The futile attempt to save the eurozone
The late Eddie George /The former governor of the Bank of England/ once remarked to me that the euro project, which was launched in 1999, came 10 years too early. He was wrong.
It is no secret that the German government and business establishment were also dubious about what they saw as a French-led project. What decided the matter for Helmut Kohl, the then German chancellor, was his belief in a federal Europe. He originally hoped that monetary union would be coupled with a political union. But, when he realised that was not to be, he still hoped that the monetary union would itself lead to a political one.
Economists had argued for ages about what they called an optimal currency area; and the magic word “convergence” was often used. The convergence that matters is that of domestic costs.
A country with its own currency has two safety valves, which Greece and others that may be in a similar position lack.
People forget that one of the oldest currency unions in history, that between the UK and Ireland, was brought to an abrupt end when Ireland abandoned sterling – first for the European exchange rate mechanism and then for the euro.
I am attracted to Professor Martin Feldstein’s idea (Financial Times, February 17) of a temporary euro exit for Greece followed by re-entry at 20 or 30 per cent below the present level. But if that occurred there might not be a euro to rejoin. So it is a last resort.
Open letter to M Jean-Claude Trichet, President, European Central Bank
The fact is that each successive EU treaty has added new and
little noticed powers to Brussels institutions, often involving majority
voting. It is arguable that the EU now emerging is sufficiently different from
anything approved by the 1975 referendum as to justify a fresh appeal to the
Why we should stick with sterling
A different view of euro-sclerosis
Keep floating, stop worrying
Let pounds and euros compete
We are on the verge of publication of the Treasury report on
Gordon Brown's five euro tests. From then on discussion will be at two levels.
As I am neither an English nor a European nationalist, I find no over-riding political reason either to push the euro project or to oppose it. The economics seem to me to favour continuing with a floating exchange rate with which the Treasury and Bank of England have, I hope, learned to live.
My own support for UK membership some years ago was based on the view that it was the one way to ensure an operationally independent central bank.
J. M. Keynes is often reported to have said, "When the facts change I change my mind". It is unlikely that he said anything so banal. He is more likely to have said, "When I change my mind I say so, what do you do?"
Either way, the arguments point to shelving euro-membership, while making it easy for British residents to use the euro.
The opponents of Britain's joining the euro at an early date are in danger of shooting themselves in the foot by their generalised hostility to continental Europe. The case I wish to make is is a positive one, not against the euro - still less against the European Union - but in favour of a floating exchange rate, which the UK now enjoys and could not have inside the euro.
A fixed rate of exchange produces two problems. The first is the threat of a balance of payments crisis and runs on the currency. It should in all fairness be said that this threat is removed either by a floating exchange rate or by membership of the European European Monetary Union. There cannot be a run on the pound if it no longer exists.
But there is a second problem, which would not be removed by joining the euro. That is the possibility of unemployment owing to money wages that make British goods uncompetitive compared with those of other countries. An exchange rate adjustment to reduce them is no more possible in the eurozone than it would be now for Yorkshire or Lancashire.
The last of the sterling crises, the "IMF" one of 1976, took place when sterling was already floating. In retrospect, this was an unnecessary crisis, owing to the fact that policymakers had insufficient experience of floating rates.
Today the wide divergence of views, both on whether the dollar is overvalued and on the rate at which Britain could safely enter the euro, shows how unsure we are of the correct exchange rate.
The matter is worse than this. Suppose that Britain were able to negotiate a euro entry rate 5 or 10 per cent below the present market one. There is a common belief that the euro is undervalued. What if the euro itself subsequently staged a vigorous recovery against the dollar? The result could be a net appreciation of sterling.
spricker när dollarn faller
The only way of restoring the competitive position of British industry would then be several years of near-zero increases in nominal wages in the trading sector. There is of course no way of avoiding necessary adjustments in real wages. But there is all the difference in the world between reducing them indirectly via the exchange rate backdoor and reducing money wages - as Winston Churchill discovered in the 1926 General Strike.
Even after 1992 there was a remaining attraction in joining the looming euro: it seemed the only feasible route to an independent central bank. The surprise establishment and subsequent success of the Bank of England's monetary policy committee by the incoming Labour government deprived me of the second argument; and since then I have drifted back into the floating exchange rate camp.
Most of those who spoke for the left in Venice pinned their hopes on a European federal structure that could promote their desired social model across the continent.
There has been an inconclusive debate on what is an optimum currency area. The practical answer is that it is the area covered by whatever political authority is responsible for decisions affecting costs and profitability. This is still individual governments.
The euro has in fact existed for three years, during which currencies such as the franc, the D-Mark and the lira have simply been local names for the euro.
The economic question now comes down to weighing the advantages of exchange rate stability for half of British trade against the disadvantages of trying to establish a "one size fits all" monetary policy for the whole euro area.
The one aspect on which economists ought to be able to pronounce professionally is a negative one. There are certain exchange rates at which it would be disastrous for the UK to enter. But even here it would be vain to look for too much precision.
The present sterling exchange rate of £0.61 to the euro is probably too high. But beyond that there is a wide range of economic opinion on what would be tolerable.
A responsible referendum question would ask the electorate to approve the government's intention to negotiate entry but leave open the option of staying out if agreement could not be reached on an entry rate.
The British government view is that there would be great political gains from joining Emu; but no one has spelt these out convincingly. Unfortunately Mr Blair has surrounded himself with Foreign Office and Cabinet Office types who are obsessed with establishing British influence - by which they mean their own influence - at some "top table" of their imagination.
A couple of years ago I suggested that Mr Blair should give the whole subject a rest for five years. Even further back I suggested that the most likely way for the UK to adopt the euro would be through its creeping use in ordinary business or, as it is now often called, "membership by osmosis".
This still seems to me the most attractive route. It also has a rather interesting political and intellectual history. Towards the end of the 1980s, Margaret Thatcher suddenly announced that the UK would develop its own approach to monetary union as an alternative to the plans for launching the euro. This was simply an off-the-cuff remark.
Nigel Lawson, then chancellor of the exchequer, came up with the idea of competition among national currencies. This had originally been put forward by the economist Friedrich Hayek, who had in mind competition among private enterprise currencies. But British officials found it quite difficult to translate even competition between official currencies into a specific proposal.
There is nothing in British law to prevent contracts being made in any medium to which the parties agree - whether sterling, dollars, euros or cowrie shells. Legal tender is a formality that applies only if the currency of the contract is not clearly stipulated.
The question then arose of why there was not already more currency competition and what, if anything, governments could do to stimulate it.
The next stage came when the British government under John Major took up a second version of the currency competition idea. The vehicle for competition in that version was supposed to be the "hard Ecu", which was based on a basket of European Union currencies that had previously served mainly as a unit of account for some official transactions. There were at most three people in the UK who understood it
The acid test of euro penetration would be whether it came to be used for domestic wage payments. This would not be easy to achieve. The Canadian dollar shows little sign of being relegated despite a 3,000-mile frontier with the US.
The so-called acquis communautaire is a much bigger threat to decentralisation in Europe than the single currency
There is an aspect of the European Union that is potentially more sinister than the single currency is alleged to be by its opponents but which is hardly ever discussed in English-speaking countries and not very much on the Continent either. This is the acquis communautaire.
It is significant that the term exists only in French. Attempted English translations such as community patrimony or community heritage are clumsy and unconvincing. It means, in fact, the entire body of laws, policies and practices that have evolved up to the present in the EU.
The expression made its first official appearance in the 1992 Maastricht Treaty, under which it became an explicit objective of the Union to maintain the acquis communautaire and build on it.
One reference book notes that it lies at the heart of the rachet process of European integration, since it commits the member states to accept all previous and future centralising measures.
The doctrine is mentioned mainly when fresh countries become members of the EU. One example was the reluctant acceptance by Denmark, Ireland and the UK of the Common Fisheries Policy, which had been agreed only two years before these countries joined. It has been in the news more recently because applicant countries are being forced to accept the whole of the acquis. This includes not only the decisions of the Council of Ministers and the Brussels Commission, but all the rulings of the European Court of Justice.
Several central European leaders whom I have met mop their brows when the topic is mentioned. For the acquis covers 80,000 pages - pages, not words - in the English edition and more in the German one. Most of them refer to that inspiring topic, the Common Agricultural Policy.
Many politicians and officials from the applicant countries have found many specific parts of it either unsuitable for their own needs or objectionable in principle. But they are reluctantly accepting it as the price of membership that they value for political reasons. This may be part of the reason why one adviser to a central European government said that negotiating with the EU reminded her of negotiating with the nomenklatura in the old Soviet Union.
One immediate question that should occur to anyone is how the acquis communautaire, which involves accepting everything that has gone before, can be compatible with the principle of subsidiarity - that decisions should always be taken at the lowest feasible level - which was introduced in the Amsterdam treaty of 1997. Some lawyers seems to think subsidiarity is applicable only to future developments. It does not therefore affect what has gone before.
In fact, however, acquis communautaire concerns existing members of the EU, and not only applicant countries. For it does tend to entrench the status quo and place an obstacle in the way of those who would like to repatriate aspects of policy, such as the Common Agricultural Policy, to the national states.
Strictly speaking, a piece of EU legislation can be repealed or amended just like a French or British or US law. But it is a much more difficult and cumbersome process at the European level. The very procedures, such as unanimity and weighted majority voting, inserted to slow down the process of integration serve also to slow down the reform of unwise enactments.
And whatever the lawyers may say, there is undoubtedly a conflict of spirit between subsidiarity and the acquis communautaire. The defenders of the acquis will say that if someone wants to join a club he or she should accept the club rules. In fact, the example shows the limitations of the club analogy. For how many clubs are there that have 80,000 pages of rules? A more convincing riposte might be that the laws of any state, when set out in full, must run to a great many pages.
The fact that the argument can be set out in these terms shows how many of the attributes of a state the EU has acquired. Not, of course, a unitary state nor even a federation. It is rather a confederation run by member nations whose representatives make decisions partly by unanimity, partly by majority vote and partly by delegation to lesser bodies.
The historical examples of confederation are not encouraging. They include the Confederation of American States, which gave way to the USA in 1788, and the 19th century German Confederation, largely ineffectual until it was replaced by a united Germany based on Prussian hegemony. About its only achievement was a writ for the arrest of the composer Richard Wagner, who had to take refuge in Switzerland.
Some of us remember the complaint of Dr Henry Kissinger, the former US secretary of state, that when he rang up to ascertain a European point of view he found there was no one at the other end. A more recent comment about the proposed European rapid reaction military force was that the whole concept was a contradiction in terms.
It is too late to bemoan the form that the EU has taken. But it is not too late to try to set out those decisions that should be taken by the central organs of the EU and those that should be left to member states. The opportunity provided by the next treaty revision conference in 2004 to resolve some of these constitutional matters should be grasped. The traditional British official attitude of assuring ministers that nothing much will happen and playing down any thought of high principle is as pathetic as it is ineffective.
A sensible aim for 2004 would be to try to transform the mismash of treaties that now make up the EU into a coherent constitution. That is by far the best way of limiting the ambitions of those who want to give the central organ more power over, for instance, taxation or labour conditions than the Washington administration has in the individual states of the US.