Economic and Monetary Union: Quentin Davies MP
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Money should be the servant of man and never its master. Monetary arrangements should be determined by the extent to which they contribute to the welfare of people, and not advanced - or rejected - for their own sake or on the grounds of sentiment, dogma, or political enthusiasm.
Does the EMU project pass or fail the test? Would it advance or betray the interests of our people? No such step could possibly be contemplated without the greatest possible measure of prior thought and careful preparation. And a detailed balance sheet of advantages, costs, and risks will need to be drawn up.
So far the debate has had too much of the character of a "dialogue of the deaf". Each side has advanced its own case. Neither has been sufficiently willing to examine and to address the arguments of the other. The following paragraphs attempt to do just that.
The prospective attractions of a single currency are momentuous. We would have willingly paid a high price indeed for shelter from the currency crises which have beset us intermittently, and very destructively, over the past 30 years when we were experiencing them - though memories are short. No trading nation can for long disinterest itself in the value of its currency in relation to those of its major trading partners, and crises are inevitable from time to time under a regime of fragmented currencies. On the other hand, it can be argued that the Euro would still fluctuate against the US dollar and the yen. But our exposure to such fluctuations would be greatly reduced, partially because from the outset a much reduced proportion of our trade would be exposed to them - less than half - and partially because a large part of EU trade with third countries would most probably over time come to be denominated in the Euro itself.
Among the further important advantages of EMU would be the removal of the foreign exchange and other transactional costs of doing business within the Single Market. The European Commission have estimated these at 0.4% of GDP. Those opposed in principle to monetary union have tended to argue that this figure indicates that the burden is not significant. Nevertheless it amounts to a trade tax for the UK of £3 billion per annum at the present time. That burden will not be without economic consequences, and falls disproportionately on exporters rather than importers (the buyer usually specifies the currency) and on smaller businesses (who cannot negotiate such good terms with their banks, and who will often lose 2-3% on converting currency, and in addition face charges for clearing foreign currency cheques and drafts, and delays in being credited with payments). Even more significant for such businesses are the risks of dealing in other currencies. Taken together, these two factors certainly deter some small firms from seeking business elsewhere in the Single Market, or cause them to lose business by increasing their prices to take account of these costs. In those circumstances, trade, output, and employment are all lost, and wealth forgone.
Another great attraction of monetary union would be that travellers within the single currency area would no longer face foreign exchange costs, which typically amount to 10% of foreign exchange purchased at retail outlets - a large slice of a family holiday budget.
However, all these benefits, substantial though they are, are almost eclipsed by the stability and cost-of-capital attractions of a single currency. Despite the Medium Term Financial Strategy of the 1980s, and the inflation targets of the 1990s, despite recession, and despite the ERM, we have failed to achieve either the level of inflation or the low inflationary expectations enjoyed by the Germans, French, and Dutch. And international financial markets remain very fearful of our tendency to devalue. As a result, our interest rates have to include a premium against inflationary and devaluationary risk - or, in other words, real interest rates have to be higher here. This has an immediate and direct cost to the taxpayer which it is relatively easy to quantify. Gilt-edged stock (British Government bonds) has consistently yielded 1.5 - 2 percentage points above equivalent German Government bonds over the three and half years since the UK left the ERM. Our public debt is of the order of £350 billion. The cost to the taxpayer of the risk premium demanded by the markets is therefore of the order of £5-7 billion per annum (or 3-4p on the standard rate of income tax).
Much greater still, though obviously less easy to estimate precisely, would be the gain to the economy as a whole of acceding to monetary union. The higher the cost of capital to business the less the investment undertaken and the lower the rate of economic growth - and the resulting wealth gap will of course compound over time. If joining the Euro area brought us a German degree of stability and a German cost of capital to add to our existing economic strengths that would be a historic prize indeed.
However, before we endorse the case for monetary union without further ado the serious arguments that have been raised against the idea must be addressed. Seven main objections to the project have been deployed:
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