Commentary ( The Times )

EMS: “Treasury points out faults in ‘hurried’ currency proposals” (“sceptical to the point of contempt”)

Document type: Press
Source: The Times , 11 July 1978
Journalist: David Blake; Fred Emery
Editorial comments: An article by Fred Emery follows that by David Blake.
Importance ranking: Major
Word count: 1,153
Themes: Executive, Monetary policy, Economic, monetary & political union

Treasury points out faults in ‘hurried’ currency proposals

By David Blake

While still accepting the goal of greater monetary stability, the Treasury remains sceptical to the point of contempt of most of the detailed content of the Franco-German scheme for currencies presented at the Bremen summit.

The feeling seems to be that the five-point plan put forward by Chancellor Schmidt and President Giscard d'Estaing fails to answer most of the important questions which have to be answered. If anything workable is to be achieved, it is argued, there will have to be major changes and considerable clarification.

There is still clearly considerable anger at the way in which the proposal was “sprung” on the rest of the Community at Bremen. More substantial criticisms revolve round the vague and often confused terms in which the scheme is phrased, coupled with deep suspicion that the system is little more than a means of holding dowvn the mark and imposing restrictive policies on Germany’s partners.

There is considerable resentment at what is seen as the success of the German government in presenting its national interest as being a move for the greater good of Europe.

Only two characteristics of the scheme seem to be formulated to deal with the points which the United Kingdom has made in discussions on the setting up of a new scheme. These are that the system must not do anything to harm the dollar and the acceptance that it might be a good idea to set up some form of European monetary fund.

The point about the dollar is particulary important because the British view seems to be that the Ulnited States currency will be weak for some time to come, probably into next year.

To avoid damaging the dollar, the Franco-German proposals talk about intervention by countries taking part being in their own currencies, not dollars. This would prevent further pressure being on the United States currency.

However, most of the other items of the plan are castigated as ill-thought out, beginning with the very first sentence of the proposal which talks about the new arrangement being at least as strict as the “snake”. It is pointed out that this implies a narrower margin for nianouevre than the 2.25 per cent on either side currently allowed. Britain has not been informed of the suggestion that the margins should be narrowed to 1 per cent, though this seems to have been widely leaked by the scheme’s originators.

The commitment to tight margins is thought to be undermined by the woolly phras- ing which implies that parities will in future be fixed against some sort of basket of currencies, though this is unclear. There is also considerable unhappiness about the uncertainties on just how the “pooling of reserves” will take place. Tne British view is that much of this merely consists of relabelling reserves which already exist.

Instead of the $50,000m fund talked about, it is argued that at most half of that will be available in new money. Major questions about who will be able to draw on these reserves and under what conditions still remain to be worked out.

There is a fear that the system will impose tough conditions on countries needing to borrow money, but will not impose equilibrating conditions on countries who cause problems by running surpluses. The fact that the whole thing is dealt with in just a few hundred words is generally felt to show the danger of allowing enthusiastic amateurs to dream up schemes for monetary reform.

Quite apart from all these technical points, the commitment to greater convergence of economic policies is thought unacceptably weak. As drafted by the Franco-German statement this merely says that policies “conducive to greater stability” must be pursued by “deficit and surplus countries alike”. It is pointed out that this could mean a continuation of restrictive German policies everywhere rather than the extra German growth which Britain would like.

British ‘isolation’ at summit defended

By Fred Emery, Political Editor

Britain’s agreement to any proposed European “zone of monetary stability” would depend on a far reaching economic quid pro quo which EEC members were studying at Mr Callaghan’s insistence.

The Prime Mlinister explained to the Commons yesterday that commitments to growth and further “transfers of resources” from stronger to weaker mem- bers were kev items in a “parallel” study which, he claimed, he had got inserted into the original Franco-German proposal.

Put this way, Britain's delaying action at the Bremen EEC Council last wveek managed to sound almost like a triumph. Indeed it could turn out to have been an historic occasion, Mr Callaghan claimed, if it all turned out Britain’s way, in- cluding even a reform of the contentious common agricultural policy. He did not say, nor was he asked, what would happen if no agreement were reached.

The Prime Minister came to the Commons to try erasing impression of “isolation” at the summit, given in some reporting. The British had got what they wanted in putting the matter off until December officials insisted, or, to “ensure fuller preparation” as the Prime Mlinister's full statement had it. Mrs Thatcher insisted there was no way out of the world recession by standing aside: she exclaimed that the British people were shocked to find themselves relegated to the European second division, having been “the victors in Europe”.

This referernce to possible segregation of weak from strong currencies in the proposed scheme, was ignored by Mr Callaghan. He preferred to insist he was not going to be hurried into some ill prepared currency scheme, the way the Tories were in 1972, when, he added, Britain lost over $2,000m in seven weeks. He was trying to learn from the Opposition's mistakes even if they were not.

This managed, first to arouse Mr Heath, then to cause him to make a rare intervention. The former Prime Minister reprimanded Mr for working himself up into a frenzy orer 1972. Then in fact, Britain was not in the EEC and was “forced off an existing parity by speculation” just the way Mr Cailagihan had been in 1976 and, he added with a shaft, as in 1967 when Mr Callaghan, as Chancellor, devalued the pound.

Labour backbenchers barracked Mr Heath in his new guise as Callaghan baiter. And the Prime Minister retorted cruelly that Mr Heath’s “memory fails him”, claiming that now, as in 1972, there were non-EEC members inside the currency “snake” who were as vulnerable as was Britain in 1972.

But the essence of Mr Callaghan’s performance was its ambivalence. If the new scheme turned out to be in Britain’s interest, he would cheer it; of course it would entail surrendering power, like joining Nato.

The House would have to decide whether it wished Britain to remain poor and independent or sacrifice some power to be more prosperous, he told one anti-EEC Labour MP. But equallv he did not want to rush things.