*Secretary General of the Ecu Banking Association
Dismissing the Delors Committee's approach to the implementation of the European monetary union, the U.K. Treasury's November 1989 paper purports to propose an alternative way to realize that objective,
But the U.K. paper does more than just propose another
method ; it also proposes another objective.
COMPARISON BETWEEN THE TWO DEFINITIONS OF A MONETARY UNION.
Indeed, in the Delors report, a monetary union is defined as:
- the complete liberalization of capital transactions and full integration of banking and other financial markets;
- the elimination of margins of fluctuation and the irrevocable locking of exchange rate parities, followed as soon as possible by the replacement of the national currencies by a single currency.
- lower costs of financial transactions, especially across borders ;
- equal access to financial instruments and services for all citizens and other borrowers and lenders within the Community.
In fact, price and currency stability is the objective that was assigned to the E.M.S. in precise terms by its founders in 1978. The System has been rather successful in reaching this goal : the stability of the E.R.M. currencies is remarkable as their parities have remained unchanged over the last three years. However nobody equates these results, however satisfactory, with a state of monetary union.
The UK's opting-out of what constitutes the essence of a monetary union (i.e. locked parities) obviously derives from the intent to maintain an exchange rate " exit " if and when the monetary policy constraints resulting from its own alternative approach should, for some reason, come to be viewed as unacceptable. But this would not necessarily be at odds with its objective of currency stability which, as various official statements have shown, is a concept that allows for a quite significant degree of currency variability.
The message is clear : a Member State that wants to " keep its hands free " in monetary policy matters cannot commit itself to the irrevocable exchange rate fixity and ultimately the introduction of a single currency that the other Members of the Community, endorsing the Delors Report, view as being constitutive elements of a monetary union.
The approach outlined in the U.K. paper to achieve the
low-key goal of price and currency stability is centred upon national monetary
authorities and rejects the creation of a European central bank. It " maintains
national monetary policies within the context of a strengthening E.R.M.,
and allows currencies to compete to provide the non-inflationary anchor
in the European Monetary System " (§ 35).
MEASURES TO FOSTER CURRENCY COMPETITION.
In order to foster currency competition, two types of measure are proposed
- the reduction in costs and inconvenience of changing between Community currencies i.e. through simplification of cheque clearing systems, the introduction of electronic value-added networks, competitive commission charges by banks and ... greater use of the private Ecu (§ 22).
So far so good. The problem is that it does not seem to go any further.
Admittedly, the implementation of these measures would
increase somewhat the competition between currencies that will take place
anyway when the internal market and the freedom of capital movements and
of financial services become a reality. But that would not represent any
quantum jump beyond what is already in the works for the first stage of
LEVELS OF CURRENCY COMPETITION.
To clarify this point, it might be useful to recall that currency competition may exist at two levels.
Any currency is in the first place a national currency, endowed by the national authorities with a monopoly position within the national borders : consequently, between residents of a given country, the currency used for pricing and payment purposes has to be the national currency or, at least, it can be tendered in discharge of any debt (legal tender). At present, currency competition at the national level is either prohibited (e.g. Germany, France) or, where possible to some extent (e.g. U.K.), non-existent.
Beyond their national functions, some currencies have also taken on an international role. They are used for the pricing, invoicing, financing and payment of international transactions i.e. transactions between residents of different currency areas. At the international level, the currency choice is made by the private market operators. A national authority cannot impose the cross-border use of its currency. However, it may distort international currency competition by restricting residents' access to foreign currency assets or non-residents' access to domestic currency liabilities.
The liberalization of capital movements and of financial services, complemented or not with the British measures, will eliminate these distortions and make all EEC currencies in all Member States equally available. In other words, the economic agents in each Member State will be free to use any of the twelve EEC currencies for the pricing, financing and payment of their cross-border commercial and financial transactions with operators in any other Member State (1). But equality of choice will not necessarily result in equality of use. Indeed, for reasons of efficiency and cost reduction, business corporations, becoming increasingly " Europeanised " will quite naturally tend to cut down on the number of currencies they use for their intra-community transactions. Competition between currencies - or rather between the various national banking sectors that now have free access to each other's markets - will most likely favour the currencies with a proven stability record and backed by a large economic and financial base. Not many EEC currencies qualify on all these accounts. Consequently, the DM might very well reinforce its position as the main vehicle currency for intra-community transactions.
Turning now to currency competition at the national level, it is clear that neither the financial liberalization measures prescribed by the intemal market programme or the specific additional measures proposed in the U.K. paper will foster it to any significant extent. In fact, by implementing the Community's liberalization measures, the lagging member States will catch up with the freedom of capital movements that has already been in existence for quite some time in the U.K. as well as in Germany and the Netherlands, and in the U.S. for that matter. So far nobody is aware of any noteworthy use of the DM or Dollar between British residents or of the Pound Sterling or Dollar on the German domestic market. For Germany, there is a good reason : it is simply not allowed. The U.K. displays some tolerance but, obviously, the market has not taken advantage of it.
In summary, in each Member State, the national currency
has a quasi monopoly position as a denominator of prices and as a means
of payment on its domestic market. Indeed, consumer protection has made
it compulsory to express retail prices in the national currency ; social
security and labour laws equally impose the use of the national currency
; the various State authorities in their domestic dealings quite naturally
pay and expect to be paid (income tax, VAT) in the national currency and,
finally, the national currency is legal tender, i.e. any holder has the
right to tender it in discharge of any debt vis-à-vis a resident.
EXTENSION OF THE MONOPOLY USES OF THE NATIONAL CURRENCY.
In order to allow all Community currencies to compete freely and effectively in each other's national currency area, each Member State would have to extend the monopoly uses that are the preserve of its own currency - including legal tender - to all other Community currencies. Competition would then ensure that, in the end, the best managed currency would emerge as the " de facto " European common currency.
If this is what seems to be envisaged in the U.K. paper - though, admittedly, oral declarations have been more explicit than the paper itself - one could question this approach on both operational and logical grounds.
Indeed, merging the existing twelve single currency areas into a Community-wide twelve currency area with twelve central banks competing to " stay in business " and using interest and exchange rate changes to do so, would seem a rather disorderly way to proceed. All the more so since national economic policy would be confronted with new challenges in the countries where prices and wages would be expressed in a variety of currencies whose exchange rate would not necessarily be fixed.
But here again, equal treatment would not mean equal use. If domestic currency competition were to be initiated, one might expect its consequences to be one-way : a few major currencies, or possibly only one, would pervade, to a varying extent, the national currency areas of the other Member States.
This prospect raises an important question : why should the abandonment of monetary sovereignty to a foreign central bank induced by market forces be more acceptable to the political authorities than the decision to pool monetary competencies in a jointly managed European central bank system ?
However, the question may be premature. As of yet, the U.K. does not seem to have envisaged giving a totally free hand to private market forces. Indeed, the proposal in the U.K. paper for currency competition is a qualified one: that is, to remove the " unnecessary " restrictions on the use of Community currencies.
Whatever may be the correct interpretation of the scope
of the U.K. approach, it is clear from the foregoing that it cannot be
considered as an alternative to the Delors Committee's approach.
A USEFUL BLENDING OF THE TWO APPROACHES.
Nevertheless, a useful blending of the two approaches could be considered in two areas
- the role of market forces. The Delors Committee's approach is strictly institutional : monetary union is to be decided and implemented by the national authorities, not by market forces. The U.K. paper takes exactly the opposite stance.
- the use of the Ecu. The Delors Committee effectively postpones the development of the Ecu until the last stage of the monetary unification process. The U.K. paper envisages an expanding role for the Ecu in the first stage.
Whether one likes it or not, private market forces are going to play a role in the process of monetary union. But left to itself, currency competition within the European internal market could lead to the emergence of a national currency as the main vehicle currency on that market. This would be politically undesirable and operationally unwarranted if, as stated in the Delors Committee's report, it is the Ecu that should ultimately become Europe's single currency.
So far the ECU's development on the private market has been promising. It should be kept on track towards its ultimate goal. This requires official action : Member States - on a individual basis - should allow the Ecu - but only the Ecu - to enter progressively into competition with their own currencies in their respective national uses. Initial initiatives could consist in granting European multinationals the right to issues shares in Ecu, allowing VAT on imports to be paid in Ecu, using the Ecu as the denominator and payment currency for international tenders by the authorities, allowing Ecu quotations on the national stock markets ... Such an approach would confirm the ECU's candidacy as Europe's future currency and consequently have a sense of purpose that is lacking in the British proposals. It would nonetheless be compatible with the present U.K. stand on monetary union, at least as long as the Ecu remains a basket of the Community currencies. As such, the Ecu is a pure market instrument whose development depends on its appeal in terms of exchange - and interest rate stability. These qualities are determined by the success of the monetary policy co-ordination in the European monetary system. As for the official measures proposed, they should broaden the extent to which the Ecu would be able to respond to market demand.
Greater stability; through a strengthened E.M.S. and enlarged
usability should both contribute to give the Ecu - a currency without a
home base so far - a chance to occupy the pole-position in the upcoming
European currency race.