the Second World War, Europe began a complex integration process. However, from the 1970s, it started to experience difficult crises which worsened after the US decided to abandon the gold standard in August 1971, thereby undermining the Bretton Woods system. Padoa-Schioppa’s idea of an “inconsistent quartet”, i.e., that the free movement of goods and capital was incompatible with autonomous monetary policies and currency exchange rates, showed that creating a single currency was necessary to advance European integration. He stubbornly committed himself to this, despite knowing that for economists the project would be very difficult to implement.

However, not only was Padoa-Schioppa good at analysing and understanding facts, he also had an excellent sense of the importance of organisation to get results. At the end of 1991, to the disbelief of many, the creation of the European currency had become the specific objective of the Treaty under discussion in Maastricht. In Rome, on the eve of the departure of the Italian delegation led by Giulio Andreotti, of which he was a member, Padoa-Schioppa met Gianni Ruta, the former secretary of the Rome branch of the European Federalist Movement and the financial director of STET, a company that had recently issued the first ECU bond. Ruta pointed out to him that while the proposal submitted to the European Council did indeed envisage the creation of the European currency, it did not indicate the date of its entry into force.

Padoa-Schioppa immediately shared the importance of that “detail”, and during the flight convinced Andreotti to propose adding that date, calling it the “icing” on the cake.

Once in Maastricht, Andreotti met with French President François Mitterrand and German Chancellor Helmut Kohl, and convinced them that a final date for the entry into force of the euro needed to be set. However, the CDU leader asked Andreotti whether he realised what the Treaty would entail for Italy. Andreotti replied that he did, but added that he wanted to go ahead because this would be in the Italian people’s interests. The final date was therefore set for 1999.

On the Sunday evening after the summit ended Padoa-Schioppa called me: “We have the European currency, it went well! But the shot fired is so powerful that we’ll need to pay attention to the recoil: We can’t stand behind the cannon, we need to be ready to react.” In fact, shortly afterwards, in September 1992, the market attacks against the pound sterling and the lira started, undermining the European Monetary System, which had to function for the changeover to the euro to take place.

The pound sterling withdrew from the system, while the lira officially remained in the Exchange Rate Mechanism with its fluctuation band widened from 2.25% to 15%. The structure was saved and the arduous journey towards the European currency could go ahead.

In 1999, when the European Central Bank was established, Padoa-Schioppa was called on to become a member of its Executive Board. He told me: “I am not aiming at being in charge of international relations (the German member was obviously in charge of monetary policy), but of the organisation, because a clearing system absolutely has to be set up between the central banks of the participating countries,” as the ECU central banks had done. Padoa-Schioppa supported the project at the time as Director-General of the European Commission. At the ECB, he created and implemented the system later known as “Target 2”.

At the euro’s toughest moment, when the Greek crisis erupted, this system made it possible for capital from Greece to be refinanced without needing a formal resolution.

These very valuable months allowed former Greek Prime Minister Alexis Tsipras, former President of the European Commission Jean-Claude Juncker, and German Chancellor Angela Merkel to reach the very difficult agreement that prevented not only Athens from declaring insolvency while remaining in the euro, but also the crisis from spreading to other countries, including Italy, which would probably have resulted in the end of the single currency.

From the creation of the ECU clearing system to the Delors Report, from the drafting of the Maastricht Treaty to the ECB’s technical structure, Padoa-Schioppa’s contribution to the creation of the European currency was of historical importance, and will remain invaluable.

There are many facets to Padoa-Schioppa’s extraordinary work, and to his personality as a professional and a man, but there is not enough space here for me to mention any others.

However, I cannot fail to remember his last great project: the reform of the international monetary system, launched in 1944 by John Maynard Keynes, but subsequently diminished. Padoa-Schioppa restarted it in 2010 with the “Ghost of Bancor” conference, creating with Michel Camdessus a highly qualified working group, in which he was active until the final days of his life.

* This article was first published by Il Sole 24 Ore, on 17 December 2020