Understanding EMU
Andy Fear
Understanding the Single Currency
By IAN MILNE
The single currency debate gives rise to endless metaphors involving
modes of transport. "missing the bus" "catching the train " and so on,
usually uttered by politicians urging Britain to sign up to something so
that "we don't get left in a siding. " The destination of the journey is
never specified.
Metaphors like these, quite apart from being an insult to our intelligence,
are too facile to shed much light on the issues at stake. Apt metaphors on
the other hand do have their uses. A scientist or engineer sets up a
hypothesis - a sort of metaphor - and tests it to see if it will work. In as
complex a subject as Economic and Monetary Union metaphors and analogies can
be devised and explored whose effect is to illuminate rather than to
obscure.
National economies, and indeed the international economy, can be thought of
as analogous to complex dynamic engineering systems - dynamic in the sense
of being constantly moving, never static. In order to work properly,
engineering systems must have flexibility designed and built into them, to
absorb external shocks and pressures and to smoothly transmit
internally-generated power or force to the external environment.
When you take your window seat in a Boeing 747 as the plane stands on the
runway you notice that the wing curves downwards, that the wing-tip is
several feet below the level at which the top of the wing joins the
fuselage. When the plane is cruising at 35,000 feet the wing is flexed
upwards, the wing-tip perhaps 20 feet higher in relation to the fuselage
than when the plane is on the ground. When the plane flys through turbulence
you can see and feel the wings shuddering and flexing as they absorb the
bumps. All that flexibility is deliberately and carefully designed and built
in to the wings, and the wings in turn are designed as an integral part of
the dynamic engineering system which is the whole aircraft and the air it
flies in. Without that flexibility the wings would simply shear off.
Another example is the motor car. Springs, shock absorbers, clutch plates,
torsion bars, engine mountings, belt drives, pneumatic tyres: all are
devices whose sole or partial purpose is to soak up or dampen shocks. If you
left out just one of these devices when you built a car it would hardly go
500 yards before something vital sheared off - and during those 500 yards
the passengers would have the teeth shaken out of their heads.
Another phenomenon of engineering systems is resonance, or "hunting". When
troops march across a bridge they are ordered to break step. This is to
avoid the risk that their regular rythmic step coincides with the resonant
frequency of the structure and sets off an ever-amplifying and ultimately
disastrous oscillation.
All these phenomena occur in electrical circuits too, which is why they have
flexibility designed and built in to them, in the form of capacitors to
dampen surges, circuit-breakers which trip out when there is a fault or
overload, and, in low-voltage circuits, fuses. Without these safety
features, electrical circuits would be fire-bombs.
We can begin to see now the parallels between economic systems and
engineering systems. The Economic and Monetary Union mapped out in the
Maastricht Treaty involves each participating country throwing out the
equivalents of springs, shock absorbers and clutches and locking the
steering wheel into a fixed position. EMU means locking in interest rates;
locking in exchange rates; clamping shut the safety-valve of allowing the
budget deficit to rise and fall over time; and rigidly constricting each
country's ability to alleviate hardship by adjusting taxes.
EMU deliberately and specifically designs flexibility out of the economic
system; and the design error is compounded and magnified by removing
decision-making from democratically accountable national parliaments and
placing it instead in the hands of unelected and deliberately-unaccountable
central bankers in Frankfurt.
The only attempt of the EMU designers to inject some compensatory
flexibility back into the system is to provide mechanisms to pump
Brusselscontrolled subsidies round the Continent. This (to change
metaphors) is the equivalent of designing a Boeing 747 with rigid wings and
then saying "don't worry if the wings shear off, a committee in Brussels
will send along some chaps with a safety-net to catch the passengers before
they hit the ground". Too late, of course: just as knowingly creating
unemployment in an attempt to meet and stay within the convergence criteria,
and only then pouring in subsidies in vain job-creation schemes, is too late
for the unfortunate people concerned.
Resonance will cause other problems. Divergence, not convergence, is good
for economic health. Once all euro-zone economies have "converged" (the
central aim of Maastricht EMU) it will be like soldiers marching across a
suspension bridge without breaking step. Economies will lurch from
recession to growth in unison: and the oscillations will get longer and
deeper, causing severe strain on national economies in the process. In the
depths of a uniform Europe-wide recession, Europeans will look aghast at
their collectively dismal prospects and rush off - in step - to whatever
market outside Europe appears to offer some relief. There they will scrap
like alley- cats for the same piece of business, dissipating their energies,
cancelling out each other's efforts. And, when a Europe-wide upturn begins,
they will figuratively speaking - turn back to the home market again, in
step, leaving the way clear for their non-European competitors. Such will be
the consequence of economic "convergence" and "resonance".
No one deliberately designed the world's financial system to operate with
floating interest rates and floating exchange rates: it just grew up that
way. Nevertheless, it has most of the features of a properly-designed
dynamic engineering system. The volatility we are seeing at the moment is
evidence that the safety-valves, shock absorbers and circuit-breakers are
working, not that the "global financial system is breaking down". It is the
world's misfortune that just when the planet is flying through turbulence
and could do with more flexibility, not less, the geniuses who gave us the
CAP are designing flexibility out of their own particular bit of the system.
This article was taken from *Eurofacts*, a fortnightly paper
looking at the reality behind Europe. Further further details please write
to Eurofacts, PO Box 9984, London W12 8WZ. Tel/fax 0181 746 1206. Eurofacts
bookshop holds a wide range of books and pamphlets on European Issues.<P>
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Andy Fear EUROPEAN UNION: THE DEAD END
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