The Government is like a celibate reviewing a sex manual, says David Smith.
Mention European monetary union and a single European currency and most people's eyes glaze over. It will never happen, they believe, or it is such a long-term proposition that it can safely be forgotten about for now.
Time, however, is marching on. The December 9-10 meeting of European Community leaders in Maastricht, Holland, should rubber-stamp the changes in the Treaty of Rome needed to bring about European monetary union (EMu). By 1997, on the present timetable, Europe will have embarked on the final stage of Emu, in which individual national currencies are replaced by (probably) the European currency unit (Ecu) and sovereignty in monetary policy is handed over to a new European central bank.
Do not let all these Emus and Ecus confuse you. These are big issues. Before the end of this century, in other words well within the planning horizon of many companies, the pound could be no more and the Bank of England merely a regional office (surely not the head office) of the European central bank. In Britain, of course, Emu and the single currency are political hot potatoes. The Government's position, thanks to the sensitivity of the Tory party on this issue, has frankly been ridiculous. John Major and Norman Lamont have negotiated with European on the details of the mechanism under which a single currency could be adopted, without declaring their position on whether they think such a goal is desirable. The Government's position during the inter-governmental conference on Emu has been akin to that of a celibate advising on the contents of a sex manual.
This stand-off cannot continue indefinitely. Over the next few years a British Government will have to decide whether it wants to be part of Emu and the single currency. This is not a matter for a free vote in Parliament or for a national referendum. It would be better, and braver for the British Government, of either party, to declare its position at an early stage.
Businessmen appear to be clear on their position. According to the Confederation of British Industry, a single currency is desirable for three principal reasons. It would save businesses £300 million a year in foreign currency heading costs. It would reduce sharply transactions costs, saving the equivalent of 0.5% of Community gross domestic product. And, if Emu were established on sound principles, it would mean a low-inflation and low interest rate zone throughout Europe.
The Association for the Monetary Union of Europe allows for costs as well as benefits to business from the adoption of a single currency. These include transitional adjustment costs and intangible factors such as the loss of sovereignty. Regarding the last, the conduct of monetary policy in recent years does not lead one to conclude that Britain will be giving up anything precious. I find it hard to foresee a situation in 20 or 30 years where a group of elderly men in dinner jackets talk of the good old days of the 1970s and 1980s, when the Treasury and the Bank of England were free to run monetary policy.
Membership of the European Exchange Rate Mechanism has weakened many of the anti-monetary union argument. Those countries in the mechanism from the start are the ones keenest on Emu. Britain is now a new boy in the system but, even so, membership is already changing attitudes. The 12 months from October 1990 went better than even the optimists had expected, with base rates down from 15% to 10.5% and an abrupt fall in inflation to European levels. It will not always be like this, but the more that belonging to the European club is regarded as better than being outside it, the more Britain will be pulled towards monetary union.
Achieving long-term success, either in the exchange rate mechanism or in Emu is, of course, a question of competitiveness. The special situation of the 1990-91 recession, and the big shake-out in employment, has enabled British business to post above-average productivity gains. This is very good news.
The challenge is to sustain those gains. This means, not just a good performance by companies and their employees but, a properly trained and educated workforce and an infrastructure that helps rather than hinders industry. Business, with its support for a single currency, has declared its belief in its ability to meet the challenge. The Government, wary on the sovereignty issue, has yet to give a proper lead. But ministers, it seems, fear the economic consequences as well as the political ones. They should not. Given a fair wind, the British economy has nothing to fear from a single currency.
David Smith is Economics Editor of The Sunday Times.
