10 JUNE 1989, Page 24


A union we should put money on


ALMOST everyone sees the advantages which monetary union would bring. A single currency would remove the uncer- tainties and expense of having to deal across the foreign exchanges. It would be good for trade, good for investment and good for competition.

However, monetary union cannot be seriously contemplated without first ensur- ing that goods, labour, services and capital are able to flow without restriction throughout the Community. That is indeed the Single European Market which should be completed by the end of 1992. Howev- er, the removal of all these rigidities would still be nowhere near enough for a single currency. In addition, a single monetary policy is required.

A single currency with different monet- ary policy stances and different interest rates in different member countries is simply not a possibility. This in turn means having a similar economic policy through- out the whole single currency area, and also a broadly similar fiscal policy.

Tax rates do not have to be exactly the same throughout a single currency area. Indeed some competition in keeping taxes down is desirable. But unless differences of tax rates are relatively minor, there will be an immediate effect on the allocation of resources. When taxes went too high in New York City, people and businesses moved out to New Jersey and Connecticut. The tax base collapsed and the city went bankrupt.

Thus it is obvious that big sacrifices of sovereignty are essential. A member coun- try's government would no longer have the primary power over its economic, fiscal or monetary policy. That might or might not be thought a good idea in theory. Howev- er, we and member countries as well are nowhere near ready to hand over economic and monetary policy to a central European authority.

Moreover, there is a big hurdle in the way; and it is this which represents an immediate danger to us.

Distribution of economic resources with- in a single currency area is affected by two factors: market forces on the one hand and political intervention on the other. Market forces magnetise resources to economic centres; political action is needed to coun- terbalance this. Within any single currency area there are continuous flows of re- sources from rich to poor regions as a result of political action. This takes place not just by the flow of regional aid but by transfer payments under social security systems, educational and infrastructure ex- penditure, and so forth. Were it not for these continuous transfers, market forces within would tend to make rich regions richer, and poor regions relatively poorer until some major political or natural event occurred to interrupt the process.

The Delors Committee Report recog- nises this problem: monetary union 'would tend to favour a shift in economic activity away from less developed regions, espe- cially if they were at the periphery of the Community, to the highly developed areas at its centre'. This is the force which leads, for example, to labour migrating to shanty towns round big industrial centres.

If monetary union was imposed, with no effective political mechanism to counterba- lance this magnetism, the result could be disastrous for the less successful regions of the Community. It is thus obvious that monetary union would require a sufficient transfer of sovereignty to a central Euro- pean government to enable it to handle not only overall economic policy but the deci- sions needed to effect these transfers of resources to the poorer regions. The trans- fers required in the wake of monetary union are of a different order, requiring continuous and unified political power, not periodic bargaining by separate sovereign governments. In other words, a Commun- ity government: that is what Delors in- volves.

If monetary union were implemented before the creation of a single government at the centre, it would lock in, possibly irrevocably, the gulf between rich and poor regions. This is the risk Delors is prepared to run. The poor regions would have lost the ability to correct imbalances by ex- change rate adjustments (making them- selves more competitive through devalua- tion).

Not everyone agrees with this view. Some argue that for decades before 1914 when the gold standard ruled, European currencies were locked together without political unity, without tax harmonisation, and without harm resulting. But there were during that period imbalances in the price of labour, with periods of severe unem- ployment and much misery, and great political upheaval resulted. Not much of an example of how to do things.

So far, much to the annoyance of our continental partners, 'the time has not yet become ripe' for full British membership of the EMS. This is a perfectly understand- able view. Mrs Thatcher wants to see greater convergence of economic perform- ance first. This means controlling inflation, and her belief is that you can only do this by monetary policy. This means interest rates; and if you want to retain the power to put up interest rates you must be ready to see the exchange rate rise. You must not lock yourself to a particular exchange rate, sacrificing thereby your sovereignty over monetary policy.

All very logical; but now our partners interpret our failure to join as a withhold- ing of commitment to the European idea. The Delors Report makes clear that mem- bership of the exchange rate mechanism of the EMS will indicate how member coun- tries stand, and that those who do not go to full membership by July next year will have less influence. This is the 'two-speed Europe' looming up over the horizon.

The fact is that, faced with the clear threat of a two-speed Europe, it is no longer possible to occupy a simple blocking position. The European response to this will be to go ahead without us and we shall be left behind. We shall not have the advantage of being part of a powerful single currency area at the centre of the Community, and we shall cease to have significant political influence on its de- velopment.

So what ought we to do? The answer must lie in being altogether more co- operative. We should welcome the idea of monetary union as a respectable, though distant, goal; not just reject it as impractic- able. We should point out the dangers of imposing it too soon. We should put new energy into discussing with our partners how to achieve economic convergence and make the single European market work. But we must also be committed to full membership of the EMS by, if not July 1990, then some specific date not too distant thereafter. And the commitment to do this must come soon.

Sir Martin Jacomb is the chairman of Barclays de Zoete Wedd.