THE ECONOMY
Intimations of mortality over Westminster
JOCK BRUCE-GARDYNE
Winston Churchill did not become 'the King's First Minister in order to preside over the liquidation of the British Empire'. Yet that — give or take a year or two of Clem Atlee — was roughly how the cookie crumbled. So now Mrs Thatcher has served notice on the faithful Commons last. week that the establishment of a European central bank would lead to its dissolution, we should sit up and take notice. For our present Prime Minister did not sound any more enamoured of the second proposition than her 'Winston' sounded of the first.
The fudge cooked up at the Brussels interim summit in February appalled some of us because it involved the tacit abandon- ment of any serious attempt to clamp the Common Agricultural Policy. But maybe we didn't know the half of it. For this week's gathering in Hanover, freed from the obligation to haggle over agriculture spending, embarked instead on monetary union. And as usual our Prime Minister distinguished the wood from the trees. If the Community endows itself with a com- mon currency managed by a common central bank, then the Westminster Parlia- ment, like its siblings in Bonn and Rome and Paris and the others, will be trans- formed into glorified municipal councils. Never again would Nigel Lawson, or his successors, be able to assert that they laid down the rate of interest: and without control of interest rates, or a sovereign right to manipulate exchange rates, the Treasury would very soon discover that it was no more at liberty to choose the rates of taxes, direct and indirect, or the size of the Budget deficit, to suit its fancy than the burghers of Edinburgh are.
OK, so what's so special about our ability to pick the interest and exchange rates that suit us in our present dispensa- tion? The pound, after all, is hardly more than an incidental piece of flotsam on the surface of the world financial markets: if the tide flows strongly into marks or dollars, we are swept into the slipstream, as we have been, frequently, in recent months. True. But we do preserve at least a limited ability to break loose, and, again, have exercised it. If we are prepared to grit our teeth and face the consequences of sharp movements in the foreign value of the pound, we can still pick the rate of interest that suits us. Alternatively, if we are prepared to grit our teeth and let the cost of borrowed money settle where it
may, we can at least influence what hap- pens to the exchange rate. We can't do both at the same time, but then, who can?
To which the Euro-purists would reply, so what? If the partner governments meant what they said when they committed them- selves to the single market concept, these consequences must follow. And in logic they are right. Only the governments did not mean what they said. They very rarely do.
The Bonn government backed the launch of the European currency club in 1978 in the hope that it would act as a dragging anchor on the mark: enabling its local central bank to pursue an auton- omous counter-inflationary monetary poli- cy without driving its exchange rate to uncompetitive levels. The French Govern- ment joined in enthusiastically in the hope that linkage to the mark would act as a dragging anchor on their domestic inflation rate. Both expectations have been largely satisfied. But whereas the Germans are happy, the French are not. The French feel that the Bundesbank imposes upon them a monetary regime of Prussian severity. They dream of a European central bank which would be managed by the politi- cians, just as their own is (and the Bundes- bank is not) — in the interest of Keynesian expansionism. The German vision, by con- trast, is of a central bank in the image of the Bundesbank — autonomous, severe, and Prussian.
Mrs Thatcher's predicament in Hanover was akin to that of one of those female Forsytes, pursued simultaneously by rival suitors whose lifestyles are equally un- appealing. The French desired her hand in the hope that she would help them soften up the German Bundesbank, since they reckon that she would object to the defla- tionary monetary steer applied by the German central bank interfering with our high speed economy. The Germans, by contrast, courted her because they take our commitment to low inflation at face value, and therefore assume that we would back their resistance to the pressures from their partners in the existing currency club to loosen monetary policy. Were she to suc- cumb to their blandishments we should, no doubt, disappoint them both. But, of course, she won't.
So there we are, once more, left grumb- ling on the platform while yet another Euro-train departs without us. That, at least, is the conventional wisdom. But as that wise old buzzard Charles Goodhart, late of the Bank of England and now of the London School of Economics, has been gently reminding us, it may not be that simple. For while the destination (of a single European currency presided over by a single European central bank) may be admirable — even essential if the single market is to become a reality — we might be very uncomfortable fellow-travellers along the way. The enthusiasts for full membership of the EMS argue, for exam- ple, that had we been there we should not have experienced that burst of enthusiasm for sterling which set the Prime Minister and Chancellor at each other's throats this spring and which has indeed, as Mr Law- son predicted, proved 'unsustainable'. Yet as Professor Goodhart points out, this assumption is not obviously based on anything more substantial than wishful thinking. It must be at least as likely that the harsh choice, between letting the pound rip and slashing interest rates at a time when all the evidence cried out for monetary tightening, would have been presented to us in even starker terms.
For the time being, at any rate, the Hanover summit has safely shunted monet- ary union into a 'high level study', calcu- lated (at least in the minds of the British delegation), as Harold Wilson used to say of Royal Commissions, to 'take minutes and waste years'. And in deference to Mrs Thatcher's susceptibilities the dread words 'European Central Bank' have been de- leted.
But I have a feeling that her confidence that the absence of those words means that 'they' have been defeated is a little prema- ture. M. Jacques Delors, the Commission president, is to run this exercise and although Mr Leigh Pemberton, the Gov- ernor of the Bank of England, our repre- sentative, will certainly get his marching orders from 10 Downing Street, I would not envy him the task of dampening the enthusiasm of M. Delors. The Hanover communiqué promised that the heads of government would examine 'the means of achieving.., economic and monetary un- ion' in Madrid in twelve months' time. The threat of dissolution of the House of Commons may be an exaggeration. But there could be some intimations of mortal- ity for our Prime Minister to cope with when she gets to the Spanish capital.
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