Mr Davies concludes that it would be a disaster for Britain to remain outside a monetary union between Benelux, France and Germany. Why? Canada, whose economy is smaller than Britain's, cut its link with the US dollar in the Fifties and has not felt a need to restore a fixed exchange rate. Switzerland has floated against the German mark without obvious disaster.
In any case, there is the grave risk that the continued debate over monetary union will be a source of instability in Europe just as the ERM has been. The Maastricht treaty offered monetary credibility of a sort, but the monetarists were so mesmerised with this that they did not notice that it failed to offer fiscal credibility.
The Irish Republic, which faces a difficult time because it has refused to follow the sterling devaluation, is looking to Brussels for financial support to meet the costs of being a 'good European'. Poorer countries that do join a monetary union are likely to face unemployment as wages rise in anticipation of the supposed economic benefits of the union. There may be civil disorder. How much aid will the European Community offer to those regions damaged by the wage-push effects of monetary union? That is the unresolved and barely discussed question of fiscal credibility.
Suppose that the union is limited to France, Germany and Benelux. Belgium has a ratio of national debt to GDP of 130 per cent, which is higher even than Italy's. I would not like to have to live in Belgium as it reduces its national debt to comply with the Maastricht guidelines. Or perhaps the Belgians are hoping to be bailed out by handouts from Germany. I cannot see why the Germans should pay.
M. R. WEALE
Faculty of Economics
University of Cambridge
7 DecemberReuse content