European Monetary System

Part of the debate – in the House of Commons at 12:00 am on 29th November 1978.

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Photo of Mr Frank Hooley Mr Frank Hooley , Sheffield, Heeley 12:00 am, 29th November 1978

I was much impressed by the critical analysis of the EMS proposition by the hon. Member for Croydon, Central (Mr. Moore). I was particularly interested in his use of the word"myth"as he touched on the various misconceptions—six, I think—which he catalogued.

What strikes me most about the EMS is that it is yet another addition to European mythology. The first great myth was that this common market of 250 million customers would provide a great dynamic for the United Kingdom economy and a great impetus to British business men to modernise their businesses and build up our economy. In fact, nothing of the sort has happened, as the anti-Marketeers prophesied and contrary to all the arguments of those who were so passionately anxious to get us into Europe.

We have had the oil crisis, the commodity price explosion, the worst inflation since the war and mass unemployment. We had a balance of payments crisis in 1976. We had a plunge in sterling in 1976. Far from assisting us with these various problems, the CAP has aggravated our inflation by its dear food policy. The budget is unfair since it places on our balance of payments a strain that will grow and grow.

I am particularly sensitive about this since I have been involved in an argument about the special steel industry in Sheffield, which is being destroyed by German dumping against which we have no defences. Our lack of defences in terms of protecting industries has also aggravated our problems.

The pro-Marketeers will say that this is grossly unfair because Europe was responsible neither for the oil crisis nor for the commodity explosion. That is true. But this great common market of 250 million customers has done absolutely nothing to protect us from those disasters. There are certain aspects of the Community's structure which are to our dis- advantage and which deprive,us from taking sufficient action to protect ourselves.

The first myth was that business men were going out to this great market with vast investment and making dynamic sales. But, apparently, those unfortunate business men, who were referred to rather disparagingly in the quotation from Keynes, do not understand or cannot cope with currency fluctuations.

The second myth is that we must have a zone of monetary stability which will be achieved by the European monetary system. It is not to be a zone of full employment or a zone of economic growth. On the contrary, the zone of monetary stability could easily drift into being a zone of economic stagnation and indefinite high unemployment.

I have not the technical capacity to follow all the arguments in detail, but I believe that the hon. Member for Croydon, Central hinted at something of that kind. He and others said that the notion of a zone of economic stagnation could be compensated for by the United Kingdom becoming the remittance man of Europe by a supplementary benefit which would be paid by Germany to the United Kingdom. That is not a particularly agreeable prospect; nor would it solve our economic problem.

What determines the relative exchange rate? I agree with the hon. Member for Croydon, Central that it is determined basically by the real economic performance of a particular country, plus, of course, natural resources when a country has them. We have oil and natural gas, which have an impact on our ability on the exchange rate. One of the reasons why Holland is able to stay with the snake is because it has enormous reserves of natural gas which boost its economy.

The strength of the yen and the deutschemark have nothing to do with monetary management or currency manipulation. They are based entirely on the enormous productive capacity and high efficiency of German and Japanese industry. The European monetary committee accepted this when it said that for the EMS to work at all there would have to be what it called"economic convergence ". In other words, it said that the strength of the real economies of the member States would have to approximate more closely to one another or the scheme could not work.

If the real economic performance determines relative exchange rates, why have we had this problem of violent fluctuations which has vexed the Europeans? The real economy does not jerk that much from year to year, either in the United States or in this country. Why, then, were there such enormous fluctuations in sterling in 1976 and in the dollar in 1978?

It is interesting on this point to quote the Green Paper. In paragraph 5 it states: Currency movements have often been greater than was justified by the underlying economic situation, as with sterling and the dollar in some recent periods", which is correct. It continues: This has been facilitated by the great increase in the volume of mobile funds. That is most important.

There are huge footloose capital sums which can be shunted in and out of the different currencies. It is the shunting of these enormous sums, which, I gather, could amount to about $6 billion, which causes the fluctuations. As the hon. Member for Croydon, Central pointed out, a lot of the money is oil money or money under the control of multinational companies. The hon. Member seemed to suggest that it was perfectly proper and reasonable for these companies to shunt the money around, presumably on interest rate or other calculations. But, while that might be reasonable from the point of view of financial interests, it is extremely damaging and disruptive to the individual countries and their currencies.

The curiosity in the Green Paper is that although the sentence refers to the volume of mobile funds, which are at the root of international currency difficulties, it says little more about them apart from paragraph 23, which touches on the point about international monetary co-operation beyond the confines of Europe. The Green Paper says that: the UK would like to see a positive approach to the relationship of the EMS to other main currencies, including the dollar, and to the international monetary system as a whole. That is fair enough, and one could hardly quarrel with it. But the final sentence is significant: There has so far been little discussion of this problem. The designers of the EMS are not interested in that problem and do not see their mechanism as leading to a genuine reform of the international monetary system. Indeed, it cannot do so, because the resources of the EMS are in no way large enough—not even the $25 billion—to cope with the footloose capital sums that are being shunted around the currency markets.

It has been suggested by some hon. Members, and it might be suggested by my hon. Friend the Chancellor of the Duchy of Lancaster, that the EMS is a stage on the way to a more rational and stable international monetary system. I contest that on political and practical grounds.

In practical terms, there is no evidence that the creation of the Common Market as a single market has in any way contributed to international co-operation in GATT on trade matters. On the contrary, it has developed three powerful groups at enmity with one another. They are the Common Market, the Americans and the dollar, and the Third world, which is attempting to get something out of the deal in the Tokyo round.

So far from the Common Market having led to greater co-operation and understanding through GATT, it has exacerbated quarrels and arguments. It has imported into the argument a much more bitter, restrictive and selfish attitude towards the Third world, particularly on matters such as the import of textiles, preferences and so on.

I believe that if the EMS came into being it would import into the argument about international monetary reform and the development of the IMF the same kind of bloc mentality. We know perfectly well that Chancellor Schmidt and President Giscard d'Estaing have nothing but contempt for Carter and detest the dollar. Part of their political aim—I do not suggest that it is necessarily their economic aim—is to build a bloc that they think will stand up to the dollar and make them independent of fluctuations and movements of the dollar. There is no intention behind the EMS scheme to move towards a genuine reform of the international monetary system.

If we want to defeat the violent fluctuations of currency—I accept entirely the view that there has to be a process of gradual alignment, of shifting up and down without complete floating—both, as it were, on a day-to-day basis and in the long term, the alignment will be forced to take place in terms of the comparative strength of the real economies of, for example, Britain, the United States, Germany and Japan. Of course, there will be a realignment.

If we want to get rid of the violent short-term fluctuations which, I understand, part of the EMS is about, we have to act through the IMF and through the use of the special drawing rights. We must create a genuine international monetary reserve that is powerful enough to deal with the huge offshore dollar sums which are shunted around the international economy and cause currency disruption. The EMS is never likely to be powerful enough to deal with that problem. In so far as it is conceived in antagonism to the dollar, it is more likely to aggravate the problem than to provide a political solution.

As for our domestic activities, I think that the final paragraph of the Green Paper is right. Paragraph 46 states: The Government will vigorously pursue policies which are necessary for improving growth and reducing unemployment. The foundation for these policies must be an improvement in our industrial performance and victory in the battle against inflation. Only these can provide a lasting basis for stability of the exchange rate. That is perfectly correct.

I offer three suggestions for the wider problems of the exchanges and the recession that is now afflicting the Western world. We shall not get ourselves out of the present level of stagnation without a massive transfer of funds from North to South. There will have to be a massive aid programme in the wealthy industrial world to assist the Third world. It will have to be something on the scale of the Marshall plan. The Americans were wise enough to realise that that was the solution in the immediate post-war period in view of the great disparity between the wreckage of Europe and the prosperity of America. Until we see a comparable move of resources from North to South, I am dubious about the present economic climate.

Secondly, commodities—oil is the obvious example—play a part in the dis- ruption of monetary mechanisms. I am surprised that the West has not shown more enthusiasm and eagerness to move on the common fund discussions.

Thirdly and finally, if we want to deal with the problem of speculation and the shunting of great capital sums across the currencies, the only way is through the IMF and by creating genuine international currency reserves which are so large and powerful that no speculator can take them on.