WARNING FROM OUR MAN IN WASHINGTON IN 1996 -EURO DOOMED TO FAILURE

 

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Peter Jay, the most distinguished of all contributors to the International Currency Review, the former British Ambassador to Washington, explained in the ICR columns in 1996 why participation in the then proposed single (= collective) currency would be disastrous for almost all the intended participants.

 

We reproduce the timely and prescient arguments that he put forward.

 

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WE TOLD YOU SO

PETER JAY’S WARNING IN

 

International Currency Review

Volume 23- 3 -August 1996

www.worldreports.org

 

 

 

 

 

 

 

 

 

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AN AUTHORITATIVE 1996 WARNING ABOUT THE EURO

 

by

 

Peter Jay

 

Before we commence with the brilliant and authoritative lecture of the author Peter Jay we feel those who may not be acquainted with the man and his works will appreciate the following details expressed in the ICR volume 30, 4. of October 10 -2005.

 

 

ABOUT THE AUTHOR

 

 

Peter Jay, the son of the late politician and former Cabinet Minister Douglas Jay, is acknowledged to be the most fiercely intelligent among the generation to which the Editor and Publisher of the service belongs. He was one of the earliest contributors to International Currency Review, in 1969 and early in 1970’s.

 

Born on 7^th February 1937, he was educated at Winchester College and at Christ Church, Oxford, where he gained a First Class Honours degree in Philosophy, politics and Economics [PPE]. He was elected President of the Oxford Union in 1960. The Editor of this service [ICR] was Jay’s exact contemporary at Christ Church.

 

Between 1961 and 1967, Peter Jay served at the British treasury, in 1967, he became Economics Editor of The Times a post he held until 1977, and during which time (from 1872 to 1977), he was the founder-presenter of TV’s ‘Weekend World’.

 

From 1975 to 1976, he also fronted his own programme for ITV, ‘ The Jay Interview’

He was appointed to be Ambassador to the United States in 1977, and he remained in Washington until the end of the Callaghan Labour Government in 1979.

 

At a Christ church Gaudy, Peter Jay quipped to your correspondent [Christopher Story - Editor of ICR] that he thought he was ‘the only member of his generation whose career was going backwards’. This typically and amusingly modest understatement could not be taken seriously, in the intervening years he has contributed immeasurably to economic analysis, as his Darlington Economics Lecture confirms.

 

In January 1990, he was appointed the BBC’s Economics Editor. The specialist unit he headed, a part of the News and Current Affairs Directorate, provided economics, business and financial coverage to all News and Current Affairs outlets across television and radio. He presented ‘The Money Programme’ when it was studio-based.

 

When he was appointed, the then Director of BBC News and Current Affairs, Ian Hargreaves, observed that ‘Peter is one of the outstanding economic journalists of his generation’.

 

But he is much more: all agree that he is the outstanding economic and financial thinker -presenter of our time.

 

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[Lecture by Peter Jay]

 

 

 

DEFINITIONS AND ASSUMPTIONS

 

This is an opportunity for me to get off my chest an idea which has been going round my head for 25 years, which I believe, of great importance and which has been given new and great contemporary relevance by the proposal to create a Single European Currency [Written in 1996].

 

The world I want to talk about is pretty much the world we actually live in, but simplified enough to make it possible to talk about it within the compass of a lecture. The world itself is a closed economy, which is to say that it does not trade with the moon or outer space. It is made up of economies, which for tonight’s purpose I will define as geographical areas containing significant concentrations of economic activity separated from each other by evident political and natural frontiers.

 

We assume that goods and services are fairly freely traded between these economies - or more precisely between players in these economies - that capital may or may not be free to move between these economies according to political decisions made by the appropriate authorities in each case, and that labour faces large political and practical obstacles in mitigating en masse between economies.

 

THE COMPETITION FACTOR

 

 

These economies are, in a sense, in competition with each other. It is most important, however, to be clear about what that sense is-and what it is not.

 

Economies do not compete with each other as business do; and attempts to portray the successes and failures of economics as though they were a form of competition between great enterprises -Great Britain Ltd and France SA -entirely misrepresent the reality, for all the reasons which were powerfully explained by Professor Paul Krugman of the Massachusetts Institute of Technology [MIT] in his polemic published last year [1995], entitled ‘Peddling Prosperity’

 

Fundamentally - and this is not the place to spell it out at length - the difference is that for an enterprise, the success or proficiency of a competitor is bad news, essentially because it threatens market share and profitability; whereas for an economy, the success or proficiency of a trading partner (sometimes thought of as a competitor) is good news, essentially because it offers better value for money and so higher living standards to the home consumers and probably bigger markets to the home producers.

 

Nonetheless, there is a sense in which an economy can become uncompetitive with the outside world; and, if it does, that can have enormously serious consequences for employment in that economy. This has nothing to do with whether it is a rich or poor economy, or whether that economy has absolutely high or low levels of productivity.

 

It has entirely to do with the relationship between the labour costs of a unit of outlook in the home economy and the labour costs of a unit of output elsewhere. We are speaking here not of a specific product, but of the general structure of labour costs per unit of output across the board in the economy in question.

 

UNCOMPETITIVENESS

 

In an economy where the unit costs across the board are significantly out of line and above the general level in the outside world, a chain reaction of consequences begins to flow unless and until this imbalance is corrected.

 

Such an economy may accurately and instructively be said to be so, as in the Articles of the International Monetary Fund, in ‘fundamental disequilibrium’, which we express more colloquially by saying it is ‘uncompetitive’. It will be an important question how far and under what conditions this affliction is self-correcting.

 

I want to emphasise at this point the central importance in this analysis of this idea, the notion of an economy, which is uncompetitive in the sense defined. For it is from that condition that the consequences I shall discuss all flow; and it is that condition, I shall contend, which explains those consequences.

 

So, please take note, because, if you nod off [or if readers allow their concentration to lapse here-Ed] at this point, the whole of what follows will be completely mystifying.

 

An uncompetitive economy is I repeat, a geographical area of substantial concentrations of economic activity where the general level of labour costs per unit of output is significantly higher than in the world outside.

 

DEPRESSED ECONOMIES AND AREAS.

 

Now we turn to the consequences of such an imbalance. An employer whose production activities are located in such an economy will tend to find that similar products -goods and services -supplied to the home and overseas markets by other employers whose production is located outside that economy are either cheaper and more profitable than his own.

 

His lower profitability, if he initially adopts that route, will in due course weaken his will and/or his capacity to invest in new processes in the home location, and to match the technical and managerial advances made by his competitors located elsewhere. His competitiveness deficit increases; and his business will stagnate and dwindle.

 

If he takes the other route, of trying to pass on his higher unit costs in the form of higher prices to his customers, whether at home or abroad, his business will dwindle through a loss of sales, probably even faster than it will through lack of investment. As business dwindles under the conditions described, so employment will fall and unemployment will rise. Incomes will also fall; and so will living standards, at least relative to what they would have been, had the initial lose of competitiveness not occurred.

 

PAY AND UNEMPLOYMENT

 

Indeed, this process suggests the first way in which the imbalance from which we started this analysis might become self-correcting. Classically, economists have thought that the involuntary unemployment of those willing and able to work was impossible because an unemployed person would always be willing to offer for less than those currently employed, thereby driving pay and labour costs down to the point where the labour market cleared and everyone was employed.

 

There clearly had to be something wrong with this theory, since large -scale involuntary unemployment was an evident fact of historical and modern experience, not least in the most advanced industrialised economies.

 

The very best explanation for this phenomenon is known to economists in short-hand as the fact that “pay is sticky downwards”, in other words that people are immensely reluctant and slow to reduce money pay levels even when they are under economic pressure.

 

This may partly be a matter of their personal attitudes to pay which, understandably enough, they are liable not to think of as being a price, namely the price of labour, or therefore, as being subject to the same kind of supply -and-demand logic as the price of cabbages.

 

 

NO SCOPE TO BID WAGE LEVELS DOWN

 

 

It may partly also be that the way in which the labour market works makes it in practice impossible for the individual or even groups of individuals to present themselves to employers and to offer to bid down the level of pay in order to get work for themselves to employers and to bid down the level of pay in order to get work for themselves.

 

Strong social sanctions may well discourage such behaviour. Existing trade union agreements and bargaining power may prevent it. More to the point, employers may be reluctant to upset their existing employees by lowering remuneration levels.

And in certain cases, social security incomes paid only to people who are not at work, or not in possession of earned incomes, may make it uneconomic for unemployed people to work for less than a certain weekly figure, which may itself be above the level which would interest a possible employer.

 

For all the reasons, in modern societies money pay is adjustable only very slowly and painfully to adverse economic conditions; and in consequence, it is perfectly possible in practice for an economy to be and to remain uncompetitive in the sense that I have defined for long periods of time.

 

RECAPITULATION

 

At this stage in the argument, certain points need to be emphasised before we proceed:

 

·     First, it is not suggested here that uncompetitiveness in the sense that I have defined is the only or necessarily most important cause of unemployment;

·     Secondly, it should be obvious that uncompetitiveness is a relative condition, and cannot therefore afflict every economy simultaneously, and:

·     Thirdly, since the world is a closed economy, global unemployment cannot be caused by global uncompetitiveness, though, if substantial parts of the world are uncompetitive with other parts and suffer unemployment in consequence, they can thereby contribute to the global unemployment total which will not sum to zero, since negative unemployment is not, except by some artificial statistical manoeuvre, a recognisable phenomenon.

 

SOVEREIGN ECONOMIES

&

REGIONAL ECONOMIES

 

Next we need to introduce a distinction between two different kinds of economy as a concept separating the world into mutually exclusive and collectively exhaustive (oceans and poles apart) geographical areas.

 

Some economics coincide with politically defined areas, governed by a single sovereign authority. Commonly in practice, though perhaps not theoretically necessarily, such areas also employ single common money or currency, which in its turn is commonly managed by the sovereign government or by the Central Bank so empowered by that government.

 

Such economies we will here call “sovereign economies” to distinguish them from the second type of economy in which we are interested.

 

These are again geographical areas containing significant concentrations of economic activity. And they commonly suggest themselves as naturally coherent units with a discernable identity. But they are only parts of sovereign economies in the sense we have defined the term. Economies which are actually component parts of sovereign economies we will call here “regional economies”, or just “regions”.

 

We shall disregard the two other theoretical possibilities, namely:

 

·     Economies containing more than one sovereign economy, in the sense in which one might talk about the Caribbean economy or the Oceanic economy in the Pacific.

·     Economies which contain parts but not all of more than one sovereign economy, as for example one might want to talk of the Mediterranean economy or great lakes economy.

 

I an happy to anticipate en passant the question- what is the status of the economy or economies of the

 

EUROPEAN UNION?

 

by saying, that in my view,

 

it is an area whose political leaders are debating a mooted transition from being a plurality of sovereign economies

To Being A Sovereign Economy That Contains Regions.

 

There is in my view no need to develop some extra or special definition of categories of economy to cover the European case.

 

SOVEREIGN ECONOMIES

AND

REGIONAL UNCOMPETITIVENESS

 

Sovereign economies and regional economies are both susceptible to becoming uncompetitive in the sense, which I have defined. But at a certain point the stream of consequences of being thus uncompetitive diverge from each other in the two cases.

 

A sovereign economy, experiencing uncompetitiveness, will face rising unemployment just like an uncompetitive regional economy. But then the problem, takes different forms for each case.

 

The uncompetitive sovereign economy will experience either a deteriorating trade balance, or a deepening recession, or some combination of the two.

 

The uncompetitive regional economy will have no recorded trade balance, though the net flow of goods and services in and out of it may certainly alter adversely just as for sovereign economy.

Its main overt symptom will be a deepening recession, or indeed depression.

 

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UNCOMPETITIVENESS AND CURRENCY EXCHANGE RATES

 

But, whereas the sovereign economy’s deteriorating external balance may force the government and Central bank to intervene by drawing on official reserves to finance the external deficit, the regional economy’s imbalance will automatically be financed by the ordinary flow of payments within the single currency area to which it belongs.

 

A regional economy cannot therefore have an overt balance of payments problem or, what is the same thing in other words, a currency crisis of the rest of the sovereign economy to which it belongs, there is no possibility of normal trading, let alone capital flows and speculation, causing its money to be sold short against the money of the rest of that sovereign economy.

 

A pound is a pound, whether it be in Devon - Dover- Dyfed- Derby- Darlington or Dundee.

 

This may sound like a mercy for the regional economy, and it does contain some merciful elements.

 

For example, the regional economy cannot suffer from the consequences of speculation that the value of its money may decline on the foreign exchange markets against the value of other currencies.

 

It cannot therefore be subject to capital flight inspired by such a fear, though of course, if the sovereign economy to which it belonged suffered such a fate, the region could suffer along with the rest of the sovereign economy.

 

UNCOMPETITIVENESSS AND FISCAL TRANSFERS

 

·     Secondly, by being a part of a sovereign economy, a regional economy may - I emphasise ‘may’, not by any means necessarily ‘will’ - benefit from some fiscal transfers from the government of the sovereign economy. These are in two kinds:

·     Automatic transfers which flow directly as a result of the depression of the economy activity in the uncompetitive region, through for example reduced liabilitities to income, corporation, value added tax (VAT) and other taxation, and increased receipts of unemployment and other social security payments financed from the centre, and:

·     Discretionary further help directed from the centre in order to ease the pain of the affected region.

 

UNCOMPETITIVENESS AND ITS REMEDIES

 

However, it is the central contention of this analysis that these advantages are outweighed by one massive disadvantage, which makes the position of the uncompetitive region far worse, economically and politically, than the position of an uncompetitive sovereign economy.

 

What an uncompetitive economy needs above all is to restore its competitiveness. If it fails to do that, then it is doomed to economic depression, high unemployment and falling or depressed living standards over an indefinite period.

 

Everything that it does, or tries to do, will tend to be anaemic, unsustainable, against the grain of the marketplace and discouraging to those animal spirits which Adam Smith saw as the driving force of all economic activity.

 

In the end the population, which the uncompetitive economy can no longer sustain, will face an ugly choice-to remain and be destitute, or to leave. The old and the weak will probably stay in poverty. The young and the strong will leave, not because they want to leave, though some may, but because the alternative is worse.

 

Generations later it may all seem to have ended well; but that will not diminish the pain at the time; nor the waste of the social capital that is left behind, nor the sufferings of those migrants for whom the move does not work out. But how can competitiveness be restored?

 

A sudden burst of faster productivity growth could certainly contribute to lower relative unit labour costs.

 

But what would bring about such a spurt? Market forces will be pointing in precisely the opposite direction. High unit costs mean low profitability. Low profitability triggers the outflow of capital, not inflows, and discouragement for enterprise and for overall economic growth.

 

The public sector can theoretically try to fill the breach. But then the public sector may, indeed should, already have been doing all that it judged it could and should do - and could afford -before the problem arose.

 

If it lies within the power of the public sector to bring about a discretionary great leap forward in productivity now, why had it not done so before [Written in 1996], since gains in productivity must always contribute to economic welfare in general, at least as conventionally measured?

 

Moreover, governments have their own imperfections. The categories of regional aid which commend themselves to the politicians in charge are not necessarily the forms of aid, which go furthest to the roots of the problem.

 

A few millions of pounds sterling on a conspicuous white elephant which the politician can be photographed [There have been many such examples in the reign of King Tony since 1997] and better still a filmed-opening, may have stronger appeal to him than the money used to address the underlying competitive imbalance.

 

WHY, you may answer, do development projects funded from Brussels always seem to be accompanied by enormous notices informing the passer-by that this great blessing comes to him by courtesy of the generosity and largesse of the European Union?

 

The harsh reality is that it is normally extremely improbable that a serious competitive problem of a whole economy, be it sovereign or regional, will be solved by engineering a sharp rise in productivity over and above the natural gains being made in the ordinary course of business.

 

Somehow or other lower pay, relative to the outside world has to be part of the story; and it is typically the only part of the story that policymakers have any hope of influencing - and then only in the case of a sovereign economy.

 

And it is here that we come to the real crux and the central message of this analysis.

THE ROLL OF THE EXCHANGE RATE

 

The sovereign economy, precisely because it has an overt external payments balance which it may be financed by changes in official reserves and which, if not so financed, may stimulate a change in the value of its currency against other currencies in the foreign exchange market, has an option which the regional economy does not - even though both may be confronted by identically the same difficulty, namely uncompetitiveness as I have already defined it.

 

·     The sovereign economy can experience a change in the value of ITS currency. At this stage in the argument, we are not concerned with such tactical questions as whether this comes about as a result of:

·     Some direct command decision by the government, for example to declare a new parity under some fixed but adjustable exchange rate regime, or:

·     Whether it comes about spontaneously as a result of market forces, the changing external balance and the effects of that on sentiment in the foreign exchange markets, or:

·     As in the case of Britain’s ignominious exit from the Exchange Rate Mechanism of the European monetary System, first one or the other.

 

The point IS that the exchange rate can change.

 

 

For a regional economy, that cannot happen because there is no currency unique to that economy whose price is registered in foreign exchange transactions.

Such a change in the exchange rate of the home currency there and then changes all values in the home economy in terms of the currencies of the rest of the world, except and unless, and only to the degree that home currency prices move to nullify this effect.

 

Such an offsetting movement in home currency prices is of course quite probable for those imports whose market price is cost determined.

 

But there is no reason why other domestic prices should nullify the effects of currency devaluation, unless either or both of two conditions obtain.

·     The home economy is operating under such overall pressure of demand that prices, measured in terms of foreign currency, quickly return to their pre-devaluation levels, and:

·     Labour is supplied to the market under such monopolistic conditions that the suppliers, mainly trade unions, can post more or less any price they like for labour and choose to restore the pre-devaluation purchasing power of pay.

 

There came a time in the 1980’s, conspicuously represented at the bank of England, in arguing that the effects of devaluations are normally nullified within four years; and there was even produced a little rule of thumb equation to describe the rate at which this happened, mainly in the second and third years.

 

The best that can be said for this work is that it may have looked like this to anyone who looked narrowly at British post-war experience.

 

But any claims to general theoretical validity are entirely specious; and the experience of the 1990’s demonstrates that a devaluation can, not merely restore, but actually transform the competitiveness of a sovereign economy to a point where neighbouring nations complain so bitterly that they take to muttering darkly about administrative retaliation against what they denounce as unfair competition, up to and including threats to invoke obscure clauses of the Treaty of Rome under which (British) exports to the rest of the European single market could allegedly be subject to restrictions or punitive imposts [Again to remind the viewer that these words were written in 1996]

 

DEVALUATION AS A SAFETY VALVE

 

The fact is that devaluation can work, if conditions are right, and that nothing else will - not fiscal transfers from some supposedly benevolent central government, not automatic fiscal transfers, not sudden productivity leaps forward, not smoothly adjusting reductions in nominal wages, not spontaneous migrations of cheerful job-seekers.

 

NOBODY. Of course, should be deceived. We are not speaking here of some magic wand that painlessly accomplishes huge economic benefits.

 

Devaluation of the currency works, when it does, precisely because IT LOWERS PAY AND IS ACCOMPANIED BY ECONOMIC CONDITIONS WHICH PREVENT IT FROM BEING INCREASED AGAIN, unless and until, real gains in productivity earn such increases in the world marketplace. Clearly, such any such remedy is logically, though not chronologically, a last resort.

 

It would be better not to be uncompetitive in the first place.

 

It would be better, were it not impossible, to accomplish the restoration of competitiveness by compensating forward leaps in productivity or even by smoothly adjusting nominal pay levels.

 

In the case of regional economies, it might even be better, were it not everywhere contradicted by the disappointing lessons of experience, to be able to rely on successfully operating regional policies, transferring fiscal resources and otherwise engendering the required new regional dynamism.

 

But as a logical last resort, devaluation is therefore the only resort.

 

If the other better resorts were available, they would have been used. And a last resort is nevertheless vital for being the last resort.

 

The safety valve that can blow on a pressure vessel, the aircraft emergency exit that will open under enough pressure, the ejector seat that can save the pilot, are all last resorts, but we sneer at them at our or somebody else’s-peril.

 

FURTHER RECAPITULATION

 

Let us summarise where we have got to here and examine the implications.

 

Both sovereign and regional economies can be uncompetitive.

 

A regional economy can be in theory can in theory hope for succour from the fiscal action of the government of the sovereign economy to which it belongs, or from a smooth adjustment of money wages, or from nature’s remedy -the outward migration of its able-bodied working population.

 

Such remedies are unlikely, unpleasant or both.

 

A sovereign economy can also in theory look to cuts in money pay and to outward migration of its population, no less improbable in the one case and unpleasant in the other - perhaps more so - than for the regional economy.

 

But it can also devalue, and, if it is prepared to pay the price, it will find that that can work and that though unpleasant, it is far less so than the long slow agonies of being a depressed region with no control over its own fate.

 

SO WHAT?

 

This conclusion, if accepted, of course raises a whole host of supplementary questions:

 

·     Are all regional problems simply suppressed exchange rate problems?

·     If it is so much the better to be a sovereign economy than a regional economy, should all regions aspire to become sovereign, i.e. have their own currencies?

·     What is the minimum size of a sovereign economy or currency area?

·     Why did East Germany ‘aspire’ to become a region of the sovereign German economy?

·     Why is the sovereign US economy so large?

·     Is Europe simply wrong to intend to convert a plurality of sovereign economies into one sovereign economy with many regions?

 

[Again to remind the viewer that this essay was written in 1996 by Peter Jay -details above]

 

I will attempt brief answers to these questions:

 

1.Are most regional problems simply suppressed exchange rate problems?

 

In so far as regional problems are essentially competitiveness problems, which means that at the present general level of employment costs the natural market -driven level of economic activity does not employ all of those willing and able to work, and that there is a pay level above subsistence at which all could be economically employed, given the natural endowments and general structural features of the local economy, then I say ‘Yes’:

 

Regional problems can correctly and helpfully be seen as suppressed exchange rate problems, that is: problems which could and would be amenable to exchange rate adjustments, subject to what was said above about the general conditions required for successful devaluation and subject to what is also said below about minimum currency areas.

 

2.If it is so much better to be a sovereign economy than a regional economy, should all regions aspire to become sovereign, i.e. to have their own currencies?

 

·     All regional economies should aspire to be sovereign economies unless:

·     The character and record of the economy is such that there is no serious prospect of it ever having a competitiveness problem;

·     Becoming a sovereign economy would infringe what is said below about minimum currency areas; or:

·     There are such huge fiscal or other uncovenanted benefits associated with regional status that they outweigh both the effectiveness and the self-reliance arguments for economic sovereignty.

 

3.What is the minimum size of a sovereign economy or currency area? The minimum size for a currency area and therefore for a sovereign economy in the sense defined in this analysis is one that satisfies the following two conditions:

·     That the administration and transaction costs do not exceed the benefits; and:

1.That the area must be large enough for prices, including (perhaps especially) pay, to be genuinely fixed in local currency units without automatic or continuous comparison back to external reference standards. It follows that there would be no benefit in establishing a sovereign economy in an area where pay was set by some wider agreement in which pay levels were expressed and determined in the units of the wider area. The more local the bargaining, the more local the scope for a separate currency-though with a floor in size, where in reality the pay and price setters would be looking at external reference values.

 

4.Why was East Germany prepared to become a region of the sovereign German economy? People in East Germany wanted to become part of an all-German sovereign economy partly because they saw this simply as an extension of the overriding imperative for German unification, partly because they wanted their savings validated in a money which the outside world would honour (which was not much different from just wanting to receive large cash gifts from their richer cousins in the west) and, partly because they believed that the West German taxpayer would be willing to transfer large enough sums to the east for the sake of unity to outweigh the consequences of the huge competitiveness deficit, which they were likely to face, if one ostmark became one deutschemark, which of course what happened. [It is said that the major cost of this hugely expensive exercise was eventually paid for by the other main contributors of the EU?]

 

In my judgment, at the time both they and Germany as a whole would have done better to have reformed the ostmark and allowed it to find its own value against the deutschemark, although it may be that such an arrangement would have been so imperfectly understood that an unmanageable migration of able-bodied labour to the West would have forced the hands of the authorities.

 

5. Why is the sovereign US economy so large?

 

The sovereign American economy is so large because the sovereign United States is so big. Whether or not this arrangement has been in the economic interests of the regional economies of the United States, i.e. of the people who live in those places, is a different matter.

 

There is in my opinion a case for saying that an historical error was made at the end of the Civil war when the Confederate Dollar in the Southern States was abolished in favour of the federal Dollar by a political fiat from Washington.

The South remained economically depressed for a century; and its recovery only began in the 1970’s

 

With President Lyndon Johnson’s civil rights programme, which for the first time ever made it practical for the labour force in the Southern States, which was predominantly Black, to migrate north and west in search of better living standards.

 

The political and social consequences for them and for the areas to which they moved in the northeast, the mid-west and the west coast were painful and profound.

 

If the southern regional economy had been able to overcome its competitiveness difficulties in some less crude and insensitive way so that a much bigger proportion of working people had been able to find work nearer to where they wanted to live, much waste and suffering might have been avoided; and if a separate Southern currency freely adjusting against the Federal Dollar could have contributed to such an outcome, it would have been well worth it.

 

AND EUROPE?

 

6. Is Europe simply wrong to wish to convert a plurality of sovereign economies into one sovereign economy with many regions?

 

So, now, lastly, we come to the question of

 

‘EUROPE’.

 

It is fashionable to look at the question of Europe’s future [since 1999, of course, current-Ed.] currency arrangements and Britain’s place in them as though the questions were whether Britain in particular is either ready or willing to join the arrangements, which at least the hard core of the rest are expected to make by 1999…and whether or not Britain should make the sacrifice of some political sovereignty for the sake of a great economic good.

 

All of this is comprehensively

back to front:

 

·     The BIG questions should be:

·     What are the best long-term economic arrangements for Europe? and: Should Europe’s economic interests be sacrificed for a political gesture?

·     Secondly, What is in the best long-term economic interests of Britain? and: Would the economic sacrifice entailed by joining be justified by the political advantages of first -class membership?

·     Thirdly, even if the EMU is the wrong long-term economic arrangement for Europe and Britain are there short-term or political reasons for establishing a temporary monetary union?

 

I will now briefly answer the questions:

·    The best long-term economic arrangements for Europe (on its own terms) are those that will enable it to fulfil its goal of becoming a large country with global influence, social harmony and economic success.

· It will fail in all or most of these objectives if the regional economies, of which it aims to be composed, are in such a state of competitive imbalance that political cohesion and social harmony are destroyed.

·    They will be in such a state of competitive imbalance if there is no mechanism for adjusting such imbalances, which tend to occur normally and naturally in the ordinary course of economic events.

·    The prevailing abject plight of France in consequence of its 12-year struggle to uphold the symbol of a strong franc (le franc fort) in defiance of all normal laws of economic gravity, illustrates the point.

·    If there is only one currency-whether or not the notes and coins are identical is trivially irrelevant-then the mechanism of exchange rate adjustment will not be available. As we have already seen in this analysis, no other mechanism can be relied upon instead.

 

The provisions in the Maastricht treaty for convergence are empty and irrelevant. They do not deal with convergence of competitiveness, but merely of nominal and monetary variables that are only partially related to the crucial question of competitiveness. They only even pretend to aim for convergence before monetary union begins-with no mechanism for promoting it, let alone, guaranteeing it, thereafter.

 

[It is in the nature of our people to have seen the impracticable nature of the Single Currency whereas our neighbours beyond our shores are easily taken in by bogus schemes of grandeur]

 

 

 

We may suspect that the European Commission is happy enough to engineer massive regional competitiveness imbalances by promoting monetary union and thus frustrating the normal workings of the exchange rate mechanism to promote balance, because it foresees that strong political demands will soon arise for vigorous regional policies to be devised and implemented from the centre, thus providing a wholly new political pretext for increasing both the budget and the power of the Commission.

 

But as we have seen, however much money and power that the European Commission posses, it is improbable that they will be able to have any significant impact upon the competitiveness imbalance problem which a single currency will pose.

 

This will leave the problem to nature’s remedy- namely, the migration of population.

 

It seems hard to believe that the