30 March 1990 - 01 April 1990

Monetary Union and the Single Market

Chair: The Rt Hon Sir Michael Palliser GCMG

This conference coincided with the meeting of Finance Ministers in Ireland to discuss the latest version of the Delors proposals. Given this clash, we were fortunate to have with us such a distinguished and knowledgeable group from nine countries, four within the Community and five outside it. By ill-luck however an unusually high number of participants had to cry off through illness.

The meeting, for once, followed closely the terms of reference: my note will therefore take the seven questions posed there in turn and conclude with some general comments.

Does a single market require the establishment of permanently fixed exchange rates or a single currency? No; but differing exchange rates were the last non-tariff barrier. Moreover, once irrevocably fixed exchange rates were established, there was no advantage in not going to a single currency, if the full benefits of a single market were to be reaped. There was some debate about the level of transaction costs involved in differing exchange rates, most bankers believing they were smaller than the estimates of the Commission. It was claimed that in any case business would benefit from being allowed to keep its accounts in ECUs, for example, even to-day, though the point was also made that there would be costs both in running a thirteenth currency and in converting to a single currency.

Could fixed exchange rates be achieved by a development of the European Monetary System? Is there a role for an outside standard? This highlighted two different approaches: supporters of the Delors proposals were sceptical of the possibility of achieving irrevocably fixed exchange rates by an evolutionary process based on the E.M.S.; those sceptical of the Delors proposals, on the other hand, argued that evolution, by competing monetary policies within the E.M.S., would tend to produce narrower bands and ultimately fixed exchange rates, and that such a system, tied as it would be to the central bank delivering the greatest price stability (currently the Bundesbank) would tend to be less inflationary than a centrally-managed policy representing a compromise between the stern and the less stern. This conflict was unresolved, and critics of the evolutionary approach characterised it as going no further than Delors Stage I. There was general agreement however that while an outside standard might be desirable, it was not easy to devise one.

Does a single currency require single central bank to manage it? Who controls foreign exchange holdings? The answer was clearly yes to the first question (the Euro Fed perhaps); and to the second, that at least a proportion of national reserves would have to be transferred to such a central authority.

Should a central monetary authority be autonomous: and if not, what manner of democratic accountability could be applied? It was agreed that price stability, which was owed by a democratic government to its public, was most likely to be achieved by a monetary authority enjoying a considerable degree of independence. Various models were considered: the Bundesbank, established by law, operating by law and subject to control by law, was probably the most admired. The more elaborate and conspicuous the mechanism of accountability, to the European Parliament, to national parliaments, to the Commission, to the Council of Ministers, the less would be the authority’s credibility in the market. Managing monetary policy so as to achieve price stability, however that might be defined, within a macro-economic policy laid down by the political authorities was, with acting as banker to government, the one essential task for a central bank. Other responsibilities could be added, notably, and probably desirably, assuring the integrity of the banking system by regulation and supervision of the banking system, a role in the general supervision of financial services, and the role offender of last resort. Not all central banks had the full range of responsibilities and the principle of subsidiarity, much quoted during the weekend, had to be observed. Accountability to parliament might be achieved e.g. by regular meetings with the European and national parliaments, or, less onerously and therefore with enhanced credibility, by, e.g., appearances before a specialist committee of a newly-created European Senate.

Does monetary union require close alignment of fiscal and economic policies among the member states? No, but there would have to be co-ordination, perhaps through individual self-imposed guide-lines, approved collectively, designed to curb excessive deficits or surpluses. Monetary financing of deficits and ‘bailing out’ (not including regional aid) must be banned.

The implications for European monetary union of German monetary union. Surprisingly perhaps, this was not discussed in depth. It was stated and accepted that the process of German monetary union was unique - the take-over of the Ostmark by the Deutschmark, with no established exchange rate - and did not conflict with the aim of European monetary union.

Is monetary union possible without a larger central budget than the current Community budget? It was agreed that there would have to be some increase in the Community’s structural funds, but disagreement about the measure. Some argued that the “exchange rate weapon” was no longer usable or effective, so there need be no compensation for its loss; others that in extremis, exchange rates could be used to cushion shocks and that, compensation apart, there was a real risk in a regime of fixed exchange rates or a single currency, that whole countries, not merely regions, might suffer severe recessionary effects which could only be alleviated by migration, which might be unacceptable, or by structural help, including perhaps a Community unemployment fund. In that case doubling the resources available from one third of one percent of GDP, as envisaged in the Commission’s proposals, would not be enough - 5-8% of GDP might be nearer the mark, despite the political difficulties involved. An increase on that scale might also allay the anxieties of the hesitant.

In general, all agreed that monetary union was an inevitable and, despite some sceptics, desirable outcome. While the Delors proposals, as revised, were the only viable scheme now under discussion, there could well be scope for adaptation of particular provisions (there was some trans-Atlantic advice on the need for flexibility to meet unforeseen problems).

Underlying the whole debate, at Ditchley and elsewhere, was the question whether the ultimate and hidden objective was not political union, and, if so, what that was thought to involve. Some thought that in logic the two objectives must be linked and argued that it was the political perception of the need for a politically united Europe, involving joint effort in all areas of common concern e.g. trade, foreign policy and defence, which was driving the train of monetary union. While there might be pressure for that train to move off without waiting for those who failed or declined to catch it, the point was made that there would have to be provision for others, including late-comers, to join at subsequent stations, if the Community was ever to consider enlargement.

How would the establishment of the E.M.U. affect the rest of the world? Here it was of interest that the same thought was aired that surfaced in the conference in February on international decision-making in the economic field, namely that a G3 of the dollar, yen and ECU authorities might emerge as a firm base for managing the world’s money. Some fear was expressed that the E.M.U. might be more protectionist than the existing Community members and that for that reason, and because the Europeans were distracted by the E.M.U. process, the success of the Uruguay Round was crucial but might be in jeopardy. On the whole the conference was reassured on both scores.

If there was one conclusion, though probably not unanimous, it was that Britain should join the Exchange Rate Mechanism as soon as possible, so as to become fully involved in the discussion of the processes leading to the E.M.U. and participants were heartened on that score by the news from Ireland.

This Note reflects the Director's personal impressions of the conference. No participant is in any way committed to its content or expression. 

Conference Chairman: The Rt Hon Sir Michael Palliser GCMG
Deputy Chairman, Midland Bank Group (1987-); Chairman, Samuel Montagu & Co Ltd, Chairman, Council of the International Institute for Strategic Studies; a Governor and Member of Council of Management, Ditchley Foundation.


Mr Edwin F Delofski

Minister (Economic), Australian High Commission, London

Mr David Brice

Senior Executive, National Westminster Bank pic.
Mr Samuel Brittan
Principal Economic Commentator and Assistant Editor, Financial Times; author; Hon. Fellow, Jesus College, Cambridge; member, Ditchley Foundation Programme Committee
Mr Andrew Crockett
Executive Director, Bank of England
Mr John Eatwell
Fellow of Trinity College, Cambridge; Economic Advisor to the Leader of the Labour Party
Mr Brian J P Fall CMG
High Commissioner, Ottawa
Mr Christopher Johnson
Chief Economic Adviser, Lloyds Bank pic; Visiting Professor of Economics, Surrey University; Chairman, Executive Committees, Institute for Fiscal Studies and the Employment Institute; Member, Economic Situation & Europe Committees of the Confederation of British Industry (CBI); Member, Council, Royal Economic Society, Royal Institute of International Affairs
Mr William Keegan
Economics Editor, The Observer
Miss Lucy Kellaway
Correspondent, Financial Times, Brussels
Sir Donald MacDougall CBE FBA
Economist; author; Hon Fellow, Nuffield College and Wadham College, Oxford
Mr Peter Morgan
Director General, Institute of Directors
Mr John A Morrell
Director, Baring Asset Management Ltd; Chairman, Baring International Investment Ltd; a Governor, Ditchley Foundation
Mr J C Odling-Smee
Deputy Chief Economic Adviser, HM Treasury
Mr Christopher Redman
Paris Bureau Chief, Time Magazine
Mr C W Roberts CB
Deputy Secretary, Department of Trade and Industry; Chief Executive, British Overseas Trade Board
Lord Williams of Elvel CBE
Life Peer (Labour); Opposition Spokesman on Trade and Industry, House of Lords and on Energy

Mr Fred Gorbet

Deputy Minister, Department of Finance

M Herv
é Carré
Head of Division, Directorate D, EMS, ECU and foreign exchange markets, Directorate-General II (Economic and Financial Affairs), Commission of the European Community

M Philippe Lagayette

First Deputy Governor, Bank of France
M François Lagrange
Vice Chairman and Director, Credit National, Paris

Dr Michael Endres

Member of the Board, Deutsche Bank, Frankfurt am Main
Mr Daniel Gros
Senior Research Fellow, Centre for European Policy Studies, Brussels
Professor Dr Helmut Schlesinger
Deputy Governor, Deutsche Bundesbank

Mr Koei Narusawa

Economic Adviser to the President, Bank of Tokyo, Tokyo

HE Mr Bryce Harland

New Zealand High Commissioner, London

Dr Huib J Muller

Director, De Nederlandsche Bank NV, Amsterdam

Mr Jeffrey Garten

Managing Director, The Stamford Company, Investment Bankers, New York; Adjunct Professor of Political Economy, New York University; member, Advisory Council, American Ditchley Foundation
The Hon H Robert Heller
Executive Vice President, Visa International, San Mateo, California
Mr Robert Kuttner
Journalist, The New Republic; Columnist, Business Week; Kennedy Fellow, Institute of Politics, Harvard University; Woodrow Wilson Fellow, University of California at Berkeley
Senator William Roth Jr
Member 90th-91st congresses at large from Delaware; Senator from Delaware; Member, Finance and Government Affairs committees, Joint Economic Committee
Mr Scott Sullivan
European Editor, Newsweek International Paris