The political economy of EMS - article ; n°5 ; vol.30, pg 866-894

Christopher Allsopp

Description

Revue économique - Année 1979 - Volume 30 - Numéro 5 - Pages 866-894
The political economy of E.M.S.
The economic issues underlying Britain's decision not to join the EMS at its inception are analysed. Technical difficulties were the most important factor in the short term. Britain had been following a successful policy of stabilising the effective rate whilst the Dollar and Deutschemark diverged.
Opposition to the parity grid system reflected the fear of a bias toward devaluation and/or deflation within Europe.
Most economists stress the likely conflict between domestic policy objectives and EMS. Sortie focussed on the implied loss of monetary control and adjudtment costs. Others pointed to the likely loss of competitiveness and squeeze on profits. The crucial issues are difficult to resolve empirically.
In the U.K. EMS tended to be seen as a move towards Monetary Union. Longer term issues are analysed in terms of the regional analogy. A country could face a « regional » type problem if it became uncompetitive. Costs of monetary union seem small if a country is already, in effect, a region of a larger area. Alternatively if real wages and competitiveness are unaffected by the exchange rate (as assumed by international monetarist there may be little loss. The costs may be large if neither of these spécial cases applies. For a low productivity country the costs may be balanced from integration if it is initially competitive and can remain so.
A final section summarises the posotion of the U.K. vis a vis EMS and compares it with other European countries.
A l'inverse, si les salaires réels et la compétitivité ne sont pas affectés par le taux de change (comme le présument les monétaristes internationaux), la perte pourrait n'être que minime. Les coûts pourraient être élevés en dehors de ces cas particuliers. Pour un pays à basse productivité, les coûts pourraient être équilibrés grâce à l'intégration si ce pays est initialement compétitif et peut le devenir. Le dernier paragraphe résume la position de la Grande-Bretagne vis-à-vis du SME et la compare à celle des autres pays européens.
29 pages
Source : Persée ; Ministère de la jeunesse, de l’éducation nationale et de la recherche, Direction de l’enseignement supérieur, Sous-direction des bibliothèques et de la documentation.

Sujets

• Sociologie, société et politique

Informations

• Publié par: REVUE_ECONOMIQUE
• Publié le: 01 janvier 1979
• Nombre de lectures: 53
• Langue: English
• Poids de l'ouvrage: 2 Mo

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Monsieur Christopher Allsopp
The political economy of EMS
In: Revue économique. Volume 30, n°5, 1979. pp. 866-894.
Citer ce document / Cite this document :
Allsopp Christopher. The political economy of EMS. In: Revue économique. Volume 30, n°5, 1979. pp. 866-894.
http://www.persee.fr/web/revues/home/prescript/article/reco_0035-2764_1979_num_30_5_408490Abstract
The political economy of E.M.S.
The economic issues underlying Britain's decision not to join the EMS at its inception are analysed.
Technical difficulties were the most important factor in the short term. Britain had been following a
successful policy of stabilising the effective rate whilst the Dollar and Deutschemark diverged.
Opposition to the parity grid system reflected the fear of a bias toward devaluation and/or deflation
within Europe.
Most economists stress the likely conflict between domestic policy objectives and EMS. Sortie focussed
on the implied loss of monetary control and adjudtment costs. Others pointed to the likely loss of
competitiveness and squeeze on profits. The crucial issues are difficult to resolve empirically.
In the U.K. EMS tended to be seen as a move towards Monetary Union. Longer term issues are
analysed in terms of the regional analogy. A country could face a « regional » type problem if it became
uncompetitive. Costs of monetary union seem small if a country is already, in effect, a region of a larger
area. Alternatively if real wages and competitiveness are unaffected by the exchange rate (as assumed
by international monetarist there may be little loss. The costs may be large if neither of these spécial
cases applies. For a low productivity country the costs may be balanced from integration if it is initially
competitive and can remain so.
A final section summarises the posotion of the U.K. vis a vis EMS and compares it with other European
countries.
Résumé
A l'inverse, si les salaires réels et la compétitivité ne sont pas affectés par le taux de change (comme le
présument les monétaristes internationaux), la perte pourrait n'être que minime. Les coûts pourraient
être élevés en dehors de ces cas particuliers. Pour un pays à basse productivité, les coûts
être équilibrés grâce à l'intégration si ce pays est initialement compétitif et peut le devenir. Le dernier
paragraphe résume la position de la Grande-Bretagne vis-à-vis du SME et la compare à celle des
autres pays européens.THÉ POLITICAL ECONOMY OF E.MS.
The France proposals and for Germany a European at the Monetary European System Summit put forward in Bremen by
appeared to take other countries by surprise. Problems of
exchange rate instability were high on the agenda, but the political
initiative which proposed a return to something like the Bretton Woods
system of fixed but adjustable exchange rates within the Community,
supported by a Europen Monetary Fund, went further than commonly
expected. It was natural enough that the proposal should have been
seen as a move towards Union — an idea that had recently
been revived by the Commission 1 — and that the ensuing debate
should range over fundamental political and economic issues such as
the future of the Community, and the feasibility, desirability and scope
for domestic as well as international economic policy action.
This paper concentrates on the debate as it developed in the United
Kingdom. At the time of writing, Britain, alone among the nine, remains
outside the scheme, with the option to join later. The merits and
costs of the EMS are still actively under discussion. But in other
countries too there are uncertainties about the effects of EMS, the
more so as remain unresolved questions about whether the
European Monetary Fund will be set up, about the relationship of currencies to the Dollar, and about whether the EMS will
evolve towards more comprehensive monetary union or remain as a
kind of extended « snake ». Expressions of scepticism about the durab
ility or desirability of the arrangements are certainly not confined
to Britain.
1. See, for example, the Jean Monet lecture given at the European Institute,
Florence (October 1977), by the President of the Commission, Roy Jenkins. Reprin
ted in Lloyds Bank Review, January 1978.
2. Examples of many of the arguments are included in the First Report from
the Expenditure Committee, Session 1978-1979, « The European Monetary System »,
House of Commons, November 1978.
566
Revue économique — N° 5, septembre 1979. Christopher Allsopp
On the face of it, any move towards fixity of exchange rates is surpris
ing in view of the continuing disequilibrium in the world economy. The
conventional view is undoubtedly that fixity of rates is only possible
when underlying economic conditions are appropriate, and that to
impose « convergence » by setting up an exchange rate system that
could only work if convergence occured, is to get the order of events
dangerously wrong. Part of the reason for the adoption of the scheme
is, of course, political. Relative fixity of exchange rates within the
community can be seen as part of the « European Ideal ». Moreover,
at the level of economic diplomacy, there has always been agreement
on some of the aims of the arrangement, based partly on rhetoric in
favour of greater stability on the exchanges, and also on the desira
bility in principle of « convergence » in performance. But the most
important reason for the political success of the EMS initiative seems
to have been a swing in economic fashion, amongst officials and
politicians, against floating exchange rates.
In the early 1970s, rates came to be regarded as a
kind of panacea which would allow national governments to pursue
domestic objectives — a major gain to economic sovereignty.
Experience since has qualified that enthusiasm in two important
respects. It is recognised that floating exchange rates can overshoot,
and act in a destabilising way. And it has been found, that far from
removing the constraint on domestic economic action, floating rates
may exacerbate it, especially if a falling rate feeds through quickly
into the domestic inflationary spiral. Moreover, the degree to which
the exchange rate can be managed against market forces — other than
by changes in overall demand management policy — appears small.
To some, it seems only a small step further to give up exchange rate
variation altogether as an instrument of policy.
This paper considers the economic issues involved in three stages.
Section I considers the choice of exchange rate regime (fixed versus
floating etc.) from the point of view stability, and feasibility. Worries
about the technical difficulties were probably the most important
reason for Britain's decision not to join the EMS at its inception. The
second Section considers the broader question of exchange rate policy
and its interaction with domestic objectives. Section III looks at some
of the pros and cons of Monetary Union, or of a regime of totally
fixed exchange rates. This appears justified both because EMS is often
seen a step on the way to more comprehensive arrangements, and
because longer term issues of economic growth or relative decline are
867 Revue économique
highlighted. The concluding Section summarises the situation of the
United Kingdom and compares it briefly with that of other Members
of the Community.
I. ALTERNATIVE EXCHANGE RATE REGIMES
In retrospect the surprising thing about the Bretton Woods system
set up after the war must be its durability, especially since exchange
rate changes in response to « fundamental disequilibria » occurred
much less frequently than had been envisaged. The conditions under
which a fixed exchange rate system might be expected to succeed are
examined in the next sections. Here, we are mainly concerned with the
problems that can arise when such a system comes under strain — as
it did from the mid 1960s onwards. It seems plausible to assume that any
attempt to move towards fixity — as with the EMS — is bound to be
difficult, both because the initial conditions may not be appropriate,
and because market operators may be sceptical about the durability
of any new arrangements.
By far the most important practical objection to the adjustable
peg system is that changes in parity are likely to become predictable
in direction. In the presence of internationally mobile funds, changes
are liable to be forced, often after heavy contrai bank intervention, and
there is a marked gain to international hedgers and speculators.
Gradual movements in the exchange rate which could occur under
floating are replaced by sharp step changes with destabilising effects.
Alternatively, if parities are to be defended, sudden lurches in domestic
demand management policy are called for.
It is not inevitable that changes should be forced in this way. It
is possible in principle for the Authorities to move ahead of the
market, to change policies or exchange rates in advance of market
sentiment. But successful operations of this kind are somewhat