Monday Book: A bank note with two faces

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The Independent Culture
FANS OF Doctor Dolittle will remember the Pushme-Pullyou, the llama with two heads facing in opposite directions. Perhaps it is not surprising that the new European single currency should be the subject that brings us its publishing equivalent. Read this book one way up and you get the case for the euro (made by a former business editor of The Independent). Turn it upside down and back to front to find the same facts marshalled to make the case against the euro.

The reason the body of the economic evidence can be turned to such contradictory conclusions is that the 'philes and the 'phobes are never comparing like with like. The case against joining the single currency is macroeconomic: it concerns the loss of some of the levers that alter the big picture on the economy. Will interest rates have to be set at the wrong level? Will the loss of the option to devalue prove a serious blow to growth and job prospects in the UK?

On the other hand, the case in favour of joining rests on microeconomics - on the efficiency gains to thousands of businesses from the removal of exchange-rate uncertainty and transaction costs, and on the dramatic industrial restructuring likely to result from the creation of a genuine single market of nearly 300 million people. For those countries taking part, this will spell job gains and greater productivity. How big an opportunity is British business going to lose from our non-participation?

There will be no answer to these questions until we actually take the plunge (which is why economists tend to think that membership of the single currency is essentially a political decision). Yet despite, or perhaps because of, the lack of clear empirical evidence, it is rare to find euro aficionados who are genuinely undecided about the merits of these arguments. Anybody who cares about the single currency - and it has to be said it is not a topic to kindle popular interest - holds very firm views on the subject.

Given the passion with which so many of its readers will approach a book that gives both sides of the case in a reasoned and straightforward way, I decided to experiment with an open mind. Could James Forder, the Oxford economist who puts the case against joining, convert me from europhilia to europhobia? If not, the magisterial and compelling arguments put forward by Christopher Huhne in his half of the book are unlikely to change the misguided opinions of those who are against joining the single currency.

I did not change my mind. I still think it is madness for the UK to stay out of the euro. After all, would any business prosper more if it were Canadian or American? If it were outside a huge and rich market, even with no formal barriers to trading with it, or inside? It's a no-brainer. And while Canadian businesses have no choice; Britain does.

There is just one big question mark about the operation of the euro, and one well argued in the Forder half of the book. It concerns the institutions of the single currency, and especially the European Central Bank (ECB). The Maastricht Treaty gave the ECB complete independence, and set the control of inflation as its overriding priority.

The explanation for this institutional framework lies in the recent history of monetary union. Jacques Delors, the French socialist who was head of the European Commission at the critical time, set Europe on the path to the single currency because the French bridled at the German Bundesbank's de facto monetary control of Europe since the mid-1980s. If the Bundesbank was setting French interest rates anyway, why not aim for a monetary union run by a kinder, gentler sort of central bank? Germany's riposte was to accept the idea but to insist on an independent European Central Bank, cast in the Bundesbank's orthodox image.

Most economists believe in the merits of central bank independence, in the sense that growth is higher and inflation lower if month-to-month interest-rate decisions are kept out of the hands of politicians. But many would prefer the model of the US Federal Reserve, required by law to aim for high employment as well as low inflation. In Europe, interest rates will be in the hands of an institution with a subtly different job, and without the political network and antennae of an independent national central bank to aid it.

Of course, if Britain had been a committed member of the euro from the start, the ECB might well have taken a different shape. Picking holes in its design is utterly academic now. The euro is actually here.