False trails on road to single currency: Economic View

Conditions, conditions. Suddenly everyone is talking again about the conditions that must apply before Europe can build itself a shared currency. Not since the late 1980s, when Britain debated the conditions for entry into the ERM, has there been so muchtalk about conditions. Both the Prime Minister and the Governor of the Bank of England have returned to the subject in the last few days.

It is unfortunate therefore that almost all this talk is based on the wrong conditions. Whether one sticks to them rigidly, as the Bundesbank wants; or flexibly, as the European Commission wants; whether one adds to them, as John Major wants; or amends them, as the Labour Party wants - the conditions laid out in the Maastricht Treaty for eligibility to join a European currency club are not the conditions we should be most worried about.

What the Maastricht conditions do is set out various national policy goals. Only countries attaining those goals will be allowed into the so-called "single currency". The aim is to ensure that members will be in fit shape, both fiscally and monetarily. Specifically, there are rules for national debt, the government fiscal deficit, relative inflation performance and relative interest rates. These conditions have one very direct purpose. They are not there for aesthetic reasons, or as an incentive to goodbehaviour. They were designed only to exclude from the club those members who would potentially disrupt its activities.

You don't want, say, Italy in if she is always going to be wasting time at meetings arguing for more inflation to devalue her debt. So nations without the common purpose of keeping inflation down must be kept out.

In that sense, the Maastricht conditions are like the entry conditions for joining a graduate course at Manchester University: you need, say, an A and two Bs to get in. This is to ensure that you will keep up and not slow the class down. But just becauseyou qualify to get into Manchester University doesn't mean that it is right for you to go there.

The same is true of a shared currency: just because a country could meet the minimum eligibility requirements doesn't mean it should join. And that is where extra conditions come in. What is needed is a set of criteria to help a country to make up its mind whether it is appropriate for it to join stage three of monetary union.

It is here that discussion has focused on the wrong kind of things. The British Government, as John Major reiterated last week, has chosen labour market flexibility as its central extra concern. But this is largely a red herring. It is true, in theory, that the labour market is a relevant factor. A lack of competitiveness can always be solved by a cut in wages, rather than by devaluation.

However, there is no country - least of all Britain - whose wages are so flexible that they can be adjusted as easily as the exchange rate. It is unlikely we ever will be in that state. But you don't need to rely on labour flexibility to justify retaining a single currency. Plenty of inflexible labour markets already operate a single currency. The United Kingdom is one.

A stronger - and more popular - argument about conditions is that what is needed is so-called "real economic convergence", rather than the financial convergence envisaged in the Maastricht Treaty.

On this view, targets for unemployment or GDP growth rates should be given greater weight than those for interest rates or currency stability. This appeared to be the view of Eddie George last week. It also underlies the thinking of economists sympathetic to the Labour Party.

The idea behind the notion of "real convergence" is that monetary union requires all its member countries to pursue the same kind of monetary policy at the same time. If Greece and Germany always enjoy monetary expansions at the same time, they can dispense with drachmas and marks. One currency will suffice. But if Greece likes monetary expansion (to reduce unemployment, for example) just as Germany wants monetary contraction, then you have a problem if you only have one currency to expand or contract.

The wrong-headedness in the "real convergence" argument lies in the idea that meeting a number of conditions for a short period of time in itself amounts to economic convergence. Economic convergence requires not that countries happen to look similar fora year or two: it requires that they respond in a similar way to events as they arise for ever more; events like oil price shocks, financial liberalisation, German unification.

These are the kind of things that have led countries along economic ups and downs in recent decades; and it is those ups and downs that determine whether or not you need a change in monetary policy. Indeed, it matters little whether countries look similar at all. It doesn't matter for monetary union that France has higher unemployment than Germany. All that matters is that French unemployment should rise and fall at the same time as German unemployment.

So does there appear to be enough real "real convergence" to merit monetary union? For the rest of Europe - by which one really means Germany and France - it is possible to answer yes. The economic cycle of Germany and France does appear to have synchronised. The countries co-ordinate their policies to a substantial degree. And in natural resources, the countries are in the same boat. Germany depends more on manufacturing than France; but France is a heavy trading nation none the less.

For Britain, it is harder to answer that question. Our resource base, our policy cycle and our economy seems to beat to a more Anglo-Saxon drum than the others in Europe. As the table indicates, Britain lies somewhere between the Continent and the dollarzone. We could as easily apply to the Federal Reserve for membership as to the European central bank. Given our schizophrenic economy, schizophrenic political attitudes to the conditions for membership of a European single currency are inevitable.

Graphic omitted

Sport
Laura Trott with her gold
Commonwealth GamesJust 48 hours earlier cyclist was under the care of a doctor
Life and Style
Upright, everything’s all right (to a point): remaining on one’s feet has its health benefits – though in moderation
HealthIf sitting is bad for your health, what happens when you stay on your feet for a whole month?
Arts and Entertainment
Peter Griffin holds forth in The Simpsons Family Guy crossover episode
arts + ents
News
Orville and Keith Harris. He covered up his condition by getting people to read out scripts to him
People
PROMOTED VIDEO
Sport
France striker Loic Remy
sportThe QPR striker flew to Boston earlier in the week to complete deal
Arts and Entertainment
Gal Gadot as Wonder Woman
arts + entsFilmmaker posted a picture of Israeli actress Gal Gadot on Twitter
Sport
Vincenzo Nibali rides into Paris on the final stage of the 2014 Tour de France
Tour de FranceVincenzo Nibali is first Italian winner since Marco Pantani in 1998
News
Bryan had a bracelet given to him by his late father stolen during the raid
people
Arts and Entertainment
Chris Pratt stars in Guardians of the Galaxy
arts + ents
Arts and Entertainment
Pedro Pascal gives a weird look at the camera in the blooper reel
arts + entsPrince Oberyn nearly sets himself on fire with a flaming torch
News
Danny Nickerson, 6, has received 15,000 cards and presents from well-wishers around the world
newsDanny loves to see his name on paper, so his mother put out a request for cards - it went viral
Arts and Entertainment
Zoe Saldana stars in this summer's big hope Guardians of the Galaxy
filmHollywood's summer blockbusters are no longer money-spinners
Sport
Red Bull Racing's Australian driver Daniel Ricciardo (C) celebrates with Scuderia Ferrari's Spanish driver Fernando Alonso (L) and Mercedes' British driver Lewis Hamilton
sport
Arts and Entertainment
comedy
Arts and Entertainment
Public vote: Art Everywhere poster in a bus shelter featuring John Hoyland
art
Arts and Entertainment
Judd Apatow’s make-it-up-as-you-go-along approach is ideal for comedies about stoners and slackers slouching towards adulthood
filmComedy was dominated by the romcom at its most insufferable
Sport
Tour de France competitor Bartosz Huzarski’s legs have highlighted the gruelling nature of the race, after he posted a picture on Facebook showing extremely prominent veins stretching from his feet and all the way up his legs
Commonwealth Games
Life and Style
Elle Kaye demonstrates the art of taxidermy
food + drinkFood revolution taken a step further in new ‘edible taxidermy’ class
News
A rub on the tummy sprang Casey back to life
video
Sport
Halsall broke her personal best in the 50m butterfly
Commonwealth GamesEnglish swimmer is reborn after disastrous time at London 2012
Arts and Entertainment
O'Shaughnessy pictured at the Unicorn Theatre in London
tvFiona O'Shaughnessy explains where she ends and her strange and wonderful character begins
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Life and Style
Workers in Seattle are paid 100 times as much as workers in Bangladesh
fashionSeattle company lets customers create their own clothes, then click 'buy' and wait for delivery
Arts and Entertainment
Red Bastard: Where self-realisation is delivered through monstrous clowning and audience interaction
comedy
Arts and Entertainment
booksForget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks
Voices
The Express offices in the 1930s when writers (such as Orwell) were paid around £2 weekly
voicesWebsites offering your ebooks for nothing is only the latest disrespect the modern writer is subjected to, says DJ Taylor
Life and Style
A cut above: Katy Guest at The Ginger Pig
food + drinkThe Ginger Pig's hands-on approach to primary cuts
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Application Support Analyst / Junior SQL Server DBA

£40000 - £45000 per annum: Ashdown Group: An established professional services...

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

The benefits of being in Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Test Analyst - UAT - Credit Risk

£280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

Day In a Page

A new Russian revolution: Cracks start to appear in Putin’s Kremlin power bloc

A new Russian revolution

Cracks start to appear in Putin’s Kremlin power bloc
Eugene de Kock: Apartheid’s sadistic killer that his country cannot forgive

Apartheid’s sadistic killer that his country cannot forgive

The debate rages in South Africa over whether Eugene de Kock should ever be released from jail
Standing my ground: If sitting is bad for your health, what happens when you stay on your feet for a whole month?

Standing my ground

If sitting is bad for your health, what happens when you stay on your feet for a whole month?
Commonwealth Games 2014: Dai Greene prays for chance to rebuild after injury agony

Greene prays for chance to rebuild after injury agony

Welsh hurdler was World, European and Commonwealth champion, but then the injuries crept in
Israel-Gaza conflict: Secret report helps Israelis to hide facts

Patrick Cockburn: Secret report helps Israel to hide facts

The slickness of Israel's spokesmen is rooted in directions set down by pollster Frank Luntz
The man who dared to go on holiday

The man who dared to go on holiday

New York's mayor has taken a vacation - in a nation that has still to enforce paid leave, it caused quite a stir, reports Rupert Cornwell
Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

Best comedians: How the professionals go about their funny business

For all those wanting to know how stand-ups keep standing, here are some of the best moments
The Guest List 2014: Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks

The Guest List 2014

Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks
Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

Jokes on Hollywood

With comedy film audiences shrinking, it’s time to move on
It's the best of British art... but not all is on display

It's the best of British art... but not all is on display

Voted for by the British public, the artworks on Art Everywhere posters may be the only place where they can be seen
Critic claims 'I was the inspiration for Blanche DuBois'

Critic claims 'I was the inspiration for Blanche DuBois'

Blanche Marvin reveals how Tennessee Williams used her name and an off-the-cuff remark to create an iconic character
Sometimes it's hard to be a literary novelist

Sometimes it's hard to be a literary novelist

Websites offering your ebooks for nothing is only the latest disrespect the modern writer is subjected to, says DJ Taylor
Edinburgh Fringe 2014: The comedy highlights, from Bridget Christie to Jack Dee

Edinburgh Fringe 2014

The comedy highlights, from Bridget Christie to Jack Dee
Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

The woman stepping down as chair of the Heritage Lottery Fund is worried