Sterling arguments for the euro

In with the Euro out with the Pound
July 26, 1996

I believe it was Albert Einstein who said that physics should be as simple as possible, but no simpler. Following the same principle, but instead in the field of general macroeconomics, Christopher Johnson has hit the mark and succeeded in making his subject, and, more specifically, the complex issue of the European single currency, simple enough for the general reader to grasp without sacrificing the quality of the content.

Of course one would not expect less from a seasoned journalist, who was also chief economic adviser to Lloyds Bank and a visiting scholar at the International Monetary Fund. As a gentleman and a scholar, Johnson presents a balanced case for and against the European single currency and the United Kingdom's adoption of it, reserving his personal endorsement of the case in its favour for the final two chapters.

This book ought to be recommended reading for political activists of all denominations as well as for all voters genuinely concerned with their own standard of living. The author has filled a vacuum in the debate regarding the European single currency.

The existence of such a vacuum is not surprising, as pointed out by Johnson himself, when he quotes from the Kingsdown Enquiry, a working group of the Action Centre for Europe: "Britain's right to opt out I has in fact had the effect of postponing a sensible debate in Britain."

This does not mean that nothing worthwhile has been published before. But in the main, thoughts worth serious consideration have been expressed only in official addresses by people such as the governor of the Bank of England, who, in the nature of the bank's institutional role, cannot be expected to enter the fray of a prolonged debate.

It must be in everyone's interests, and in particular the interests of the British public, that the quality of the debate will now be raised. The author's hard work certainly helps in this respect.

The book's starting point is the list of the "ten dangerous British illusions about Emu", to wit: it will never happen; it is a mistake to have a timetable; it will do no harm to wait and see; we can become more competitive before joining; we will be better off outside; the single market does not need a single currency; ordinary people will not accept it; it will divide Europe; it will make enlargement impossible; it will mean the end of the nation-state.

He then enables the reader to appreciate the issues by providing well-explained basic economic concepts and plenty of digestible facts. Only after careful analysis of these does he set himself to demystify the above mantras.

Being a gentleman, he never explicitly or crudely puts the real question to those supposedly defending Westminster's sovereignty over monetary policy: how will such sovereignty be exercised outside a monetary union? Will it be exercised in the direction of making a sterling pound stronger than the infant euro? Is this a credible proposition and in whose interest anyway? Or will it be directed towards pegging the pound to the euro? If so, why inflict on the British public most of the costs and few of the full advantages? Or, finally, will it be exercised in the direction of weakening the pound vis-a-vis the euro?

To this last option, Johnson offers a personal response: "By retaining for a further period the option to let the pound depreciate, the UK would ensure that it was forced to use it" - by which he means that the option is not a real option. Once spotted by the market, it becomes an expectation.

Assuming that these options are what sovereignty will mean in practice, the author pulls off his gloves: "In spite of the damage done by inflation to the economy, British governments have persisted in the delusion that by retaining 'sovereignty' over monetary policy they can improve on their abysmal past record."

But, as ever, humour is more powerful than denunciation. Johnson has found a wonderful quote from John Stuart Mill, still a gem a century after it was uttered: "So much of barbarism I still remains in the transactions of the most civilised nations, that almost all independent countries choose to assert their nationality by having, to their own inconvenience and that of their neighbours, a peculiar currency of their own."

One of the most useful aspects of this book is a compendium of historical reviews of monetary unions. Trained as an economist, I felt duly humbled by how much I had forgotten and by what I had simply ignored, and was grateful to be provided with a ready synopsis and a reasonable bibliography on the subject.

Moreover I felt like cheering as the author demolished in a few powerful strokes all the copious nonsense written over the decades by superannuated economists and politicians about the virtues of the gold standard. "Gold is not now and never has been a good candidate for a single, stable currency, or the basis of one." That feels good, and I can now pulp a few books from the darker shelves of my library.

Johnson goes on to state, having demonstrated it, that "the United States is more a lesson in what to avoid than in how to proceed". So with a gleeful smile I can pulp a few more books, in order to avoid inadvertently donating them to one of those charities which sends books to thirsty minds in the developing world.

After reading Johnson's account of the very many other historical monetary unions - two German unions, the Scottish/English union, the British/Irish union and the Latin union, one is left with the sad conclusion that there is no suitable successful example for Emu to follow.

Does that mean that monetary unions are impracticable or intractable? One might think so. But one would do well to remember that the science of economics, rudimentary at best even today in comparison with other more advanced sciences, was in its infancy at the time of monetary unions in the last century or indeed in previous centuries; and that the most recent German monetary union was dictated fundamentally by political rather than economic considerations.

And yet, though we may be without a clear blueprint, that has never stopped humanity from building for progress. Johnson puts in some solid effort towards a workable blueprint, not a theoretical one; one steeped in the detailed knowledge of the Maastricht treaty and of the nuts-and-bolts operations of both the international capital markets and the retail financial markets. Were a Single Currency Board to be established in the UK "to supervise the transition and explain how it would affect different kinds of people", as the author suggests, I believe he would make an authoritative member.

By now readers may be wondering if the reviewer is so bereft of any critical spirit that he has swallowed the whole book from cover to cover, taking it not only as Euro-gospel, but also as the ultimate word on the feasibility of monetary union.

I can assure them I have not-nor do I think that the author would wish me or any other reader to do that. He convinced me of two things. First, that the economic case for the European single currency and even for the UK joining it upfront is solid. Second, that a lot more thought and work has gone into the preparation for it than is generally acknowledged, even concerning mundane but nevertheless important issues such as the choice of the name euro.

What he failed to convince me of is that the political process will not succeed in bungling beyond redemption both the monetary union and the introduction of the European single currency.

If the statesmen and politicians were to bungle it, this would occur in a scenario in which, as the author says, "some have suggested giving up freedom of capital movements." Restricting capital movements is in fact the crude tool used by those who wish to attempt to reconcile conflicting monetary and fiscal policies with exchange rate objectives. From there to the curtailment of the the free movement of people and trade, is a very short step.

That wind is already blowing. I was recently invited to a gathering where the speakers intended to prove that liberalisation and globalisation of markets are only myths. This is a fringe idea, for the moment, but one that is gathering momentum, like so many fashionable ideas that come from America.

As Johnson writes: "It is illogical to support the single market and yet to oppose the single currency. It is more logical to advocate withdrawal from the single market, however misguided such a course would be, and then to jettison the single currency as redundant."

If two world wars and the collapse of economic dirigisme have not taught us the lesson that limitations to the free movement of people, of goods, of services and of capital are recipes for disaster, we have only ourselves to blame for what is in store for us.

What Johnson does not point out - perhaps because he is convinced that reason will ultimately prevail - is that by not taking risks or by choosing the wrong odds, we are not only mortgaging our future, we are mortgaging the future of at least two generations to come. It is amazing that, while politicians continue to wave warning fingers at the City with ill-founded accusations of short-termism, it is left to a person like Johnson, with his background firmly in the City, to remind us all of where the long-term interest of Europe and of the UK lies.

His book is full of thought-provoking statements. Space allows me to select only two. "As countries become more open to trade with each other I business cycles will diverge between industries rather than between countries." And: "Price stability would mean that pension funds would need fewer assets to meet their unknown future pension liabilities."

Although the author self-effacingly states that: "There is no certainty in economics, whether about the past, the present, or the future", he does leave us with one key certainty: "Because there is a global capital market, in which huge sums move freely around the world, it is impossible for a country the size of the UK to achieve lower interest rates on its own."

Reading compulsively through this fascinating book, which brings to life an otherwise arid subject, brought back a childhood scene through one of those inexplicable lateral movements of the mind. As children, we used to play a game with little coloured marbles. There would always be someone who was very good at the game but who was occasionally caught by an irrational fear of losing. Half-way through the game he would pick up his marbles but, before taking his leave, would kick everyone else's marbles in spiteful rage and destroy the game for all and sundry.

Now, why should I think of that? Read this book for yourself and find out.

Rudi Bogni is the former chief executive of Swiss Bank Corporation in London, currently on a maths research sabbatical at the Centre for Quantitative Finance, Imperial College, London.

In with the Euro out with the Pound: The Single Currency for Britain

Author - Christopher Johnson
ISBN - 0 14 025455 2
Publisher - Penguin Books
Price - £7.99
Pages - 256

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