CUTTING ROOM: The unstoppable power of English; how obsolete notes are a nice little earner for central banks; on the agenda again - the exchange rate ... Evan Davis at large

CUTTING ROOM: The unstoppable power of English; how obsolete notes are a nice little earner for central banks; on the agenda again - the exchange rate ... Evan Davis at large - Now that the single currency is upon us, what other schemes are afoot to enhan

by EVAN DAVIS, economics editor of the BBC
Last Updated: 31 Aug 2010

Now that the single currency is upon us, what other schemes are afoot to enhance European integration? How about a single language across the European continent? How irritating it is to be confronted with people who don't understand you, even if they will accept your notes and coins.

I read, however, that, far from remedying this problem in the most obvious way, a European Commission report suggested that pupils in Europe should learn 'at least two European languages' in addition to their mother tongue.

Over here, any typical conversation about language skills leads the chattering classes to blush and berate our linguistic dexterity.

But maybe we are too pious and naive about this. The main reason we don't talk other languages is that there is no obvious second language. If you are German, French, Italian or Spanish, there is an obvious choice: English. It will not only allow you to talk to Brits, but also to many French, Italians, Spanish and Germans. In short, for a German, the choice to learn English opens up communication with most of the Continent (about 200 million people). For an Englishman, the choice to learn German opens up communication with a few Germans who do not speak English (about 40 million people). The cost-benefit ratio facing the different nationalities is hugely divergent. I know this point will provoke a storm of letters, but it makes obvious sense to me.

Only a few days now before we say a final farewell to 11 currencies, even though most of us forgot about them fairly quickly after 1 January. One small point about the switch to the euro is just how much old cash will disappear. Banknotes count as a liability in the hands of the central bank, so anything that fails to find its way back to the central bank that issued it is an unclaimed debt. Unreturned notes represent pure profit for the central bank (and hence the government) of the country concerned.

Even in Britain, when we withdraw a particular note from circulation, outstanding notes expire from the liabilities of the Bank's accounts after 10 years.

If one imagines that 1% of circulating currency is unreturned (and remember that currency is typically about 4% of GDP), the profit about to be made from unreturned cash should amount to about pounds 2.5 billion.

Not enough to make it worth changing currency very often, but a nice bonus for central banks. Perhaps they could share that with the shops that had to go to such expense to convert tills and pricings?

Now forget the World Cup. The Bank of England's Target 2 Point 5 tournament is reaching its climax. This is a long-running contest for schools to act as a Monetary Policy Committee, assessing the economy and making interest rate recommendations. The winning team gets its rate adopted as the official Bank repo rate for 30 days. No, just joking - it gets pounds 10,000 for its school.

As it happens, I think now is a peculiarly hard time to ask students to set rates. The conundrum of British economic policy is all down to the exchange rate; it is too high, and that makes British products overpriced compared with other countries and so exerts downward pressure on inflation, to bring our prices into line.

But we all expect the overvalued exchange rate to fall, which will exert upward pressure on inflation. Thus, we might want to worry about inflation, even if it is low right now.

Alas, what we do not know is how far the high exchange rate really has depressed inflation, and so how far a lower exchange rate will increase it.

It all hinges on this practical question: do firms let prices drift down as the exchange rises? If so, our exchange rate has suppressed inflation, a falling exchange rate will increase it, and we need to bear down on the economy to avoid that, even though inflation is low.

On the other hand, it might be that firms simply hold their sterling prices constant, notwithstanding the ups and downs of the currency in the foreign exchange market. In that case, the high exchange rate hasn't cut prices, and a low exchange rate won't increase them. Then, we need not worry about inflation: it will remain low even after a fall in sterling.

As you nice people might actually be responsible for setting prices for various things, you could let me know the answer to this. I won't win pounds 10,000, but I will pass your comments to the deputy governor of the Bank of England.

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