THE LAST OF ENGLAND

Tim Congdon on the unacknowledged

threat to national independence of a single European currency

'BUY the rumour, sell the fact', is an old adage of financial speculators. It has cer- tainly been a very profitable strategy in the last fortnight. As rumours of early entry into the exchange rate mechanism of the European Monetary System were fanned by stories in the Financial Times, the stock market argued that early ERM entry would lead to lower interest rates, and rose sharply. But the smart money will soon realise that ERM entry is yesterday's gam- ble. In December European heads of state are to meet at an inter-governmental con- ference to reach an agreement on Econo- mic and Monetary Union, including the introduction of a single currency for the whole European Community. A move to a single European currency would be far more radical, controversial and difficult for Britain than participation in the ERM.

The British public may not realise how far the idea has already taken hold in their European neighbours. Recent opinion polls in several European countries show that there is definite majority support, particularly among businessmen, for the idea. Elder statesmen like Valery Giscard d'Estaing, Helmut Schmidt and Edward Heath see it as a natural extension of the European Monetary System and have pledged their support. For them it is inevitable.

But support is not unanimous. Financial practitioners, who would have the task of making a single currency work, are much more reserved than industrialists. Many bankers — in both the City of London and European centres like Frankfurt — dismiss the proposal as hypothetical and even ludicrous. Unlike the politicians, they see it as so far outside the realm of real-world practicality as not to be worth discussing. It is not going too far to say that many of them regard it as impossible.

Sceptics argue that the process of monet- ary union described in the Delors Report, which is the origin of the current debate, closely resembles that in the ill-fated and unsuccessful Werner Report of 1970. (The Werner Report, discussed by finance minis- ters of the original six in Venice in May 1970, made the mistake of setting a defi- nite, but attainable timetable for European monetary union.) The British Government has made its opposition to stages two and three of Delors, and so to a single Euro- pean currency, very clear. In public the vigour of British official hostility is unique in the European Community; in private many Europeans agree with the British position and hope that the whole subject will somehow fade from the agenda.

The divergences between these various assessments are clearly very sharp. Despite its great potential importance to the way we will live in the 1990s, people are only beginning to think through what a single European currency might mean. Perhaps they are a little frightened by the implica- tions. The point, of course, is that Euro- pean monetary union is rather more than a technical financial matter. It could have drastic political consequences. The press- ure for a single currency is rightly seen as part of a larger campaign for European political unification; and the case for it can be represented as an aspect of a gradual drift towards European federalism.

Attitudes in Britain are particularly con- fused, perhaps because there have always been two ways of thinking about Britain and its relationship to Europe. According to the first, which found its most powerful recent expression in Mrs Thatcher's Bruges speech, Britain is interested in a Common Market with other European countries. This interest is an outgrowth of a long- standing historical loyalty to liberal inter- nationalism and an open trading system. It need not conflict with political independ- ence and a wish to maintain close ties with countries outside Europe, particularly in the English-speaking world. It sees mem- bership of the Common Market as an end in itself, which contains no further political commitment.

According to the second, the Common Market is only a stepping-stone to a Common Government embracing the whole of Europe (or, at any rate, of Western Europe). When Britain joined the Common Market, it was starting on a journey which would lead to its absorption in a European super-state. This super-state would be a United States of Europe similar in many respects to the United States of America. Membership of the Common Market was not purely economic in inten-

tion, but it implied eventual political federation.

The tension between these two views or, to give them labels, between the Thatcherite and federalist visions of Europe — has been reflected in the voca- bulary of European co-operation. Origi-

nally Britain joined a European Economic

community; today it belongs to the Euro- pean community. Back in the early 1970s, when the debate about membership was still undecided, we understood ourselves to be seeking to participate in the 'Common Market'. That phrase has now almost disappeared, perhaps because it has been made so clearly obsolete by the European Commission's wider social and political ambitions. It is nevertheless recalled in the phrase, the Single Market, used to describe the programme of market liberalisation which will culminate in 1992. Perhaps it was not an accident that this programme was very much Mrs Thatcher's and Bri- tain's initiative.

The federalists have made much prog- ress in recent years, without many people noticing what they have been about. As Nicholas Colchester and David Buchan remark in their book Europe Relaunched, the favourite tactic has been to agree vague formulas about unity as 'an invitation to duplicity — sometimes called "Europe by stealth". Europhiles can use a ceaseless process of logic ("given that the Commis- sion now has control of x, it is surely logical that it should also control y, which greatly affects x"), to lever the Community to- wards a federal Europe, without actually saying so.' The project of European monetary unification is the most important example of federalism by stealth. However much some federalists may deny it (and many do not), they know that a common currency would end the separate economic identities of the member states and so usher in a Common Government.

Monetary and political authority are closely intertwined. If an organisation can print bits of paper, which have no intrinsic worth, and require people to accept these bits of paper in payment for goods and services, it is obvious that for all practical purposes this organisation can levy taxes. It follows that, if the power to issue money is transferred from national central banks to a pan-European central bank or Euro- Fed, the power to raise taxes would be shared between the Euro-Fed and national parliaments. The fiscal prerogative would no longer be exercised only at the national level.

And who would capture the resources obtained from issues of the European single currency? The present negotiations between European finance ministers are trying to restrict the scope for national governments to borrow from the Euro- Fed. But — if the Euro-Fed were to become the sole issuer of European cur- rency — it would become an enormous institution, with the ability to lend substan-

tial sums of money. Who would borrow from it? Who would fill the vacuum cre- ated by the exclusion of national govern- ments?

The answer, surely, is the European Commission itself. It could identify a num- ber of deserving causes, like the common agricultural policy and various other kinds of Euro-bureaucracy, and ensure that they received the money. With its own source of funds, it would be able to act even more like a European central government than it does now. The so-called 'national' govern- ments would see themselves increasingly relegated to the status of regional institu- tions.

Perhaps even more fundamental to this process would be the removal of the ability to influence inflation and unemployment from the governments of nation states. At present British interest rates are set by the Bank of England, taking instructions from the Treasury; in future they could be decided by the Euro-Fed (or whatever) acting on its own supposedly non-political initiative. This element in the political debate, which is now central to party rivalries at Westminster, would be trans- ferred to an explicitly European body, probably located in Frankfurt, but perhaps with involvement from Brussels. In the last few decades Chancellors of the Exchequer, advised by Treasury and Bank of England officials, have not done a wonderful job of economic management in this country, but they have at least been British citizens to whom it is possible to address criticisms in English. If a Euro-Fed with sole responsi- bility for a single European currency were created, this would no longer be the case.

The financial sector of the British eco- nomy would be affected most profoundly by this shift. At present British banks and financial institutions are subject to diffe- rent rules and regulations from those in the rest of Europe, not just because Britain is a separate jurisdiction, but also because it has a separate currency. For example, British banks need to keep only 1/2 per cent of their assets with the Bank of England in the form of cash (which earns no interest and therefore makes no contribution to profits), whereas in Italy, Spain and Por- tugal cash reserves are above or close to 20 per cent. If there is to be a single currency, there must also be a single reserve ratio for all banks located in Europe, with the cash presumably lodged with the Euro-Fed.

If 'British' banks are to conform to practice elsewhere in Europe, they would either suffer a heavy loss of profit or have to charge their customers more. Of course, in the end the concept of purely 'British' banks — and, indeed, building societies would become obsolete. There is no way of knowing at this stage whether, in the Brave New World of a pan-European money, financial institutions would be as efficient and customer-oriented as those in this country or as inefficient and customer- indifferent as they are elsewhere in Europe. There can be no confidence, for example, that mortgages will be readily available on British lines rather than routinely unavailable on Italian lines.

And what would happen to interest rates? Would they move closer towards European levels? If so, what would happen to national savings (or should we say 'British regional' savings), gilt-edged securities, and all those insurance and pension policies which promise people 'Yes Billy, but Mr Phillips pushes legal drugs.' sums of sterling 15 or 20 years from now?

A single European currency, with all the accompanying rules and bureaucracy, would invade and quickly dominate the financial area of the economy. From there the effects would percolate throughout commerce and industry, and eventually spread into people's everyday lives. With- out control over its own currency, Britain would no longer be an independent nation. It would be merely a region in a pan- European state. In that pan-European state the division of powers, obligations and rights between it and the central authority would be largely undefined and its ability to control that division in future would be limited by its condition of monet- ary vassalage. The project to introduce a single European currency some time in the coming decade is nothing less than a project to end the independent existence of the European Community's member states.

The federalists may appeal to Thatcher- ite rhetoric to hide their ultimate goals. In his speech to the Federal Trust conference in London on 24 May, Sir Leon Brittan, vice-president of the European Commis- sion, argued that 'a single market without a single money is an increasingly expensive anachronism', and claimed that 'our objec- tive is a monetary union which respects national diversity'. But he then cited exam- ples of successful monetary unions in the past — England and Scotland from 1707, inside Canada and the United States since the late 18th century — which rather obviously contradicted the notion of `national diversity'. Of course, there is diversity within the nations of Britain, Canada and the United States, but there is no doubt that they are nations; England and Scotland, the provinces of Canada and the states of the United States, on the other hand, are not nations. A single European currency might permit diversity within the new nations of Europe; it would not be compatible with the continuing existence of the nations of Britain, France, Germany and so on.

To read the newspaper reports of over- whelming public support across Europe for a single currency, it would seem that the case for a single European currency has been carried by acclamation, almost by herd instinct. It has not been proposed, argued and refined, slowly and gradually, by a reasoned exchange of views between experts and interest groups. But make no mistake. The emerging debate about a single European currency is vitally impor- tant. It is certainly concerned with such humdrum matters as taxation, savings, inflation, pensions and mortgages, and its pros and cons can be argued at this level. But, ultimately, it is about nothing more or less than whether Britain is to remain an independent and sovereign nation state.

Professor Tim Congdon is economic advis- er to Gerrard & National.