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- The Observer,
- Sunday January 6 2002
If ever a man needed to hold his nerve amid the celebrations - birth of a daughter, birth of a currency - it is Gordon Brown. While not quite of tidal proportions, the wave of pro-euro sentiment associated with the historic arrival of the new notes and coins will almost certainly have boosted the cause of the euro in this country.
It is also reported that the Chancellor's emissaries have been indicating to other European governments that the Keeper of the Five Tests is not quite as hostile towards the pound's eventual submission to the euro as he has been presented by - well, by the Chancellor's emissaries.
There are similarities, and differences, between Brown's position now and that of his illustrious predecessor Winston Churchill in 1925. As Roy Jenkins reminds us in my Christmas present to myself, Churchill (Macmillan): 'As the gold [standard] battle unfolded there was a sense of even such a normally dominating Minister as Churchill being swept downstream by the force of a compelling current, protesting but nonetheless essentially impotent.'
The occasion was the prelude to Britain's return to the gold standard in 1925, the consequence of which was to lock the British economy into an overvalued exchange rate. As Jenkins notes: 'Reluctant convert although he had been, he deserved the responsibility and, if it be so judged, a considerable part of the blame. An irony was that, by up-valuing the pound, Churchill threw a destructive spanner into the works of Baldwin's industrial policy.'
The return to the gold standard helped to make Churchill's 1925 budget a short-term success but a longer-term disaster. The great man regretted the decision for the rest of his life.
As Lord Jenkins reminded us last week in the Independent, he himself gladly claims 'a degree of responsibility' for the euro. As President of the European Commission in 1977-81, he was midwife to the birth of the European Exchange Rate Mechanism (ERM). Although he first raised the idea in a speech in Florence in October 1977, it required the conversion of West Germany's Chancellor Helmut Schmidt and France's President Valery Giscard d'Estaing to make the ERM a reality. And the ERM duly led to the euro.
The floating exchange rates that followed the breakdown of the Bretton Woods worldwide fixed exchange rate system in 1971-72 brought chaos, not the 'sensible, market-led adjustments' that champions of floating had promised. Within Europe, the mark and the franc not only diverged widely against the dollar and the yen but, as Jenkins reminds us, from each other. Jenkins advocated the creation of 'a zone of monetary stability' in Europe, and The Observer published an early interview with him about his idea in the autumn of 1977.
Lord Jenkins sold the idea to Germany, France and the others but not to Britain. He recalls that the Labour Prime Minister James Callaghan said he would like to participate, but was nervous of locking the pound in at too high an exchange rate, 'which might prevent his dealing with unemployment'. Then, when Margaret Thatcher came to office later in 1979, as Jenkins recalls, 'she was in principle in favour of membership, but was frightened of being locked in at too low a rate, which would prevent her dealing with inflation'.
Well, by staying out, she got her high exchange rate all right. The pound went up and up and up, and we ended up suffering heavy unemployment and high inflation. Then, when we finally joined the ERM in 1990, it was at the wrong rate and the wrong time - and the episode ended in tears on Black Wednesday.
But it was not just the Conservatives who were scarred by Black Wednesday. So were the Labour Shadow Chancellor John Smith and his close colleague Gordon Brown, who had been pro-ERM. This helps to explain why the pre sent Chancellor has been explosive whenever the topic of rejoining the ERM has come up.
If - some would say 'when' - we sign up for the euro, it would be the equivalent of rejoining the ERM indefinitely. It would also be like going back on the gold standard in the sense that we should be accepting a 'permanently' fixed exchange rate against other currencies. But neither the Eurozone countries now, nor we in due course, would be accepting fixed exchange rates against the dollar and the yen; and it is eminently conceivable that a tri-polar exchange rate world (with the pound subsumed into the euro) could be highly unstable (leading some enthusiasts to talk already of the prospect of 'a single world currency').
A crucial qualification to the analogy with the gold standard is that we would not intentionally upvalue the pound at the same time. In 1924-5, the pound was deliberately nursed upwards to its pre-1914 exchange rate - from $4.20 to $4.80. This exacerbated our economic difficulties and was eventually followed by our being forced off the gold standard and effectively devaluing in 1931.
Nevertheless, if you believe - as I do, and as do the majority of the Bank of England's Monetary Policy Committee and some of the Chancellor's advisers - that the pound is now seriously over-valued, you cannot in all conscience participate in the chorus singing 'join the euro now', however 'European' you are.
This is another difference from the gold standard episode. Then, the Treasury and the Bank, almost to a man, were prominent members of the chorus urging Chancellor Churchill to take the plunge. This time, the country's leading economic institutions are singing a discordant note.
As the Bank of England continually emphasises, the overvaluation of the pound shows up in the poor performance of exports, net of imports. Individual companies are taking the hit on profit margins, and they are increasing the degree to which they source from abroad. This may make sense for the individual company, but it does not augur well for the long-term health of the economy and employment generally.
But the paradox in all this is that, while observers such as myself worry about committing the economy to a permanently overvalued exchange rate, in practice we are already experiencing our third period of prolonged overvaluation in 25 years.
Until last week's sudden revival of the euro, the pound had once again been creeping up to absurd levels. If the Chancellor really does feel that things are closing in on him and that he is eventually going to have to take a Churchillian decision, but not with Churchillian consequences, he must dearly wish that the markets have finally decided to lower the pound to a more realistic level.
