Letter:No clear case for a single currency

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The Independent Online
Sir: Gavyn Davies's excellent piece on EMU ("What would life have been like inside EMU?", 29 July) deserves a careful and detailed response. He mentions at the outset that his exercise is subject to many caveats but does not return to them at the end.

In my view there is no clear case either way that tells us whether to join a single currency or not. There are factors on both sides to which one can attach probabilities and come out whichever way one chooses but the exercise is fraught with many judgements. In Mr Davies's case the calculations that he makes are backward looking but they are also partial. Thus while he is correct that if everything else had remained the same and a Waigel-type fine had been in operation the UK could have paid as much as pounds 30bn, by the same token the effect of lower interest rates on debt servicing and indeed on lower debt, as interest costs are reduced, needs to be set alongside the pounds 30bn.

A lower interest rate of about 3 to 4 per cent on a debt of, say, around pounds 200bn as of 1988 for about four years is not to be sniffed at. So if he has to quantify one he has to do the other as well.

The single currency issue is bedevilled because each side states its own case. The need is to list the advantages and disadvantages of both options clearly setting out the issues over which we can differ both in terms of likely impact and the probability of the impact occurring and then study the range of answers with probability attached before a conclusion can be arrived at. This would be a rational way of proceeding.

Thus we can balance the gains from lower interest rates along with the likelihood that the Euro will be a strong currency and interest rates will indeed be lower, as against the costs of giving up the interest rate weapon and meeting the costs of higher regional unemployment with inadequate transfer payments. We can balance the freedom to set our own interest rates and exchange rates outside with the likelihood that as in the past devaluation will only yield temporary gains and interest rates will be higher, especially on long-dated debt due to the UK's reputation for fiscal profligacy.

Is it too much to hope that even now there is time to set up a group, non-political but expert, say in the Institute of Fiscal Studies to get some sense on this question?

Professor The Lord MEGHNAD DESAI

House of Lords

London SW1

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