Date: 14 July 2004

Speaker:
Pedro Schwartz, O.B.E., Director, Foreign & Colonial Eurotrust PLC. Member of the CEPS Board of Directors 

 
 
“Institutional competition is important – harmonisation I fear”
 
Schwartz’s new book The Euro as Politics is an emphatic call for an EU of institutional and monetary competition and against the current tendency of harmonisation. The abandonment of the British pound by fiat would essentially reduce monetary and institutional competition in Europe and in doing so would detrimentally affect not only the UK, but also the EU as a whole. This reasoning stems from the fact that the euro, in the words of Schwartz, is not a device for the smooth functioning of the economy – at the end of the day it is a political project. Hence whether the UK should adopt the euro boils down to the question of whether an EU-wide currency monopoly is advantageous for both the UK and the residual EU.
 
The first part of the book presents the major economic and political arguments of the pro-euro camp, ranging from lower transaction costs to lower interest rates, and from a symbol of European unity to the successful formation of an EU social model. At close scrutiny, however, most of these arguments do not hold water or their economic benefits prove insignificant. The author’s sceptical attitude towards centralisation, harmonisation and monopoly in general and central bankers in particular gives rise to the question of whether the central bank’s independence or currency competition qualifies as the appropriate tool to contain the inflationary tendency of central banks. Without doubt, Schwartz sides with the latter argument, since he believes that politicians ultimately can and will tell the central bank what to do.
 
Does monetary sovereignty matter or work? For Schwartz the answers lie clearly in the negative, at both the national and the EU levels. With the disputable exception of the short-term outlook, the central bank cannot steer the economy, since economic growth fundamentally rests on real effects and in the first instance on higher savings. The current economic problems of many member states, notably Germany and France, are not caused by bad monetary policy, but first and most importantly by the lethargic reform process. The dismal record of East Germany in the last decade can especially be traced back to the economically unsound currency reform in the early 1990s and the nearly one-to-one adoption of German legislation and the acquis communautaire, particularly with respect to social and environmental policies. As a result, the speaker deems the economic debate as displaced and poses the question of how to guarantee the stability of money.
 
With respect to the stability of the euro, the speaker doubts the political survivability of the no-bail-out clause of the ECB. When it comes to the crunch, this clause will not hold politically; further, because of the bulk of unfunded debt of social security systems in the EU – with the notable exceptions of the UK and the Netherlands – the real world test may occur sooner than many observers believe. The likely surrender of the no-bail-out clause would thus also hit those countries, which have abstained from amassing unfunded liability. The UK, for example, would inculpably have to swallow the bitter pill of inflation. Moreover, empirical evidence of the trade flows between Ireland and the UK seem to indicate that different currency systems do not impede trade flows, since the break up of the 150-year monetary union did not result in a lasting decline.
 
After the ample treatment of the political and economic pros and cons, Prof. Schwartz’s verdict stands in the long tradition of F. A. von Hayek’s view, which considers competition as the best guarantor for sound money and consequently for sustainable economic growth. The UK’s adoption of the euro would significantly reduce the competitive pressure on the ECB, which in turn would dismantle this potent constraint against power abuse and centralisation and inevitably lead to a less wealthy EU. As a true European, Prof. Schwartz thus advocates that the UK should keep its pound sterling.