The euro's sixth test: to what problem could it possibly be the solution?
CHRISTOPHER FILDEt
c must all make sacrifices. Gordon Brown's Cabinet colleagues spent a weary weekend ploughing their way through the Treasury's answers to his five tests for the euro. I had evaded this chore by going to Venice, to study the effect of currency reform on comparative purchasing power. The verdict is grim. Gone with the lira is the 3,000-lire negroni. The flashy new banknotes have fewer zeros on them but they do not buy so many drinks. Currency reform can do that. as we discovered when the pound went decimal. It weakened the instincts on which price resistance depends, and we had to learn new ones. Making life easier for travellers was never one of the five tests, but the euro's friends liked to claim that it would be a boon for us. Now we could travel in and around Europe without the fuss that we had come to associate with changing our money. Thanks, but competition and technology have already done that for us. We used to spend long afternoons standing in queues in Italian banks, waiting to countersign our travellers' cheques and then (a different queue) to cash them. Or we could try to persuade our hotel to change sterling, at its own rapacious rate. Now we take it for granted that the Banco Rialtos° can withdraw cash from our own bank and dispense it, in local form, through a hole in its wall, and that the lunch bill can always be put on our credit card and debited to our account in sterling. No treaty, no meeting of ministers or central bankers arranged this, and we did not have to wait for the invention of a single currency, still less to join it.
Flow of funds
Thirty years ago the proponents of a single currency believed that it would enable capital to flow freely across Europe. Those were still the days of exchange control — that temporary wartime expedient which had survived the war and seemed to be with us for ever — and of regulations in different countries designed to impede the movement of capital. Once again, competition and innovation saw them off. In London, exchange control proved no obstacle to the development of huge international financial markets, based for the most part in dollars. The makers of those markets had no difficulty in adapting to the euro and making London the leading centre for euro finance. They had no need to be in the euro-zone, or in the dollar zone, either. Money was flowing freely across Europe while its ministers and central bankers were still labouring to bring the euro to birth. It has still to pass the sixth test — the question once posed to Sir John Banham, who nowadays is the chairman of Whitbread and a pillar of the nation's boardrooms, but spent his formative years as a consultant for McKinsey. There, he put up a most ingenious proposal to Sir Arnold Hall at Hawker Siddeley, his firm's client. The cerebral Sir Arnold looked at him cautiously: 'My dear John, to what problem could this possibly be the solution?'
What the sage saw
Europe's problems are real, but some of them are no more susceptible to monetary reform than a chronic cough is to a sticking plaster, and others show symptoms suggesting that the treatment is making them worse. When Barton Biggs, the sage of Morgan Stanley, came over from New York to see for himself, the only thing that cheered him up was the spring weather. The mood, he found, was glum — about growth, about the future of the euro-zone, about the role of Europe in the world, and most of all about Europe's biggest economy, Germany, now back in recession again. From his central banker's surgery in Frankfurt. Wim Duisenberg has no choice but to prescribe a uniform treatment, which cannot serve both as a tonic for Germany and as a sedative to the outskirts of Europe, where prices and wages are being drawn upwards towards the levels on offer in the centre. The sage does not cross the Atlantic to form his opinions from taxi-drivers, and the people he talked to are starting to question the project itself. You would not, perhaps, recog nise the Europe that he visited from the prospectus on offer from Britain In Europe, whose members now threaten that if we do not sign up for the euro and stop arguing, they will stop lobbying.
Wait and see
'The Europeans' (so Barton Biggs writes) 'argue that with the Continent's economy stalled, fiscal and monetary stimulus is essential but not forthcoming. The central bank is reluctant to cut rates. Fiscal policy is in a straitjacket because of the Maastricht treaty. The strength in the euro is basically deflationary, which is the last thing Europe needs. Many Europeans are now questioning the very viability of the European Community concept, since growth and inflation diverge so much in the core and in the periphery.' Might it be prudent to wait and see if the concept is viable before we sign? That is the test that matters, for if the single currency is no solution to Europe's problems, it will not solve ours.
Poor old J.-P.
The plan to put old Jean-Pierre Gamier right for pension has run into trouble. This. as I was saying before I left for my Venetian research, required everybody to pretend that old J.-P. (and Mrs J.-P., too) were three years older than they really were. This would make the generous pension that Glaxo SmithKline is expecting to pay them more generous still. This week GSK's shareholders voted against the report of their board's remuneration committee, but since Mr Garnier's deal, like the rest of his package, is part of his contract, there is not much that they can do about it. Next year they ought to resolve that a director's contract requires their approval before it is binding.
Recount
A close-run thing at the Bank of England, where the Monetary Policy Committee was asked to choose between leaving interest rates alone and lowering them. All the Governor's instincts must have been against cutting rates when the pound was sliding — these slides are easier to start than to stop — and he got his way, but only by five votes to four. Future votes may be on the lines of the trade union which wished its ailing general secretary a full and complete recovery by four votes to three, with two abstentions.
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