One Money for Europe PDF
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ONE MONEY FOR EUROPE Also by Michele Fratianni LA LIQUIDITA INTERNAZIONALE, 1972 INFLAZIONE,PRODUZIONE E POLITICA ECONOMICA IN IT ALIA, 1975 L'ECONOMIA ITALIANA 1974-75, 1975 L'ECONOMIA ITALIANA 1975-77, 1976 BANK CREDIT, MONEY AND INFLATION IN OPEN ECONOMIES (co-editor) 1976 LE ORGANIZZAZIONI ECONOMICHE INTERNAZIONALI, 1977 L'ECONOMIA ITALIANA 1976-78, 1977 Also by Theo Peeters HET VERENIGD KONINKRIJK IN DE E.E.G. VOOR- EN NADELEN VOOR DE BELGISCHE ECONOMIE (co-author), 1970 DETERMINANTEN VAN DE INTERNATIONAL HANDEL IN F ABRIKATEN, 1971 ONE MONEY FOR EUROPE Edited by MICHELE FRAT IANNI and THEO PEETERS © Michele Fratianni and Theo Peeters 1978 Softcover reprint of the hardcover 1st edition 1978 978-0-333-25674-9 All rights reserved. No. part of this publication may be reproduced or transmitted, in any form or by any means, without permission First edition 1978 Reprinted 1980 Published by THE MACMILLAN PRESS LTD London and Basingstoke Companies and representatives throughout the world British Library Cataloguing in Publication Data One money for Europe 1. Monetary unions - Congress 2. Money - European Economic Community countries - Congresses 1. Fratianni, Michele II. Peeters, Thea 332.4'566'094 HG3894 ISBN 978-1-349-04310-1 ISBN 978-1-349-04308-8 (eBook) DOI 10.1007/978-1-349-04308-8 Contents PREFACE ix ACKNOWLEDGEMENTS xii LIST OF PARTICIPANTS xiii PART I- AN OVERVIEW xii xii EMU: Rehabilitation of a Case and Some Thoughts for Strategy 3 HERBERT CHRISTIE and MICHELE FRATIANNI PART II- THE ALL SAINTS' DAY MANIFESTO AND ITS CRITICS 35 2 The All Saints' Day Manifesto for European Monetary Union 37 GIORGIO BASEVI, MICHELE FRATIANNI, HERBERT GIERSCH, PIETER KORTEWEG, DAVID O'MAHONY, MICHAEL PARKIN, THEO PEETERS, PASCAL SALIN and NIELS THYGESEN The Inflation-proofed Europa: How it Might Work 44 THEO PEETERS, PAUL DE GRAUWE and ROLAND VAUBEL 3 Difficulties with European Monetary Union 52 DAVID LAIDLER Comment on Laidler 64 PASCAL SALIN 4 Competing Monies, European Monetary Union and the Dollar 69 BENJAMIN KLEIN Comment on Klein 95 GEORGE ZIS Comment on Klein 102 DAVID O'MAHONY vi PART III- PARALLEL CURRENCIES AND EXCHANGE RATE ARRANGEMENTS 107 5 Minimising Imbalances in Monetary Union 109 ROLANDVAUBEL Comment on Vaubel 127 RAINER S. MASERA Comment on Vaubel 132 THEO PEETERS 6 Units of Account and Parallel Currencie~ in Transnational Transactions 135 ROBERT TRIFFIN 7 Vicious and Virtuous Circles and the OPTICA Proposal: A Two- Country Analysis 144 GIORGIO BASEVI and PAUL DE GRAUWE Comment on Basevi and De Grauwe 158 JURG NIEHANS Comment on Basevi and de Grauwe 161 JACQUES van YPERSELE PART IV- THE INSTITUTIONAL PROBLEM 165 8 In Search of a Monetary Constitution for the European Communities 167 MICHAEL PARKIN Comment on Parkin 196 GARRETT F. MURPHY Comment on Parkin 199 NORBERT KLOTEN PART V- CONCLUSIONS 203 9 Prospects for Moving to Monetary Union: Concluding Thoughts 205 POLLY REYNOLDS ALLEN vii 10 Political Epilogue 216 SARAHHOGG INDEX 221 Preface The signatories to the Manifesto on European Monetary Union published in The Economist of All Saints' Day 1975, met their critics and supporters in Leuven at the end of November 1977 to discuss the principal issues arising from the Manifesto's proposals. The proceedings of the conference constitute this book. Those taking part in the conference were asked to consider the following points from the Manifesto: (i) the case for economic and monetary union, (ii) the properties of an inflation-proofed parallel currency, called the Europa, (iii) the typ<!s of exchange rate arrangements which are compatible with the Europa anJ conducive to the early adoption of monetary union, (iv) the advantag(!s of the Europa mechanism over a stabilisation of existing national monies and (v) the institutional problems. 1n Part I of the book, Herbert Christie and Michele Fratianni offer an overall view of the issues under consideration. They argue that a strong case can be made for both economic and monetary union in Europe, but leave open the question as to whether most of the benefits arise from economic union or from monetary union. The main questions then are not about the desirability of economic and monetary union in Europe but about the best ways to achieve it. Christie and Fratianni consider three alternative strategies: (i) the approach currently followed by the Commission of the European Communities with its emphasis on the snake arrangement and coordination of policies; (ii) the early introduction of a common currency; and (iii) the deferral of major steps in the monetary field until after economic union has been achieved. The current approach is manifestly not succeeding. The monetary-unification-first strategy has the advantage of relying on market forces in contrast to difficult and numerous political decisions to bring about monetary unification. The money-last strategy entails that all efforts initially be concentrated on eliminating barriers to the movement of goods, services, capital and labour. An increase in the degree of economic integration could facilitate the decision to adopt a common currency at a later stage. Part II of the book deals with the Manifesto proposal and its critics. An early reaction to the Manifesto was that the proposed parallel currency was too good and, thus, would quickly drive national currencies out of circulation. The key issue in this respect appears to be whether governments are prepared to forgo the inflation tax. David Laidler does not think so, and gives the signatories of the Manifesto proposal a low political score. He believes that governments will go to great lengths to ensure that national monies remain, for example by requiring that taxes be paid in national money. Laidler himself favours either a currency reform or a money-last strategy. But suggestion of a currency reform poses the following problem: how can one X One Money for Europe fault the Manifesto proposal for lack of political realism and propose at the same time a change which would require a comparable political commitment? Little progress was made on why governments prefer inflation taxation to explicit taxation. Governments can use their monopoly power 'to maximise tax revenues. The highly variable rates of inflation which have been experienced suggest that governments do not extract the maximum inflation tax. Rather they may fall back on it because 'legislated' tax is more difficult to raise. Indeed, as Benjamin Klein notes, 'the control of a nation's money supply ... represents a very large potential tax that can be levied quickly and collected in a broad based and efficient way, without short-run market or democratic tests'. From this Klein concludes that 'a single established money in Europe would eliminate whatever amount of competition between monies now exists and greatly increase the inflationary incentives .. .'. On more theoretical grounds Klein, and to a lesser extent Laidler, argue that the Europa would face an almost insurmountable confidence problem. Klein finds no significant cases in history where a new money has rapidly displaced existing ones. Klein's discussants were quick to point out, however, that the historical evidence is not relevant to the Manifesto proposal, because the failure of new monies to emerge can be largely attributed to the actions of states in defending existing currencies so as not to lose seigniorage. Vaubel discusses two aspects of the economics of parallel currency. First, competition between the Europa and the national currencies should lead to the formation of an optimum currency area. The Europa should assert itself first as a standard of value, then as a store of value and finally as a medium of exchange. In the end it will be an empirical matter whether the Europe of Nine or Twelve is a feasible currency domain. Currency competition is compared to language competition. Since the process by which 'inferior' languages are driven out by 'superior' ones is indeed slow, and new languages such as Esperanto have not been widely adopted, this comparison does not augur well for the quick achievement of monetary union. Vaubel's second proposition is that a parallel currency avoids the temporary unemployment otherwise necessary to move from a high to a low rate of inflation. This depends on the acceptability of the parallel currency in the market place. If Klein is right in saying that the parallel currency will not be accepted rapidly, Vaubel's point loses most of its punch. Triffin sees little value in pressing for an inflation-proofed Europa since governments do not seem to want such an innovation and he suggests that efforts be concentrated instead on promoting the adoption of a modified European Unit of Account. In his own words, this could be used initially 'as an alternative, not to national currencies, but only to foreign currencies and Euro-currencies already and increasingly used today as parallel currencies for in tern a tiona! transactions'. The current approach to monetary union stresses coordination of macro economic policies in general and monetary policies in particular. Could its chances of success be improved by eliminating positive feedbacks from exchange rate changes to the domestic price level? Basevi and De Grauwe
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