In the City
Useful union
Nicholas Davenport
On 5 December the heads of Government will meet to decide finally upon European Monetary Union. At the moment Mr Callaghan appears to be the odd man out but it was he who first stressed, long ago, the need for co-operation in currency stabilisation. The co-operation idea was taken up so hotly by Chancellor Schmidt and President Giscard d'Estaing that they are now prepared to go it alone if Britain is not ready to join in. But Mr Callaghan, who saw Chancellor Schmidt last week, is still sceptical about the Plan working while the members of the EEC have such widely differing inflation rates and economic positions. So are West Germany's five top economic research institutes. They point out that national inflation rates in the Community range from 2i per Cent to 12 percent whereas in 1972, when the joint European float was attempted, the highest inflation rate was 8 percent and the lowest 5 percent. Mr Callaghan is right to be cautious but he is also right to tell Mr Tony Berm that if the Cabinet does decide upon entry at a later stage any anti-European minister who disagrees must resign. It is outrageous that the anti-European members of Labour's NEC should denounce EMU without ever having its print or having studied its purposes. Let us look first at the details of the EMS plan. It was put before the heads of government at their Bremen meeting in July. It was a whole-hogging affair. A common European Monetary Fund would be set up which would issue a common European currency — the ECU — for use among the EEC central banks. An initial supply of ECUs would be issued against the deposit (a) of 20 percent of the gold and US dollars held in member countries' official reserves and (b) a comparable amount of members' own currencies. The EMF would exist in parallel with members' central banks and the ECUs in parallel with members' own currencies but a new European Investment Bank would be created to develop EEC resources just as the World Bank acts for the international world. The ECUs yvould be valued initially on the same basis as the European Unit of Account. It is a lovely and quite logical blueprint. Since the breakdown in 1971 of the Bretton Woods system — which with all its faults served the western world well for avery long time — the IMF has become feeble and ineffective, having failed to control the floating exchange scramble. It is therefore logical that the EEC should want to set up its own Monetary Fund and end the turmoil of floating exchanges which has been hold mg up recovery and growth. The awful difficulties arise when the EMF tries to keep its members' currencies at a fixed parity in relation to each other and the ECU at a fixed parity in relation to a world currency like the dollar.
The first — internal difficulty is the most awkward one to meet because of the widely different inflation rates and financial setups. The financial Europeans say that the exchange rate parities would be so fixed that member countries could not follow financial policies which were incompatible with one another. To make the fixed parities flexible enough to allow for adjustments to be made there are three possible ways: (i) to allow the weaker member to choose a low enough parity at the time of entry to suit its economy; (2) to vary the intervention margins around the fixed central parities to suit different members; and (3) to fix the central parities by reference to a 'grid' (like the present snake) or to a 'basket' of currencies; but no one supposes that EMU will work without a number of currency changes in its initial stages.
At this point the monetarists start protesting that a currency union as the Europeans would have it necessitates a common money supply target, a common DCE (domestic credit expansion) and ultimately a common price for traded goods. If the price equality of traded goods is to be main' tamed then those member countries where industrial productivity is growing par ticularly rapidly would, they argue, have to have higher inflation rates than the EMS average. This is the sort of absurd Catch 22 argument which clever monetarists love to indulge in when they want to be anti-EMU and non-cooperative. The answer to them is that the EMU is not conceived as a theoretical monetarist exercise. It is designed to help members of the EEC avoid extreme currency instabilities and improve their common fight against inflation. It is admittedly an experiment.
The external exchange difficulties are not easy to overcome and will not be overcome without trial and experiment. Is the German mark, the strongest European currency, to take on the job of adjustment with the dollar or is the ECU to circulate not only for official European transactions but for world commercial transactions and so take on the role of an international reserve currency? For the moment the EEC central banks will continue to manage their official reserves in the exchange markets but the EMF in time may take on the role of the IMF and arrange credits for the stabilisation of the ECU. The world is now so disjointed that it might well have two monetary funds and two reserve currencies: In any case the idea of Europe as a monetary unit is worth striving for, especially as it may help to work out the dollar problem.
The City should welcome this move towards Europe as a monetary unit like the US because it means freedom for the movement of capital and the elimination of the so-called 'dollar premium' on European stocks and shares. The London Stock Exchange, being the largest and best managed in Europe, would see a great enlarge ment of its business. Freedom for the movement of labour already exists and it is surprising that members of British trade unions who complain of the Government pay policy have not taken more advantage of the opportunity of better pay and work ing conditions (not to mention the climate) in some European countries. But the prejudices of British socialists die hard.
There are, it will be seen, immense technical difficulties in working out a greater monetary convergence for nine or more states with widely differing inflation rates and financial set-ups. The German research economists may persuade Chancellor Schmidt to become, like Mr Callaghan, more cautious than President Giscard d'Estaing, who seems to have Napoleonic ambitions, but it is surely wisel to move towards a monetary union in order to achieve a lower aggregate rate of inflation and unemployment in a vast free-trading area of a split world. It would make it easier for us British if the Treaty of Rome were revised to give us a saner agricultural policy but it would be foolish for Britain to turn its back on Europe and it would be foolish of the French to bring the crisis to an immediate explosion. We have much to contribute to the EMU in financial expertise and with Mr Callaghan as prime minister, in political wisdom as well.
Previous page
