Compulsion or choice? Key questions about the Euro

Citation

Robertson, J. (1998), "Compulsion or choice? Key questions about the Euro", European Business Review, Vol. 98 No. 5. https://doi.org/10.1108/ebr.1998.05498eab.008

Compulsion or choice? Key questions about the Euro

Compulsion or choice? Key questions about the Euro

James Robertson

An informed British decision whether to join the Euro will require us to look beyond a simple Europhile/Europhobe either/or ­ either replace sterling with a single European currency or keep sterling as a single national currency. Here I suggest some questions we need to discuss, and offer brief answers.

Q.1. Is a single currency the same as a common currency?

No. A single currency is one variety of a common currency. The difference is between compulsion and choice. People in the countries which have joined Economic and Monetary Union (EMU) will be forced to use the Euro, because their national currencies will no longer exist. For them the Euro will be a single currency. By contrast, people in the non-joining countries ­ Britain, Denmark, Sweden and Greece ­ will continue to use the pound, the kronor or the drachma for most purposes within their own countries, while arranging to use the Euro for foreign travel and trading if they so wish. For them the Euro will be a common, but not a single, currency.

Q.2. How will UK citizens be able to use the Euro that way?

Many businesses and individuals already use the US dollar as a common currency outside the USA itself. Much international trade is now conducted in dollars and international travellers regularly use dollars. Citizens of quite a few countries use the dollar as a parallel currency within their own country. Many people outside EMU are likely to use the Euro that way. Computerised banking systems make it easier than ever to operate different bank accounts in different currencies.

Q.3. How do the political arguments balance out?

The originators of the proposal for a single European currency saw it as a step towards a unified European super-state. They hoped that having Germany and France as partners within a United States of Europe would rule out for ever the risk of further European wars. And a European super-state would be able to stand up to the USA and the then Soviet Union in a world dominated by super-powers.

The first of those arguments for a single currency has become weaker, because the risk of war between Western European countries has now become very small. In any case, allowing people the optional use of a common currency would better encourage closer European co-operation than risking the inter-country disputes that the economic consequences of a single currency will generate (see questions 4 and 5). The second argument has also weakened over the last quarter-century. Instead of a global oligarchy dominated by a handful of centralised super-powers, the long-term prospects for greater democratisation of global governance, and more decentralisation of power within nations, have grown stronger.

For these reasons, some supporters of the European single currency on economic grounds now tend to play down its political and constitutional significance. But, in fact, its economic consequences are bound to create pressure for further political centralisation. (Again see questions 4 and 5.) The political and economic consequences cannot be disentangled. Neither can be brushed off as unimportant.

Q.4. How do the economic arguments balance out?

Arguments put forward for a single currency include the following:

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  it will reduce the transaction costs of changing one currency into another, which businesses trading with other European countries and people travelling there now incur;

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  it will eliminate the risk of losing money through changes in the relative values of different European currencies; and

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  being able to use the same currency to compare the prices of the same things in different countries will stimulate competition and economic efficiency in the EU as a whole, reduce prices to consumers, lead to a greater number of business mergers across national boundaries, and help to create more European companies able to compete with the giant multinationals of the USA and Japan.

However, these desirable outcomes ­ if, indeed, the creation of more multinational corporations is desirable! ­ could be achieved almost as effectively by a common, as opposed to a single, European currency. For example, most regular users of both the Euro and the pound, who had bank accounts for each, would find that their need to change euros into pounds and vice versa was not very frequent or costly.

On the other hand, the economic arguments against the single currency ­ and the pan-EU interest-rate policies it will entail ­ have become clearer over the years. How widely the economic fortunes of different EU countries vary, is better understood. It is not just that some are permanently more prosperous than others. It is also that their economic cycles are out of sync (see for example, Macrae, 1997). UK cycles tend to mirror US, Canadian and Australian cycles, as contrasted with continental European ones. Even within the EU, towards the end of 1997 when the economies of The Netherlands, Finland and Ireland were tending to overheat, most of the rest of the EU national economies still had slack to pick up, and in Italy the slack was actually increasing. The point is that uniform interest rates imposed by a single monetary authority, will tend to be too high for the economies that need the stimulus of low interest rates, and too low for those that need the restraint of high ones. The EU accepts that the euro will widen the economic gap between rich and poor areas and worsen the problems of "economic crisis regions", and that this will have to be corrected by large financial transfers from European structural funds. The centralisation of the currency will thus lead to greater centralisation of public expenditure ­ as in the USA (see question 5).

Q.5. If a continental economy like the USA can prosper with a single currency, why not the EU?

The USA is much more unified politically, economically, socially and culturally than the EU. This enables it to respond more flexibly to economic change. In the first place, the mobility of labour is very much greater between US states than between EU countries. "As an alternative to exchange-rate variations as a form of macro-economic adjustment, Europe simply cannot rely on cross-national labour force mobility to the extent that it can be relied on in the USA", (Lindsey, 1997). Second, the US federal government spends and taxes roughly twice as much as all the state governments put together. As economic prosperity rises and falls in different parts of the USA, the federal tax system automatically adjusts the amount of tax they pay (since higher or lower incomes and profits are reflected in higher or lower tax liabilities), and federal spending programmes respond to changing needs. By contrast, the tax and spending totals of the European Commission are only a fraction of those of EU national governments. Europe lacks "the automatic stabilising properties which a unified fiscal mechanism affords the USA potentially to act as an alternative to exchange-rate variations" (Lindsey, 1997). In short, as Milton Friedman predicts, the Euro will "exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange-rate changes into divisive political issues" (The Times, 1997).

There is also another quite different point. What explains the growing number of local currencies in the USA in recent years? Having the dollar as a single currency has not, in fact, led to universal prosperity there.

Q.6. What is the relevance of local currencies for the Euro?

Listen to the eminent American economist Jane Jacobs:

Today we take it for granted that the elimination of multitudinous currencies in favor of fewer national or imperial currencies represents economic progress and promotes the stability of economic life. But this conventional belief is still worth questioning... National or imperial currencies give faulty or destructive feedback to city economies and this in turn leads to profound structural flaws in those economies, some of which cannot be overcome, however hard we try (Jacobs, 1986).

Rural local economies suffer too. When any locality is compelled to use only a national (or supranational) currency, declining economic competitiveness will bring too little money into local circulation to support even purely local activities. Local unemployment then rises, local land and other resources are unused, and local needs are unmet. What applies to the EU applies to the nation too. Under a single currency the monetary policies right for its prosperous areas are likely to be wrong for its poorer ones.

Very few mainstream economists and politicians understand the part this plays in local economic failure. I know only one member of the UK parliament who does ­ in an excellent recent book (Body, 1998). You have to look mainly to the grassroots for pointers to the future. In many countries ­ including the USA and Canada; Britain, Ireland and Western Europe; Australia and New Zealand ­ local currencies or quasi-currencies are rapidly growing in number. Ithaca Hours and Time Dollars are among the most successful in the USA. Local Exchange Trading Systems (LETS) are among the best known elsewhere. Many draw inspiration from the local currencies that reduced unemployment in Worgl and other Austrian towns in the 1930s before being suppressed by the Austrian central bank[1].

Q.7. So do we need co-existing currencies at different levels?

Yes. A multi-level system of currencies will be in tune with the increasingly global and increasingly local nature of twenty-first century life. It will reflect a preference for choice, not compulsion ­ for an organic rather than a procrustean, "one-size-fits-all" approach to monetary evolution. It will provide a range of appropriate currencies for different purposes. In Europe these could include:

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  a common (not single) European currency,

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  national currencies (in countries that still have them),

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  local currencies issued by local authorities that so decide, and

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  neighbourhood initiatives like LETS, initiated by community groups.

Unfortunately, as former international banker Bernard Lietaer has pointed out, "Evaluating the implications of multiple and, particularly, complementary currency systems... is practically a virgin academic field" (Lietaer, 1996). The monetary authorities and monetary economists have ignored it. It is high time to persuade them to take it seriously.

Q.8. Who will gain and who will lose from the Euro?

In general, those who profit from centralised economic and political power will gain. The rest of us will lose. A European super-state will offer a more ambitious role on a wider international stage for career politicians and officials. A single currency will allow those who control the activities of big business and finance to become even more wealthy than they already are. It will widen the already wide gaps between people and between places ­ rich and poor, powerful and weak, dominant and dependent. It will amplify the economic anxieties and insecurities from which many people in the EU now suffer, and further diminish their sense of economic democracy.

By contrast, allowing a system of multiple currencies to evolve will help to enlarge economic freedom. This prospect is threatening for people in positions of central control. That explains why, when the local currency experiment at Worgl in the 1930s became too successful, the Austrian central bank suppressed it, and why mainstream politicians and economists have refused to study how a multi-level currency system might work.

Q.9. Finally, now that 11 EU member countries have committed themselves to the Euro, what is the right course for the UK and the other three who have not?

The Euro as a single currency will throw up serious economic and political problems for its member countries. It is difficult to predict what the consequences of a breakdown in the EMU will be, after they have dismantled their own currencies. Inside or outside EMU, the UK will be affected.

At least for the time being the following course seems best:

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  stay out of EMU in its present form;

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  encourage British businesses and British citizens to use the Euro as a parallel currency, building closer links with European counterparts, and mastering the practicalities of a multi-currency way of life; and

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  introduce experimental local currencies, in places where local economic stagnation and high local unemployment are perpetuated by enforced dependence on the national single currency and national monetary policies.

Note

1. Useful sources of information include Richard Douthwaite, Short Circuit: Strengthening Local Economies for Security in an Unstable World, Green Books,1996.

(The) Times (1997), 19 November.