Anthony O'Reilly: The world needs a new currency accord

We know that markets respond positively to leadership
Click to follow
The Independent Online

Unless Europe and the US act swiftly, they are in danger of losing not only their manufacturing but also large parts of their services industries to lower cost competitors in Asia.

Unless Europe and the US act swiftly, they are in danger of losing not only their manufacturing but also large parts of their services industries to lower cost competitors in Asia.

The referendums in both France and the Netherlands this week have shown the growing concern in Europe at the loss of employment from global competition - a problem which the latest fall in the euro will do little to rectify.

The basic reason is that jobs, trade and investment can all move more freely around the world to the area of lowest cost. As a result, the rising Asian region with its lower wages and increasing knowledge base will, on present trends, eventually supply the bulk of the world's needs for goods and services.

It is conceded that no one will go to Guangzhou or Beijing for a haircut, or indeed for a newspaper! But for freely tradable goods and services, the belief is that for everything from motorcars to DVDs to electronic goods and call centres, people will flock to India, China and the Far East.

The acceleration brought about by the internet enhances this movement, and so what might have taken 15 to 20 years can now occur in 18 months. Essentially this means that manufacturing and services in Europe will be but a shadow of their former selves, and that those products/services that can be provided from the East either in manufacturing or the design and construction of software, and/or call centre/back office facilities will be sourced in the cheapest possible area.

In the medium and long term - not to speak in certain cases of the short term - this bodes ill for Europe, including Britain and Ireland.

The question is what can be done about it? There are a number of responses, not the least being therecognition both by Europe and the US that they are engaged in a war for economic prosperity and survival as assuredly as they were in the Second World War. As we contemplate the growing competition, and such decisions as IBM's move to run down its European operations and move east, it is clear that companies do so because the European and US currencies are overvalued in relation to Asian currencies and particularly the Chinese yuan (and those countries pegged to it).

The solution to this is a major and organised adjustment of parities. If there is no movement on parities, there is the huge risk of a drift to protectionism, as already being pursued in the US Senate today and as happened with drastic impact in the 1930s with the Smoot-Hawley Act in the US. It should be noted that agriculture is still highly regulated throughout the world and this preserves much of the fabric of the European and American farm systems.

The Economist magazine a few years ago wrote an important article on the principle of 1:1:1. The dollar should be 1 to the euro 1 to the Japanese 100. A sense of direction towards this end would achieve a rational rate of change in the tectonic plates of labour parity adjustments.

The complete failure of the US government and the EU and Japan to engage in meaningful discussion on this issue and to leave what John Snow, the US Treasury Secretary, emptily calls "market forces" to price currencies, means that speculation, rumour and hubris play unusually large parts in the adjustment of currency.

There is no justification, for example, for the euro to be still selling at 1.20 to the dollar, despite its recent fall, and the unemployment rate in Germany and France is eloquent testimony to this. The European Central Bank appears to equate a high rate of parity with manhood and the perceived performance overall of the European economy.

To the contrary, it is a huge threat and not just to manufacturing and tourism, where the pressure is most evident now. The next area will be services employment, where pressures are already building and will mount increasingly over the next decade.

I believe, therefore, that all the major parties - the EU, Britain, US, China, and Japan - should urgently organise a major conference along the lines of the Plaza and Louvre Accords of 1985 and 1987. The Plaza agreement, which called for a devaluation of the dollar, particularly against the Japanese yen, headed off congressional pressure for trade sanctions against Japanese imports. It was backed by central bank intervention in the markets, and was extremely successful.

The finance ministers and central bankers would indicate what the parties believe is fair value for a basket of currencies for a period of, say, five years. And they would make a declaration that they will act in concert against any speculation or gross overvaluation of a particular currency against its neighbours.

This is not to replace the role of the financial markets. But we know that the markets respond positively to leadership. So we can be confident that such a declaration would bring economic stability and growth to the world on a steady and measured basis. Nothing else will.

Sir Anthony O'Reilly is Chief Executive, Independent News and Media