DON'T BANK ON IT
Tim Congdon explains
why a single European currency will never work
ALMOST 20 years ago, following difficult negotiations on the Werner Plan for Euro- pean economic and monetary union, Pres- ident Pompidou appeared on French television to make an important announcement. He said that Europe would have a single currency by 31 December 1980.
Not much is heard nowadays about the Werner Plan. In some ways the silence is surprising, as the Werner Plan was remarkably similar to the programme for EMU laid down in the Delors Report. In theory, so-called 'progress' towards a sin- gle currency was to be accomplished in a sequence of stages, each with a specific deadline, in order that the existing national currencies might die slowly and gracefully. In practice, nothing of the sort happened. The Werner Plan was a total flop.
The fate of the Werner Plan needs to be remembered. In the current British debate on EMU, the enthusiasts for a single Euro- pean money have one argument which they think is irresistible. For them a single cur- rency for all the nations of Europe is inevitable sooner or later. It follows, in their view, that the only meaningful deci- sion Britain can take is on the timing. We may join now, we may join in the late 1990s, or we may join later. But ultimately, so they say, we have no choice. We will have to join.
The 20th century has seen many argu- ments which rest on supposed historical inevitability. In the 1930s and 1940s, a great many of British intellectuals believed in the inevitability of Marxism, state own- ership, planning and the like. Today 'Europe' has taken the same sort of hold. Lazy leader-writers can easily string out a mass of high-sounding phrases which reduce, on inspection, to the vacuous syllo- gism — the future is inevitable; a single European currency is the future; and a sin- gle European currency is therefore inevitable.
European statesmen, including the Pres- ident of France and the German Chancel- lor, indulged in this sort of verbiage 20 years ago and have done so at irregular intervals ever since. They were making fools of themselves then. They are still making fools of themselves now. Instead of taking them and the Delors programme seriously, the British Government should stand back from the negotiations and carry out a proper analysis of what EMU would involve.
The main reason for the failure of the Werner Plan is simple. The more the prac- ticalities were explored, the clearer it became that a single European currency could not be reconciled with the divergent objectives of the nations involved. In the 1970s, EMU could make no headway against the persisting wish of the French government to pursue French policies, the German government to pursue German policies and so on. In the 1990s, the Delors programme will work only if the national governments subordinate themselves to a larger European government. If and when the various nations surrender the right to issue their own currencies, they will cease to be independent and sovereign.
Mr Hurd has said that he is opposed to the European Community taking further powers which intrude into every 'nook and cranny' of our national life. The fact is that a single European currency would involve European intervention in every nook and cranny of our public finances, our banking system and our financial institutions. Given that, there would be no significant aspect of our business life which would be free from EEC meddling of some kind. The British Government's belief that it can say yes to monetary union and no to politi- cal union is a complete misunderstanding.
The root of the problem is that the power to issue currency is like the power to raise taxes. In modern times virtually all of the money supply takes the form of paper. In particular, central banks issue notes which are legal tender and are accepted in payment by everyone in the nation concerned. The paper from which the notes are made is almost worthless. The notes have value (£5, £10, £20 or whatever) only because the Government says that it is prepared to enforce that value by law. Since it would clearly be•
wrong if the profits from the note issue (known as `seigniorage) went to private hands, they always go to the state. Resources are made available to the Gov- ernment by this means, just as they are made available by taxation.
The significance of these arrangements has been vividly demonstrated by recent events in the former Soviet Union. When Russian power was still intact, currency issued by the Union central bank had to be accepted all over the Soviet Union. In the last two years, the Union government has had a large budget deficit, which it has financed by heavy note issue. When the citizens of the non-Russian republics held these notes, they were effectively paying taxes to the Russian republic. Not surpris- ingly, the individual republics wanted to issue their own currencies, so that they could capture resources for their own use and reduce the Union's tax base.
This has created the risk of running two currencies simultaneously, the Union's and the republics'. The people of the for- mer Soviet Union will have to decide whether to hold one, the other or both. Just as there has been a 'war of laws' between the Union and the republics to determine political sovereignty, so also there is a war of currencies to determine monetary sovereignty. When republics break away from the Union, they have two main demands — that their laws be supe- rior to the Union's and that they be allowed to have their own central bank. They know well, from the bitter experi- ence of decades of communist rule, that they cannot be truly sovereign unless they have their own currency. For the same reason, one of the earliest demands of the new Croat and Slovene parliaments was to have their own currencies.
Of course, no member state of the European Community at present suffers from the budgetary chaos of the old Soviet Union. However, the essential point — that the power to issue currency is analo- gous to the power to raise taxes — is valid. If there were a single European currency, the new pan-European central bank would 'I was was just here for a few days to avoid the Euro debate.' monopolise the note issue and it would have an enormous balance sheet. It would probably be the largest banking institution in Europe. The key practical question would be: to whom and for what reasons would this bank lend?
We have seen that in the old Soviet Union the central bank lent mostly to the central government, for Russian and com- munist purposes. If the new European cen- tral bank were to respect the existence of individual nation states, it should be required to lend to their governments, just as the old central banks did. The eligibility of individual governments for the New Eurobank's finance might present a won- derful new arena for Euro-bickering. But, so far, it has already been agreed by the Twelve's central bank governors that the new institution must not make loans to national governments. The Germans (and others) are not prepared to finance the Italian government's vast and chronic bud- get deficit.
Curiously, the Maastricht documents make no clear statement of the proposed assets of the new central bank and of the purposes for which it might lend. The sub- ject would be vital to the future economic structure of Europe if something substan- tive were ever to materialise from the whole EMU enterprise. But it seems not to have even been considered. There is one obvious possibility, that the new European central bank will lend predominantly, per- haps exclusively, to a new European central government. With the British people obliged to take the new European notes, they would be paying taxes to Brussels and Strasbourg, in much the same way that the citizens of the Ukraine or Georgia paid taxes to Moscow when they used roubles.
European monetary union and European political union are two aspects of the same process. Monetary union would unavoid- ably lead to the loss of political sovereignty, in the basic sense that national govern- ments would have to share the right to raise taxes with a foreign entity. Mean- while, political union would not be mean- ingful if the nations of Europe still had separate powers to raise taxes and issue currencies. The Germans want both mone- tary and political union, and are right to insist that they are inseparable. The British people want neither, accord- ing to the most recent opinion polls. The British Government's apparently unshak- able determination to dither, equivocate and compromise is both logically indefensi- ble and politically craven. Mr Major should give a simple 'no' to our European partners at Maastricht, but it is much more likely that he will say 'maybe' and 'some time'. Fortunately, the lesson of the Werner Plan is that, when rhetoric has to be translated into practice, other European governments are just as muddled as our own.
Professor Tim Congdon is economic adviser to Gerrard & National.