THREE CHEERS FOR MONETARY UNION

Samuel Brittan would welcome a

monetary system in Europe outside the direct control of politicians

THE most important reason for favouring a European Monetary Union run by a European central bank (known to its friends as Eurofed) is precisely the reason why it is loathed by some politicians (such as Mrs Thatcher): namely its independence of national governments. The fact that it is European or supranational is secondary. The main thing is that it puts money at one remove from the control of elected politi- cians who will always be tempted to pursue inflationary policies, out of wishful think- ing as well as for crude electoral reasons.

The ideal international currency should probably cover all the seven Western summit states and other industrial coun- tries as well. But if that is not obtainable, a European currency is a good start.

The main attraction of Eurofed is, however, its independence and accounta- bility. The reactions of both the Conserva- tive Government and the Labour Opposi- tion to suggestions for an independent and accountable Bank of England (put forward by Mr Nigel Lawson when Chancellor and rejected by the Prime Minister) show how little chance there is of achieving this objective through a national route. The most likely bet is the European back door.

For more is at stake than a technical point about economies or money. Belief in the unchecked power of temporary par- liamentary majorities is the heresy of the age. And to put it this way is to dignify it unduly. For it is usually not even the power of Parliament that is at issue, but that of an elective dictatorship in which the views and prejudices of one person who holds the strings of political patronage and also approves the chief civil service appoint- ments is dominant.

The need for constitutional checks on national governments is now presented by groups such as Charter 88, with a special emphasis on civil liberties, police powers, freedom of information and voting reform.

But it was previously pressed by followers of Friedrich Hayek, who was made a Companion of Honour under a Thatcher government, to protect free markets and property rights from interventionist gov- ernments. A few old-fashioned liberals have even supported it for both sets of reasons.

There is nothing undemocratic in decid- ing by democratic procedures to put cer- tain matters at arm's length from elected governments and, on other matters, to impose a check. The courts are indepen- dent of political control, not to put them above Parliament, but to secure impartial interpretation of its laws. British adher- ence to the European Convention of Hu- man Rights gives the Strasbourg Court (which has nothing to do with the Euro- pean Community) a beneficial influence over British law and administration. There will always be many different ways to interpret the evidence. The wishful re- liance on wage and price controls by both the Heath and Callaghan governments, and the playing down of the credit boom of the 1980s, are only the most obvious examples of what happens when govern- ments try to run monetary policy directly instead of delegating it to an independent but accountable central bank. It is perfect- ly democratic for politicians to put them- selves above the temptation to manipulate the economic cycle for electoral reasons at the expense of debauching the currency.

I have hitherto been reluctant to advo- cate Bank of England independence be- cause of the behaviour of the pre-war Bank. Although this was privately owned, it was not a profit-seeking body, but took upon itself to interpret the public interest and did so in a manner which gave far too much weight to the City establishment.

By contrast, the members of the US Federal Reserve are appointed by the President, although their terms of office stretch over several presidencies. It reports to congressional committees, which can in

the last resort give it instructions -- a

power hardly ever used. The Bundesbank is not subject to instructions, but its presi- dent and seven-man directorate are appointed by the government; and the other members of its council are appointed by the eleven Lander (federal states). It is bound by law to secure price stability and to co-operate with the economic policies of the government as far as is consistent with the first objective. Both the Fed and the Bundesbank have been notably more de- tached from their own national financial interests than even the nationalised Bank of England has been from the City.

The arguments of those who oppose EMU are so contradictory that they can hardly be taken at face value. Sometimes we are told that Eurofed will not be as good as the Bundesbank because other more inflation-prone countries will have a role. At other times the very same people attack Eurofed because they expect it to be modelled too closely on the Bundesbank.

There is more in the first set of objec- tions. The danger is not that the Eurofed will be dominated by the Germans or follow German ideas too closely, as British xenophobes allege. On the contrary, it is the opposite one, that a Eurofed, with the council coming from 12 countries with very different degrees of commitment to price stability when the going gets rough, would not have as much counter-inflationary credibility as the Bundesbank itself.

Until recently I have been much keener on the EMS than EMU precisely because the former is more definitely a deuts- chmark zone. The EMS was set up as an agreement among central banks which bypasses the Brussels Commission. The central bankers have their get-together in Basle, a city my atlas tells me is not officially in the Community at all. It is established as a simple currency grid, with a minimum of bureaucracy; and cannot be hijacked for regional transfers to line local politicians' pockets or to contrast cathed- rals in the desert.

But, unfortunately, the EMS cannot go on forever in its present form. Either exchange rates will become so fused together that it will be silly not to have one currency; or there will be a breakaway by some member government that has redis- covered the temporary kicks of inflationary finance — unless there is the institutional safeguard of a single official money (which would not prevent people making contracts in dollars, yen, gold or cowrie shells if they so wished). Moreover, most other Euro- pean countries, while free of British para- noia about the Germans, will not accept a common currency which is called the deutschmark, or is literally run from Frankfurt.

No foolproof way has been found of securing Eurofed's counter-inflationary credentials. But the formula on which 11 out of 12 countries — Britain being the dissenter — have already agreed is that Eurofed must (a) have a commitment to price stability written into its constitution, (b) must have a strong directorate free from interference in its executive functions and also (c) that the members of its council must be free of national governments in interpreting their obligations. As the mem- bers are certain to be the existing national central bank governers, the independence of those banks becomes vital. An analogy exists in the Brussels Commission, whose members have to take an oath not to accept instructions from national govern- ments. Some Commissioners may take this more seriously than others. But who can doubt that the Commission is more inde- pendent than if its members were simply national delegates?

(Incidentially, as Gavyn Davies has writ- ten in the July UK Economics Analyst, 'All of the problems associated with accounta- bility and independence of the Eurofed, which have so exercised Mr Major, would apply in equal measure to his alternative European Monetary Fund', which would run the Government's proposed hard ecu, if the latter were really to take off. The kindest question one can ask is if the Prime Minister and Chancellor understand their own proposals.) Both national sovereignty and its trans- fer to a United States of Europe are misplaced objects of loyalty. It is the effect

on individual people that matters. I have my share of childish interest in frontiers

and passport-stamping, but I try to keep it in its place. If currency matters are for the foreseeable future best run on a Commun- ity basis, so be it.

The implications are, however, fre- quently exaggerated. National sovereignty is a question of degree, as we discovered last autumn when British base rates were raised half an hour after German ones, while French rates were raised 15 minutes before. But is there something so very special about money which makes the possession of a national currency the hall- mark of an independent nation? During much of the 19th and early 20th century there was in practice a single national currency. Sterling, dollars, marks and francs were simply the local names of gold. Yet Gold Standard nations were so inde- pendent that they even went to war with each other.

It is understandable that some upholders of the conventional Labour wisdom of the 1960s, such as Mr Peter Shore, who sin- cerely believe that devaluation can confer real benefits on output and employment should treasure the right to an independent exchange rate as a hallmark of sovereignty. But Thatcherite thinkers are supposed to believe that there is no long-term gain for jobs and output from tolerating inflation and that any short-term gains are fleeting and uncertain. The economist who most clearly demonstrated this was none other than Milton Friedman, the godfather of monetarism. The main thing that Britain would be giving up by joining first the EMS and then EMU would be the right to inflate faster than its Continental partners.

Why then do so many 'free-market' Conservatives reject the most likely route to zero or low inflation that they are likely to see in their lifetime? Some of the opposition to EMU in the Thatcherite camp is simple opportunism. People who are eager for advancement are ready to embrace the prejudices of the Prime Minis- ter of the day, such as not drinking Perrier and not turning up in German cars. Many of these same cheer-leaders would be happy to roll over in another direction if someone else were at Number Ten.

A slightly more creditable reason is that while sound money economists have already been split into those who support fixed rates or common currencies and free floaters, the preponderant bias of recent Anglo-American economies — reflecting events in the United States — has been towards floating rates. The alternative sound money Continental tradition is as little known as its ideal of the rule of law.

Unfortunately another objection in- creasingly coming to the fore is to for- eigners in general, and Germans in particu- lar, having a role in our affairs. National- ism is an odd and late addition to the • Conversative pantheon, coming in with the French Revolution, and anathema to most defenders of the established order until the time of Bismarck.

It is curious that today anti-German feelings are more virulent among the Brit- ish than among other Western European nations who were occupied by the Ger- mans in the second world war and who suffered far more. My own parents' im- mediate family were killed by the Nazis, which would provide me with more excuse for indulging in Kraut-knocking than many politicians and businessmen who simply dislike the accent, or who are looking for someone to blame for their own failures.

Neither the perpetration of evil nor the identity of the victims is confined to one nation, race or people. The very circum- stances of the second world war massacres, including the involvement of a good few Batts, Poles, Ukrainians and Russians, is sufficient evidence. Indeed, a little more than a century ago the Germans were widely regarded as sentimental, profes- sional, music-loving provincials. To in- dulge in a cult of the badness of Germans or the goodness of any other nation is to indulge in the same fallacies as the Nazi ideologists or the South African 'intellec- tuals' who tried to rationalise Boer domination.

I have moved a long way from Eurofed. But the issue will never be discussed sensibly until these ghosts are laid to rest.

Samuel Brittan is an Assistant Editor of the Financial Times