Dear David,
Linda very kindly shipped me round a copy of your clearly written Bruges group paper on the single currency. I have, in turn, sent it to Prof. David Currie, whom the EIU, with a group of eight City sponsors, has asked to write a dispassionate report for the EIU on the “Pros and Cons of EMU,” I have asked him to take on board all your arguments as part of the search for The Truth.
I think you describe the dangers of EMU extremely well. Inappropriate interest rates plus constrained fiscal policy plus low labour mobility plus small fiscal transfers plus an EU penchant for labour market rules add up to a formidable list of constraints. Joblessness seems to be the only variable left. As I sometimes say in speeches on this topic: “If you cannot adjust your handicap, you must be allowed to adjust your golf!” For this reason “subsidiarity” the freedom of a given EU member government to run all internal aspects of its society the way it wants is a CRUCIAL counterpart to accepting a common unit of account.
Like you, I consider that currency remains a prime ingredient of sovereignty. But, for me, the ultimate proof of this lies in the potential demands of war, when money-printing is vital to mobilising the resources of a nation to fight, rather than in the less certain advantages of monetary independence in a world of free-flowing capital and powerful market judgements. For the first reason alone I am sure that EMU would be an historic step for Britain, and that we should therefore have a referendum on the issue.
I differ from you, though, on various points. I think you underplay the disincentive to foreign direct investment, or indeed long term portfolio investment, of intra-European currency fluctuations. Trade can cope with these fluctuations, with the help of foreign exchange cover. But the company that builds a factory abroad cannot. Of course direct investment still takes place, in particular from Asian companies wanting to get within the ring-fence of potential European protectionism, but it is powerfully discouraged. And this in a world where direct investment is the coming form of trade.
I disagree that a government which no longer can decide on deficit policy has no democratic function left. I have bitter memories of all those dispiriting years when Britain lived in a sort of Keynesian trance. The budget balance was the thing a sort of glorious ship’s indicator with “full ahead” or “astern” in the chancellor’s hand.
Meanwhile, manifold micro-economic ills remained untreated until Mrs T set to work. Even with fiscal and monetary constraints, parliament can decide whether Britain is a highly-taxed society with lots of public sector spending or not. And parliament retains immense powers of government by regulating, as opposed to government by doing and providing.
This leads me to my key attitude, the one that is less dispirited about the prospect of that list of dangers than you are. I suspect that if the right to inflate and devalue is removed from a society, particularly a democratic society, it WILL find ways of adjusting to exogenous economic shocks (or to internal inadequacies, which are often just as important) in ways that will often be more durable in creating employment than adjusting the real value of its currency. So people will accept real pay cuts, rather than disguised (but just as real) ones. People will move more across frontiers to exercise their skills. And rules systems will be forced to become more flexible and friendly to employment. And social charges will be reduced and the money raised in other ways, or done without.
A strong indication that this is what might happen is the experience of France in pursuit, first, of the open single market (international capital flows allowed, banking system slowly prised open, industrial subsidies slowly made more difficult, protectionism slowly made almost impossible) and second of EMU (further erosion of the role of the state and of countless fiscally subsidised vested interests, and now the beginning of a big push to reduce social charges on jobs, collect income tax properly etc. etc.). Even before La France has finally laced the EMU corset up, her economic poitrine has adjusted upwards! Perhaps the lady will rebel the story certainly isn’t over yet but her changes to date support my thesis.
Economic dangers on one hand. Crunchy remedies on the other. I hope that the EIU report will help complete the economic balance sheet of this prospect. Beyond that balance sheet lies everyone’s political proclivities and individual vision of Europe.
I suspect mine are hopelessly idiosyncratic. I want a sort of glorified 19th century Europe with one depoliticised, functional money (as with gold), full freedom of individuals to move, goods to move, services to move, and the central rulemaking required for these to happen; but, within these constraints, the maximum possible freedom of nations to govern themselves in every internal aspect of their lives an open, unfudged competition between national systems. You are dealing therefore with a peculiar European who doesn’t like centralised government (whether in Westminster or in Brussels), does like the unique European adventure in collective governance, does like the idea of one unit of account, and will go to the barricades against the social chapter. What would the Bruges brigade make of him?
Yours ever
Nico
