August 19, 2002

A Single European Monetary Standard? Forward to 1913!

Daniel Davies has come up with a good solution to the "Should Britain join the Euro zone?" debate. As he points out, signing up for the euro is "...signing up for a currency which is run by the ECB, with an assymmetric inflation target ("below 2%") which is set on purely technocratic basis with no way of changing it by voting.... I don't like the technical design of the ECB's target; I think it has a deflationary bias. Second, I'm worried about the individuals in charge of ECB policy; I think that they have a deflationary bias..."

The pound sterling, on the other hand, is controlled by an institution, the Bank of England, which is ultimately subject to electoral control. It is staffed by skilled technocrats who are not unduly attached to deflation for deflation's sake. And its mandated targets are sensible and sound.

Once he has set out the situation this way, the solution is obvious: "Europe should adopt the pound sterling as its single currency."

:-)


D-squared Digest -- A fat young man without a good word for anyone: I think the problem is that, the idea, in principle, of a single European currency, is a good one. It's cosmopolitan, forward-looking, New Britain, and all the other things that the pro- camp say about it. But it's not possible to have a position on the abstract idea of a single European currency any more; one has to be for or against the only actually existing single European currency, the euro. Which means signing up for a currency which is run by the ECB, with an assymmetric inflation target ("below 2%") which is set on purely technocratic basis with no way of changing it by voting for one party rather than another.

I have a problem with that. First up, I don't like the technical design of the ECB's target; I think it has a deflationary bias. Second, I'm worried about the individuals in charge of ECB policy; I think that they have a deflationary bias. And finally, I remain in the dwindling camp of people who still think that the rate of interest, the rate of inflation and the rate of unemployment in an economy are proper subjects of democratic debate. Don't even get me started on the "stability pact"

...So, I think that there is only one logically and politically consistent policy for me to endorse; the official position of D-squaredDigest is that Europe should adopt the pound sterling as its single currency...

Posted by DeLong at August 19, 2002 12:35 PM | TrackBack

Comments

It depends on the meaning of the phrase 'electoral control' of course, but for years the argument has been (And still is )for "independence" of the C.B., which of course meant independence of politicians and those silly voters who elected them.

Posted by: Atrios on August 19, 2002 12:59 PM

Well, maybe not the pound as a single currency, but in each case the design of the Bank of England for the ECB.

Strange things happens by the way: the ECB is headed by a social-democrat (Duisenberg is a member of the Dutch social-democrats), the FED (more an institution like the Bank of England) by a (former?) pupil of arch-capitalist Ayn Rand.

Posted by: Ivan janssens, Belgium on August 19, 2002 01:01 PM

Duisenberg is a social democrat, but he's also a monetary nutter. (fun fact: Gerda Duisenberg, his wife, has a Palestinian flag in her office window at their house, causing Wim to regularly have to point out that his household, like the EU, doesn't have a single foreign policy). Trichet is an out-and-out socialist, but he's also a monetary nutter; he was the guy behind the "franc fort" policy.

I'd also note that my next policy proposal would be to allow the Japanese and Americans, both of whom appear to be toying with deflation, to join the sterling zone.

Posted by: on August 19, 2002 01:09 PM

Giving up control of monetary policy for the sake of the Euro union could prove a considerable mistake since there is no reason to believe Germany can adopt the flexible employment policies of the Netherlands and so reduce unemployment even with fairly tight monetary policy. Labor does not flow readily though Europe and the unemployment problems of Germany may be increasingly troublesome if the general slowing continues.

Why Central Bankers can so easily dismiss the social concerns of unemployment for the sake of currency valuation is puzzling, but there are many examples.

We do not need deflationary pressure in Europe, since deflation has long been significant in Japan and for the last 8 months in China. We are too close.

Posted by: on August 19, 2002 02:36 PM

I agree that the ECB has some institutional flaws which I think will be fixed as soon as the bank will be regarded as thoroughly non-inflationary. I also think that there are institutional flaws that make this task harder than it could be (eg voting records, publication of minutes, transparency, Trichet/France). It's bad timing, but no pain, no gain. I have doubts on (direct) democratic control of central banks. There are worse problems of democratic deficits in the EU than the ECB.

Posted by: Tobias Schwarz on August 19, 2002 05:44 PM

I agree that the ECB has some institutional flaws which I think will be fixed as soon as the bank will be regarded as thoroughly non-inflationary. I also think that there are institutional flaws that make this task harder than it could be (eg voting records, publication of minutes, transparency, Trichet/France). It's bad timing, but no pain, no gain. I have doubts on (direct) democratic control of central banks. There are worse problems of democratic deficits in the EU than the ECB.

Posted by: Tobias Schwarz on August 19, 2002 05:44 PM

In my view, the (likely) fatal flaw of the common currency is the lack of a common fiscal policy -- sure, there are guidelines, but when push comes to shove, it will be much harder for, say, a high-unemployment rate Portugal, to accept a high rate necessary to tamp down inflationary growth in Italy or Germany. Until the populations support greater central political decisionmaking, I fear a meltdown.

Posted by: Carl on August 19, 2002 08:51 PM

Tobias: why on earth do you regard "Trichet/France" as a difficulty in establishing inflationary credibility? Trichet's record is far more hard-money than anyone else in Europe, including any contemporaneous Bundesbank director. If anyone can point to an occasion on which Trichet ever took risks on the side of inflation rather than deflation, I'd be interested to hear it.

I cannot help but think that there is some sort of "national character" argument going on here; that Trichet is regarded as being intrinsically soft on inflation because he is French, and the French are "socialists", ergo the French are soft on inflation. This syllogism sounds barmy when you set it out in cold print, but something very like it indeed was more or less the entire case against Trichet being made president of the ECB.

Posted by: Daniel Davies on August 19, 2002 11:30 PM

I think we're being a little harsh on the ECB. Its treaty says that its primary objective is maintenance of price stability (which is defined as 'price increases of less than 2%', i.e no deflation allowes) but also it says that without prejudice to this objective, that it will support the general economic policies in the Community. As these are growth and low employement, then essentially we're saying as long as inflation is low then go for growth. Which is the same as the Fed.

As for its supposed lack of transparency, the ECB is the most open central bank in saying how and on what grounds it decides monetary policy (see its publication 'Monetary Policy in the Euro Area). As for voting records, the ECB is a trans-national bank which it is generally agreed needs a non-national setting of monetary policy. Having voting records (such as the BoE) would inevitably put pressure on committee members to vote for their own countries needs, not the euro-area as a whole.

The ECB's deflationary stance is therefore not institutional but due to the monetary policy stance of its members.

Posted by: Matthew Turner on August 20, 2002 01:49 AM

Defining price stability as inflation less than 2% for the Euro block may indeed be excessively restrictive for at least some member countries.

Germans may well regret giving away control of monetary policy when a fiscal stimulus may be difficult.

Why should Germans tolerate high unemployment levels for an arbitrary inflation goal for all Euro countries?

Posted by: on August 20, 2002 09:21 AM

>>Why should Germans tolerate high unemployment levels for an arbitrary inflation goal for all Euro countries?<<

A cynic might say "because the whole miserable regime was their bloody idea in the first place". But that would be excessively harsh.

Posted by: Daniel Davies on August 20, 2002 09:32 AM

I must continue to protest. It is not a 'miserable regime'. With the possible exception of Germany, and then it is detable, it isn't hard to argue that every country in eurozone has a better monetary policy, that is one more suited to its needs, than it had in the year's before the euro was launched.

One only has to look back at the disastrous history of Italian, or Spanish, or French monetary policy in the 1970s or 1980s, or for that matter British monetary policy. Most of the smaller countries either followed the Bundesbank's monetary policy with no say in its making (e.g. Belgium/Netherlands) or they suffered from a lack of monetary credibility (e..g Greece, Ireland)

Posted by: Matthew Turner on August 20, 2002 09:50 AM

So pleasant to criticize Europeans for a while, since they have been making such a point of criticizing us.

Posted by: on August 20, 2002 10:42 AM

What was wrong with French monetary policy in the 1970s and 1980s?

Posted by: Daniel Davies on August 21, 2002 09:03 AM

French monetary policy does not strike me as having been problem other than briefly in 1992 and 1993. The French wished to keep their currency within a band of 15 percentage points. After England let the pound float in 1993, France was forced to follow. Defense of the franc was a mistake for several months.

Posted by: on August 21, 2002 10:08 AM

The last comment is slightly inaccurate. The franc was being kept in a band (technically around the Ecu, but in reality the DM) of 2.25% each way until August 1993 when the band was widened to 15%. It never (unlike Sterling) was left to float without reference bands, although 15% each way is of course rather large.

Posted by: Matthew Turner on August 22, 2002 12:08 AM
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