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Text Of Seminar - London, 16th November 1997 (plus updates)



How do claims by federalists on the single currency and EMU stand up to scrutiny?

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1. "A single currency is essential & logical to complete the Single Market"

This Commission-speak is a case of "Hope they don't think twice about that one" - a single currency is not essential to trade any more than a single language, shoe size or sex!.

This statement assumes that the Single Market is "A Good Thing" - although the European Journal reported the benefits through relaxing trade controls at c. £130m for a year, the cost to Britain of implementing EC legislation has been put at near £20 Bn - some two-thirds of this legislation is reckoned to be due to the Single Market.

Michael Heseltine MP let it slip in 1994 that "...the Single Market is over-regulated, over-protected over-centralised. We now have Eurosclerosis, we burden our businesses with extra costs, preventing labour markets from working properly". (More on costs later)

The Single Market can be quite a rigged market (e.g. France & Spain have only allowed software imports in their native language). It can also be a Trojan Horse for political purposes - such as the 1995 Data Protection Directive, which puts in place steps towards a police state.

Colchester and Buchan (two pro-EC Economist journalists) noted in 1992 - Europe Relaunched that a 'common market' had a limited validity and the more common goods & services needed to be adapted to national & local needs. Diversity and adaptability are tomorrow's watchwords, not blind standardisation.

2. "There's a one off cost, but savings on currency conversion costs are worth it"

Rodney Leach estimated UK changeover costs at £15Bn which would take 20 years to achieve a payback (assuming other things being equal, which may not be so. Accountants KPMG have put the figure at nearer £30Bn). An estimate for the retail sector would be £3.5 Bn and it would take $750 to update each computer terminal for a Euro key & software.

The European Movement argument that Marks & Spencer would be spending 70% of the £100m on computer systems 'sooner or later' rings rather hollow.

3. "A single currency will provide stability/reduce uncertainty and boost trade & employment"

Bank of England Governor Eddie George (Chatham House EMU Conference, 24/10/97), Eurofacts & Le Monde have stated that there is no correlation between trade and exchange rate variability.

Prof Feldstein of Harvard University said in 1992 - "Monetary Union is not needed to achieve the advantages of a free trade zone. On the contrary an artificially contrived monetary union might actually reduce the volume of trade and would certainly increase the level of unemployment."

Several European economies have been strained trying to qualify for the single currency. Their Governments are playing a numbers' game and have adopted one-off measures such as imposing taxes to artificially qualify.

"Stability" is a bit of a loaded word - but essentially it means the ability to cope with change. A single currency managed by the European Central Bank (ECB) would reduce a government's options to cope with economic changes, with the most likely concentration of impact upon employment.

The Pound is more US dollar-sensitive than to the Deutschmark (DM) or French Franc - 4 to 5 times as much business is done with the US$ as the others combined. Rodney Leach & Ian Milne recommend letting the Pound find its own value between the US$ and the leading European currency.

If the UK is to replace the Pound with the Euro, it will need unanimity between UK and the first wave of Euro-joiners on our joining rate. There is no way that the continentals will let the UK join at a permanent competitive advantage - look at the way in 1997 Italy was forced to rejoin the Exchange Rate Mechanism (ERM) at a rate more acceptable to those in it.

4. "An independent European Central Bank will bring a strong currency & have lower interest rates / lower inflation";

It is a myth that the German post-war economic success has been mainly due to an independent central bank (Ian Milne, Maastricht: The Case Against EMU). Germany's success factors have included good industrial relations, high skills, a long term financial approach, and above all exporting high value goods while importing lower added-value goods.

The ECB is modelled on Germany's Bundesbank - but the latter has missed targets as often as it has hit them, and Milne notes that in recent years (to 1992) the 'dependent' national central banks' records in France & Japan have been better than in USA & Germany, with 'independent' central banks. Dr Jeremy Leaman noted that since 1948, the Bundesbank's inflation record is no better or worse than others. Eurofacts reported in Oct 1997 that real interest rates (i.e. adjusted for inflation) have been lower in the UK than for the DM, French Franc and the forerunner of the Euro, the ECU.

Dr Brian Burkitt (in 'There Is An Alternative') reviews the argument that staying outside the Euro might attract higher interest rates against the risk of higher inflation. He states that this is not automatic and will depend on a number of factors. Switzerland has shown that it is possible to have a lower rate of inflation than Germany in spite of (or because of?) tenaciously remaining outside the EC.

In A Price Not Worth Paying, Burkitt warns: "There is no reason to suppose that interest rates will be significantly lower in the Euro zone than for any nation remaining outside. Indeed the reverse is more probable, given the fudged convergence criteria". The unproven Euro may be 'weak' rather a 'strong' currency. (Interestingly, an argument given for Germany adopting the Euro is that should she fail to do this, the DM will rise in value against other European currencies, with which it is supposed to be pegged through the ERM!!).

The UK differs from continental economies with more equity financing for business and more variable-rate loans. (European Movement's 'The Other Side of The Coin' claims some UK mortgages are moving back to fixed-rate - but unlike continental ones, most of these (29%) soon revert to variable-rate or bear renewal fees (CML, Q2/97). The pamphlet conveniently ignores corporate finances.)

Isabelle Murray (Sun, 28.5.98) pointed out the problems and economic disadvantages in obtaining mortgages on the continent. She quoted Mike Lazenby, a Director of Nationwide Building Society, that if anything, adoption of the Euro would mean a slight increase in British borrowers' costs.

5. "An independent European Central Bank will take party politics out of managing the interest rate".

This gem came from Lib Dem MP Menzies Campbell in 1995. Basically a euphemism for explaining that the ECB will not be controlled by a government that is elected - and therefore accountable. You might as well excuse single party states for 'taking party politics' out of decision making!!!

You can also point out that the much hyped 'independent' Bundesbank has actually been bound by law to support German government policy. (Connolly - The Rotten Heart of Europe)

6. "A single currency will provide enhanced joint monetary sovereignty for EC members"

The European Commission's Green Paper of May 1995 claims that individual member states have no monetary sovereignty now, but will get it through a single currency.

But it will not be member states adopting the Euro that will control the money supply/interest rates - it will be the ECB, treaty-bound not to take instructions from member states or EC institutions. Joiners' national banks will not be truly independent as they will have to conform to the rules set by the ECB, which will police a 'single monetary policy' covering them.

The argument over 'no sovereignty now' is technically inaccurate for the UK, as our opt-out under Maastricht allows us to maintain monetary powers in line with national law (Protocol 11). Should the UK eventually leave the EC and exercise greater economic sovereignty, she would be free to put in place whatever measures were necessary to take advantage of 'world market conditions'.

7. "A single currency will boost competition/cut prices through making them more comparable, and will lower costs for business".

The effect of saving 0.15% (average) on transaction costs will probably be marginal overall. The former EC Tax Commissioner Lord Cockfield studied the USA and found that up to 5% differences (in local taxes) between neighbouring states did not make a significant difference in buying decisions. Many UK companies currently trade as part of wider world markets and are used to comparing prices.

The costs for the UK retail sector to adopt the Euro would be unavoidable and are estimated at £3.5Bn. An example of changeover costs will be compulsory dual pricing for around 6 mths before the Pound is abolished. This would hardly increase competitiveness, especially if calculated price increases of c. 2.6% are passed onto the consumer (even before the Euro hits the counters). Staying out of the single currency might therefore increase competitiveness.

8. "The UK will lose overseas investment if 'left out' of a single currency"

This is purely speculative. In 1994, a DTI report listed several factors behind winning investment (e.g. the UK's skilled workforce, low tax rates, English language). Neither EC membership nor possible single currency membership were mentioned. The Institute of Directors (1995) says that none of these 'plus' factors are threatened if Britain stays out.

Haruko Fukuda of Japanese investment house Nikko Europe has stated that many Japanese companies would like the UK to stay out of the single currency. In 1997, the UK management of motor manufacturers General Motors & Toyota denied claims that they would leave the UK if we did not join. Toyota's recent decision to invest in France seems more related to government sweeteners.

Even if the Pound does strengthen and this has some bearing on export profitability, one still has to look at the overall picture before making a comparison. Bank of England Governor Eddie George has predicted a bright future outside the single currency for the City, which should be as well equipped to trade in Euro-based services as it is in, say, US$-based transactions.

9. "The UK will lose influence if 'left out' of a single currency"

If the UK joins the single currency at a later stage, it will have no direct influence on the ECB, as it will be treaty-bound not to take instructions from member states or EC institutions. The European Court can only sack the Central Bankers under extreme conditions (e.g. embezzlement) - and short of the loose requirement to aim at "price stability" the Central Bankers are virtually a law unto themselves.

The UK would only potentially have influence when (a) appointing governors every 4-8 years or so, (b) at determining at what exchange rate new single currency joiners join at --- and even then it's diluted, one vote amongst many.

With our economy behaving differently to other EC economies, we sacrifice the influence we have if we subjugate ourselves to yet another outside control mechanism. By staying out, we can at least operate some of the levers of economic control (e.g. by determining the UK's interest rate policy).

In 1977 and 1992, former EEC adviser McDougall reckoned the cost needed to stop a single currency system falling apart at 7% of our economic production (GDP) in the form of transfers abroad to prop up Europe's less healthy economies. Using Government forecasts (FT, Nov 1995) 7% of GDP would reach £58Bn in 1999. (Some lower estimates for the UK span £23-40Bn a year.) In 1997, a group of Oxford economists said a single currency would effectively mean 5p in the Pound more in taxes.

Although there are agreements between EC Heads of State that the contributions will stay within 1.3% of GDP by Yr 2000, the Maastricht Treaty contains enough loopholes for centralised taxation & resourcing to extract large sums of money thenafter. The Commission has already proposed central VAT collection arrangements from 1999.

11. "A single currency will deter speculators"

The Euro comes into being on 1.1.99, as a bookkeeping currency rather than one you spend in shops. Whereas it is true that after 1999 speculation will end between existing currencies such as the DM and the Dutch guilder, whose rate of exchange will be fixed, speculators can merely turn their attention to the Euro - indeed pro-single currency commentators are gleefully informing us about the 'opportunities' to deal in Euro-based financial services.

As the Euro is likely to replace 'weaker' currencies like the Lira, it is unlikely to be more 'stable' than the DM it will also replace. This could provoke more speculation in DM-based investments - at least until the Euro proves itself. And of course, the Euro can - and always will - be the focus of speculation against Yen & US Dollar.

The Economist lead article (14/12/96) highlighted the possibilities for speculators causing turbulence in currency markets after 1999 when joiners adopt the Euro.

12. "A single currency will remove the option of devaluation from irresponsible short-termist national politicians"

That's certainly a loaded sentence, and even by itself 'Devaluation' is a loaded word - not all devaluation is irresponsible or evil, in fact it may be desirable where a currency has become overvalued on currency markets. Bernard Connolly in The Rotten Heart of Europe showed how devaluation of some continental currencies was dressed up as 'revaluation of the DM'.

After the 1992 devaluation of Sterling, the cheaper Pound allowed the UK to take advantage of growth in the world economy. Political crises in Italy led to a cheaper Lira (through normal financial markets) boosting Italian exports.

13. "A single currency will prevent 'excessive' government debt and budget deficits"

Not when you look at the fuller picture. A look at the Maastricht Treaty and the 1997 Stability Pact shows that 'excessive government borrowing' is definitely permitted in a recession.

Also, in deciding the conditions for qualify for the single currency, government pension liabilities were deliberately left out of the formula for measuring government debt - for instance Germany's would be 200% of GDP not 61%. Although the effects might not be immediate, demand for funds to meet higher pension payments will mean higher levels of taxes (which might lead the European economy towards recession), higher levels of borrowing - with an effect on interest rates - or a combination.

Although we are assured that Maastricht protects one country against another's debts, the EC is also committed to providing "a high degree of social protection" and entitled "to provide itself with the resources it needs to achieve its objectives". Jacques Delors has stated with a single currency "all members of EMU would become liable for the debts of any single country" in that union.

There is sufficient ambiguity not to rule out a political initiative, not least with plans in place for Europe-wide subsidies (transfers) and central collection of some taxes.

Although the problem of pension provision would occur independently of a single currency, the scale of the UK's problem is only one-seventh that of Germany's.

14. "A single currency will provide pension fund opportunities"

Vernon Ellis, a partner with Arthur Andersen, made a claim at the Chatham House EMU conference (24/10/97) that the single currency could produce $1.25 trillion in pension fund opportunities. He was unable to substantiate this figure to a challenger (who was also able to interpret that dividing $1.25T by 370m people in the EC might give an average 'opportunity' of over $3m regardless of wealth! Even with more conservative 'American' interpretation, a projection would be over $3,000 per head).

However the key point to note is that the problem of funding future national pension liabilities will occur independently of a single currency. There is no requirement for member states to reduce the debt figure (towards qualifying for the Euro) by privatising these liabilities.

15. "A single currency will save the tourist problems/costs in changing holiday money"

True in the immediate sense, but the saving might well be a few pounds a year for most, maybe less than the 2.6% average price increase to be passed on by retailers in converting, not to mention the costs of banks, local authorities, etc. If the UK was faced with a high tax regime to stop the single currency falling apart (estimated at £400-1,000 extra per year per person in the UK) foreign holidays could become a thing of the past for many.

16. "A single currency will bring Europe closer together"

In 1992- Europe Relaunched, Colchester & Buchan showed how economic union (a common market) had actually seen divergence in national tastes, so this might not stand. In a 1995 lecture, mindful of the strains of holding a single currency system together, Bank of England Governor Eddie George warned that the single currency might produce 'less rather than more harmony across Europe" and in 1998 forecast 'serious tensions'. Prof. Feldstein of Harvard University warned that it would produce tensions both within the EC and between continents (Foreign Affairs, Nov/Dec 1997).

Edited by Brian Mooney, based on New Alliance/CIB conference presentations.


References/Recommended Reading

Date this page was updated Jun 13, 1998