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Chapter 7: The European Monetary Union

By Dr. Yahia Abdul Rahman


This chapter is a brief review of Europe's efforts to unite politically.

It serves as an introduction to a case study of a group of nations on one continent which tries to integrate their economies, markets and ultimately political systems into the "United States of Europe.".; It is felt that these efforts and the experience of Europe in reaching these goals are important lessons for those who want to see the developing Muslim countries' economies, markets and political leadership united.

We hope that this entity will be the major force behind offering and proving the usefulness of the LARIBA system as an alternative to the RIBA system in the world.

The European Economic Community- EEC

After WWII, Europe was divided politically and economically into Western Europe, dominated by the U.S., France and England, and Eastern Europe, dominated by the (former) Soviet Union.

Germany was split into West and East and France went along but with subtle resentments to the new and old English speaking masters of Western Europe (the U.S.and the U.K. ).

As the European economies developed in the 50's and 60's, many European leaders, mainly in France under the leadership of Mr. de Gaulle, called for a united Europe.

A 12-nation European Economic Community (EEC) was started with its own parliament and economic integration boards of governors including industrial and agricultural policy planning bodies.

The 12- nation EEC focused first on reducing and/or removing trade tariffs, promoting trade amongst Western European countries, and attempting to achieve uniform wage policies in the EEC countries.

The U.K. policy makers never liked the idea.

They wanted to control Europe through the financial power house of London and to control international trade through monetary planning and exchange rate fluctuations, all originating from the source of world trading in currencies and many commodities; i.e. London.

The Fall of The Soviet Union And The Unification of Germany

With the collapse of the Soviet Union, and the unification of Germany into one potential major power in Europe, the dream of uniting Europe started to gain strength.

German political leaders' vision was to see Germany regaining its lost bid for Europe, albeit this time peacefully.

Their vision was to see Europe disengaged from the U.S.-U.K. political and monetary domination.

France liked the idea, and French political leaders under the leadership of President Francios Mitterand promoted a new system called the European Monetary Union (EMU).

The European Monetary Union- An Historic Perspective

The idea is to sweep away trade barriers amongst the E.E.C. countries, and to stimulate economic activity.

This union idea is not new, in fact it was tried back in the year 794; the occasion, the Council of Frankfort; and the man who conceived of this union was Charlemagne, the man who was responsible for the stopping of the tide of Islam deep into Europe after taking control of Spain and Southern Europe.

The military campaigns that followed his succession in 768 had given him control of an empire stretching from modern-day Austria to the Atlantic.

Only Napoleon and Hitler were to emulate his reach.

Charlemagne was fascinated by economic policy and the value of his coinage of a standard currency called the denarius(after the Muslim dinar).

Article 5 of the proceedings of the Council of Frankfort reads:

"As regards denarii ... you should be fully aware of a decree that everywhere, in every city and every trading place, the new denarii are also to be legal tender and to be accepted by everybody.And if they bear the monogram of our name and are of pure silver and full weight, should anyone reject, in any place, in any transaction of purchase or sale, he is to pay 15 soldi [roughly the price of a cart load of wheat]". The new coins were introduced after Charlemagne's crushing defeat of the Avars of Eastern Europe in 791.

For the first time since Roman days, Europe's coins were minted with uniform design though Charlemagne's bust was not to be a regular feature until 812.

In contrast to earlier practice, fewer than 40 mints across the empire were allowed to produce the new coins; in 812 they were reduced to about ten.

The new money was widely adopted, as if some European monetary system existed.

King Offa of Mercia (a small kingdom to Charlemagne's north west) enlarged the size and weight of his pennies broadly in line with Carolinian reforms.

Before long, others, including Pope Leo, followed suit.

It was not just the coinage that changed.

Before Charlemangne, the economy had centered on gift-giving and subsistence farming.

Market place values had largely disappeared with the Romans.

Charlemagne's reforms, announced at the Frankfort Council, aimed to tip the balance back towards the market.

Some claim it was made possible by the influx of treasures from the defeated Avars; others that the reform coincided with the discovery of new silver mines in western France.

A more elaborate thesis is that Charlemagne obtained the silver as a tribute from the Beneventan and Danish Kings, who were engaged in lucrative commerce with the Abbasid Muslim traders connected to the silver- rich court of Khalifh Harun al-Rashid in Baghdad.

More intriguing, however, than the source of his wealth are Charlemagne's motives.

Modern French, German and Italian politicians hark back frequently to the carolinian achievement.

All have been nurtured on the thesis of a Belgian historian, Henri Pirenne, who contends that Charlemagne erected the scaffolding of a medieval Europe which was quite different from the totalitarian regimes of antiquity and which has fascinated generations of historians, philosophers and social scientists.

After Charlemagne's standardization of the coinage, land, already measured in monetary terms, took on new values.

The court, the main monasteries and the aristocracy set out to increase the size of their properties, systematically clearing land and concluding written, long-term agreements with tenants to develop agricultural production.

Roman technologies were revived.

The old tribal ethics of Western Europe was slowly eclipsed by society in which service was the paramount relationship: service on the land; service to knights, king, or emperor; above all services to God.

With monetary reform went a Church-led cultural renaissance, producing books about paintings and new styles of wall paintings, metal works and sculpture.

The reform of the coinage, business, and the land went hand-in-hand with this cultural renaissance.

By contrast, modern Europe's discussion of monetary reform, with its emphasis on the harmonization of rules rather than the promotion of cultural and social diversity, seems questionable.

Ironically, Charlemagnes court at Aachen was less than 35 miles from the new locations for the latest European Monetary Union; Maastricht.

The central question is, Can the developing countries of the world learn from history to bring about a Union of States, clustered in a way that homogenous enough to make a difference in the life of their citizens?

The European Monetary Union (EMU) and The European Exchange Rate Mechanism (ERM)

The Europeans, in an effort to establish a new European block which can stand up to the Japanese and U.S. economic powers, started promoting the idea of working to achieve a unified single currency for Europe.

The idea of the "United Europe" movement gained support and momentum when Mr. Bush, the former President of the United States, came up with his "new world order" foreign policy.

This new order saw the world into larger blocks (or clusters) led by a major country in each region.

For example, Germany would lead Europe, Japan would lead Asia and South East Asia, Saudi Arabia would lead the Muslim countries, and so on.

All of these leader-countries would then be led by the U.S.A.; the only super power of the world.

This whole vision was rejected by the policy makers of the U.K.

They saw this as a direct threat to the very existence and continuation of the U.K. as the leader of Europe.

The "European Monetary Union" was created because the European policy makers believed that the first step towards real political unity was to stabilize exchange rates through stabilization of monetary policy, then reaching a unified currency for Europe.

It was towards this effort that the European Rate Mechanism (ERM) was agreed upon in Maastricht, Holland to become the treaty that governs the exchange rates amongst European currencies.

The European Exchange Rate Mechanism- ERM

The ERM was originally designed as a multilateral system of currencies.

In theory, if one country's currency hit its floor against another, then both governments were meant to take remedial action.

In practice, the weak currency countries have always been forced to raise their interest rates to keep their exchange rates within its permitted band (2.25% in most cases and can be up to 10% in some cases and 15% in other cases) against the Deutsche Mark; i.e. the anchor currency stipulated by the treaty.

This made the Deutsche Mark, officially, the anchor currency of Europe (and not the British pound which was the anchor currency for a long time).

The Deutsche Mark is the world second most widely held currency after the U.S.dollar.

In 1992, some 75% of European transactions were done in Deutsche Mark.

Germany's economy is by far the biggest European economy.

It is 50% bigger than France and accounts for more than 40% of the total output of all ERM members.

The U.K. policy makers never liked the agreement.

It meant that the U.K. would lose London as the center of all world financial transactions, an honor which would shift to Frankfurt.

They balked, but were forced politically to join.

In an effort to try to reestablish itself, the Bank of England through political and currency speculation and maneuvering got the British pound to approximately $2 per pound level.

The objective was to justify for the British government and the rest of Europe to reduce their interest rates to get the economy in England going and to force the Bundesbank (Germany's Central Bank) to reduce its interest rates hoping to fuel inflation in Germany.

The Bundesbank refused and the British, unilaterally, reduced interest rates.

The British pound sank from $2 to approximately $1.5 per pound in no time.

The Bank of England was required to increase its interest rate to keep with the Maastricht agreement.

But they decided to drop out completely.

Earlier, attacks by currency speculators drove the Italian Lira out from the system in 1992.

Attacks in the summer of 1993 on other currencies of the ERM (mainly the French Franc) by currency speculators were so overwhelming that the system was, for all practical purposes, dismantled.

European currencies can now float by as much as 15%.

London's nightmare, called ERM and EMU, is now out for sometime to come.

The ERM finally was ratified in October 1993, and Frankfurt was made the headquarters of the European Monetary Institute, Europe's Central Bank.


In this last section, the book reviews the practical aspects of starting up and operating a LARIBA bank.

Chapter 8 reviews the major features of the LARIBA banking policies and practices.

The relationship of the LARIBA bank with its depositors and entrepreneurs and business persons, who would utilize the LARIBA bank funds to invest it in the economy, is discussed in Chapter 9. Chapter 10 discusses, in details, the process of attracting the deposits to the LARIBA bank and the legal (Sharia) relationship between the bank and the depositors.

It also discusses the types of deposit services available in the LARIBA banks.

The other important and most crucial role of the LARIBA banks function; i.e. its investing of the funds it accumulates, is discussed in Chapter 11.

This chapter explains the different financing models offered by the LARIBA bank and the portfolio management approach that should be used by the LARIBA bank to reduce risk and realize better returns.

Finally Chapter 12 outlines the foundations of the author's dream of a LARIBA banking system which prevails world-wide as an alternative banking system to the RIBA system for the benefit of mankind.

Chapter 8 Chapter 6