11 September 1997 - 13 September 1997

The Implications, Within and Beyond Europe, of Prospective Monetary Union

Chair: Professor Dr Reimut Jochimsen

We began Ditchley’s 1997/98 programme with an exploration of the project currently dominating politico- economic debate within Europe. Monetary union was a massive adventure, driven by deep political commitment in key countries; but it could not be assessed in political terms alone. It stood to have far-reaching and lasting practical economic consequences of a kind, scale and complexity that political will could not simply command. We took it however as a (provisional) given that the enterprise would go ahead - as indeed most estimates of probability strongly suggested at the time of our meeting - and sought to probe its nature and effects.

The going-ahead seemed certain to reflect some relaxation of the strict economic criteria envisaged in 1991 at Maastricht. The abortive German foray in respect of gold reserves had anyway made full rigour - as for example through the exclusion of Italy - impossible, and not even Germany and France themselves would meet the letter of the criteria in every respect. The prospect now was for a monetary union with about eleven member countries, still proceeding to the original timetable. A union of this breadth would entail more internal economic risk than a narrower one, but it should command stronger political confidence and support. Several conference participants believed that there had already been healthy economic convergence and stability-improvement that should ease earlier worries about national indiscipline, and the EMU timetable now looked to fit felicitously into a cyclical upswing for the majority. It was argued also - again contrarily to much previously-received wisdom - that a wide Euro need not be a soft one. It would span a very large market and so probably come to be much in demand as an international reserve currency; moreover, the new European Central Bank was likely, for its own credibility (especially in Germany) against the earlier fears, to set its standards at levels that guarded firmly against softness.

The performance of the ECB was plainly of crucial importance. The selection of individual members would matter a great deal. Some participants felt confident that the ECB’s highly-concentrated remit to maintain monetary stability, coupled with substantial fixed terms of membership tenure, would lead to a robust independence and a Europe-wide focus following sectoral rather than national lines of policy consideration, and would preserve the ability - essential to the adequate management of a currency - to respond fast and decisively to changing circumstances. Others, less sanguine, judged that it would be humanly impossible for individual ECB members to avoid entirely the role of national champion - especially since the data available to the ECB would primarily be nationally derived and compartmented - and that the absence of an established and coherent environment of political support such as the Bundesbank enjoyed to act as shock-absorber in difficult times might make pressures of scapegoating complaint about unaccountable power hard to hold off. It was evident, on either view, that the ECB would need to develop swiftly mechanisms both to explain itself effectively to the public (as also to the European Parliament) and to interact well with national governments, for example in ECOFIN. ECOFIN itself would have to improve its working both in dialogue with the ECB and in mediating likely tensions among nations, for example over the stronger interactions which EMU would generate between national fiscal decisions.

What would be the effects upon national economies of a single currency, centrally operated with an overriding concern for anti-inflationary stability across a wide and diverse area? The removal of revaluation/devaluation from the array of instruments available to governments would place heavier burdens on the rest of the array; and it was largely in the evolving experience of this new situation that the monetary-union project would be brought to account. Most of us doubted whether the direct economic effects of EMU itself were of first-order importance in fostering overall growth - consistent low-inflation low-deficit policies were more significant. But national publics (who mostly had no great enthusiasm for EMU, often seeing it as just one more arcane élite-driven piece of Euro-engineering) would quickly feel the effects if the strain of asymmetric economic setbacks within the currency zone, of a kind that would once have been tackled with the help of devaluation - a world decline in prices for products on which one country was especially dependent, for example - had to be taken by labour markets that were still, in much of Europe, notably rigid by “Anglo-Saxon” or “Asian-tiger” standards. Within economies managed by national governments, as in the United States and Canada, shocks could be cushioned by fiscal transfers and by labour mobility. For the European Union, however, the realistic scope for fiscal transfers, whether of cyclical or of structural rationale, would be much more limited, especially if high ECB-set interest rates to maintain stability intensified national fiscal problems; and both long habit and language difference severely restricted the mobility of European labour. The risk was accordingly that adjustment would perforce be concentrated upon reducing wages or increasing unemployment; and such effects might raise political temperatures very sharply. Successful diversification - perhaps based upon heightened labour-force skills - might offer alleviation, but it was not easy to see this as a ready general instrument in the nearer term. Governments would find themselves compelled to face up to extensive structural reform - a very salutary development, several participants believed, though others were uneasy (given the difficulty some countries had already found in such reform, and the massive problems of ageing populations and mounting healthcare costs that weighed more and more heavily) that popular discontent might fuel forces of protectionism and illiberalism, with EMU and the EU enterprise as a whole placed in the dock.

What direct and early benefits might EMU bring? Optimists hoped that increased transparency in comparative costs would generate more efficient Europe-wide specialisation, less compartmentalisation of markets and thus better competitiveness; sceptics were less sure, and feared even that in matters like wage-setting and price-rounding transparency might impel costs in the wrong direction. All agreed however that there ought to be savings in transaction costs and through increased cost certainty within the zone of the Euro; publics might moreover increasingly come to welcome its convenience. EMU would in such ways be a useful reinforcement to the development of the single European market (though we were warned of the dangers of suggesting that EMU was actually vital to the single market - it was not, and presenting it thus would risk feeding the fears of Eurosceptics who suspected it as being part of an inexorable momentum towards a “federalist” destination).

There was - so it was vigorously urged - already a clamant need to loosen and expand capital markets in Europe (proportionately much smaller than in the United States in aggregate amount) and to ease the path to investment in enterprise. EMU, on this view, should rapidly have a salutary effect in making capital flows more efficient, in integrating markets and in enhancing volumes (perhaps thereby, through capital mobility, easing pressures for labour mobility).

As we turned to the external effects of EMU we were reminded that there was no likelihood of the United Kingdom’s joining at the outset - the new Government had made this clear, not least by its commitment to a prior nationwide referendum on the issue. Some participants saw considerable risk to UK interests, through loss of influence, in any long absence from or ambivalence about the project. Others noted that UK participation or abstention was bound to be significant for the long-term strength of the Euro. In any event, initial UK absence would underline the importance and complexity of relationships within Europe (not just in the current EU) between EMU “ins” and “outs”. There would have to be some understanding about monetary policies, though the closer convergence recently achieved might in practice make tensions less acute than seemed likely a year or two ago.

How would and should North America view all this? Interest there had mostly been low but seemed now to be rising, for example in the US Congress. Most of us were minded to discount once-fashionable hints of a damaging contest of prestige or hegemony between the US dollar and the Euro. Such considerations seemed of healthily little concern either to policy-makers or to publics. Given, as seemed likely for intrinsic reasons, an initial relativity for the Euro that did not attempt to confer upon Europe an unreasonable trade advantage, there was no reason for serious conflict. Both the US dollar and the Euro would be large enough for external parities to be of fairly modest significance for anti-inflationary policy: and the ECB’s remit was focused strictly upon internal stability, so that there should be no urge towards manipulating the Euro for external political ends. On a wider canvas, North American interest in the health of the global economic and trading system must point towards concern that EMU, once embarked upon, should work well.

We knew that the period of transition from national currencies to the Euro would be testing. Technical preparations, we were told, were in good general shape (though we heard an apprehensive voice about the demands on information-technology skills and capacity alongside the Year 2000 problem). Might there be serious turmoil and destabilising speculation in the currency markets during the successive 1998 phases as membership was determined and parities were set before the ECB could take charge? Most who commented thought that this risk was not grave, on the crucial proviso that EMU was not expected to and did not actually fail after introduction. But we were aware of a salutary undercurrent of reminder that - to a degree new since 1991, and not yet wholly familiar to all European governments - financial markets were a key arbiter, and issues like conversion rates must be settled in ways that they would find credible.

We touched briefly on the hypotheses of delay, and of downright failure. There remained a substantial strand of opinion that the pace of EMU was needlessly fast, that so important an enterprise needed measured patience, and that in practical economic terms delay would be prudent. The majority opinion was however that, for good or ill, the political content of the enterprise was so high and the political commitment to the present timetable so strong that (quite apart from the technical turbulence that backtracking now would cause) delay could now happen only in circumstances probably pointing towards effective abandonment As to failure, we knew that monetary divorces were not unknown to history, and our discussion had constantly warned us of the magnitude if not the exact character of the strains that might lie ahead for EMU; but in political terms failure would be so huge a calamity for Europe that governments would surely make vast efforts to ensure that it was averted.

We talked in general terms about what EMU and its various possible gradations of outcome might mean for the “Europe” movement as a whole. The degree of its prospering would clearly have repercussions upon how further cooperative endeavour in other fields was viewed; and its operation would certainly reinforce the habit of dialogue among its participating states. A touch of unease was expressed - but contested - on whether its introduction would delay or make more difficult the embrace of ex-Communist countries into the EU. We found no consensus on how far it would contribute to creating a common long-term political consciousness adequate to support a step-change in such fields as defence and security.

Any overview comment on the sense of the conference would be hazardous. There was perhaps to be seen a rather stronger expectation that EMU would happen on time, and that it would on balance work well rather than ill, than a gathering like this might have reached a year ago. But we all acknowledged that there remained wide uncertainties which only events could resolve; and there were bound to be surprises yet to come. Europe’s agenda was already heavily loaded in several ways, and the ability of political leadership to explain, to manage and to prioritise would without doubt be fully tested.

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

Chairman: Professor Dr Reimut Jochimsen
President, Landeszentralbank in Nordrhein-Westfalen; member,Council of the German Central Bank


Mr Peter Macfarlane
First Secretary, Australian High Commission, London

Mr Peter Cook
European columnist and Chef de Bureau (UE), Brussels, The Globe and Mail
Professor David Laidler FRSC
Professor of Economics, University of Western Ontario
Dr John McCallum
Senior Vice-President and Chief Economist, Royal Bank of Canada

The Rt Hon Sir Leon Brittan QC
Vice-President of the European Commission

HE Ambassador Pertti Salolainen
Ambassador of Finland to the Court of St James’s

Monsieur Jean Pisani-Ferry
Cabinet du Ministre de l’Economie, des Finances et de 1’Industrie
Monsieur Armand Pujal
Deputy General Manager, Foreign Department, Banque de France

Dr Kai M Schellhorn
Member, Board of Directors, Herbert Quandt Stiftung, München

Sir Samuel Brittan
Principal Economic Commentator and Assistant Editor, The Financial Times
Sir Nigel Broomfield KCMG
Ambassador to Germany (1993-97)
Sir Roy Denman KCB CMG
Consultant in international trade
Mr Martin Donnelly
Head, EMU Team, HM Treasury
Mr John Flemming FBA
Warden, Wadham College, Oxford; Executive Director, Bank of England (1988-91)
The Rt Hon Lord Howell of Guildford PC
Life Peer (Conservative); Chairman, House of Commons Select Committee on Foreign Affairs (1987-97)
Dr Kirsty Hughes
Head, European Programme, The Royal Institute of International Affairs
Dr DeAnne Julius
Member, Monetary Policy Committee, Bank of England
Mr Anatole Kaletsky
Economic Editor and Associate Editor, The Times
Mr Giles Keating
Chief Economist and Managing Director, Credit Suisse First Boston (Europe)
Mr Paul Lever CMG
Deputy Under-Secretary of State (Director for European Union and Economic Affairs), Foreign and Commonwealth Office; Ambassador designate to Germany
Sir Christopher Mallaby GCMG GCVO
Ambassador to France (1993-96) and to Germany (1988-92)
Mr David Marsh
Director European Strategy, Robert Fleming Securities Limited
Sir Bryan Nicholson
Lately Chairman, Confederation of British Industry; President, British United Provident Association
Professor Richard Portes

Professor of Economics, London Business School
Lord Tugendhat
Chairman, Abbey National pic
Mr David Willetts MP
Opposition Front Bench spokesman on Employment

Mr Robert M Conway
Limited Partner, Goldman Sachs International
Dr Arthur I Cyr
President, World Trade Center, Chicago
Dr Betty C Daniel
Professor of Economics, The State University of New York at Albany

Dr Marvin H Kosters
Resident Scholar and Director, American Enterprise Institute for Public Policy Research The ~
Honorable June E O’Neill

Director, Congressional Budget Office, Washington DC
Ms Therese Raphael
Editorial Page Editor, The Wall Street Journal Europe