So we’re one step closer to knowing the initial members of the exclusive Emu club. It’s one of the few clubs in the world where the members are tacitly encouraged to lie about themselves to gain entry even though they might be blackballed when truth emerges in a few years’ time. That, of course, is only if the club lasts that long and isn’t brought down by currency speculators before it even opens its doors. For while bilateral conversion rates among participating members will be announced on 2 May this year, they will not come into effect until 1 January 1999, leaving eight months for the markets to play with them at their will. These rates will not even be legally binding, merely statements of preference, so euro-candidate finance ministers will ultimately be forced to accept whatever figures foreign exchange traders give them before heading out to celebrate New Year’s Eve. HSBC Holdings chief international economist Mark Cliff says: “The markets could definitely break it (Emu) before it starts. But they would have to be convinced that they could win as the presumption is that there would be very strong resistance to any action. The central banks are not pledged to intervene but it would be the same as defending their own currency so they would be likely to intervene without limit.” Walter Eltis, economist with the Centre for Policy Studies, is more pessimistic: “There will be staggering opportunities for profit at the expense of those who, like the British government in 1992, seek to hang on to exchange rates which they cannot in the end sustain. George Soros will be there.” Even if Emu survives this, there are growing concerns it will not last the pace as populations suffer the effects of a monetary policy that is less tailored to their own region. Even the conservative IMF recently warned that the process of “conducting monetary policy at an EU-wide level is likely to be challenging”. The IMF’s concern is over the so-called “transmission mechanisms” – the varying impacts that monetary shocks have in different countries. The IMF’s research divided EU countries into two groups, according to the speed and extent with which they react to interest rate changes. The slow response group included Germany, the UK, Austria, the Netherlands, Belgium and Finland. The fast response group included France, Denmark, Italy, Portugal, Spain and Sweden. Output in countries in the first group bottomed out around 12 quarters after a sudden monetary tightening while in the second group it took only half the time. And the economic effects were nearly twice as strong in the first group. “While some of the differences are bound to disappear as soon as a single currency becomes a reality, others will only vanish in the long run, while others will be permanent,” the research concludes. When you add this to the fact that some countries have already had to apply cosmetic surgery to their economic data in order to make it look as if they are strong enough to join, then the longevity of the union is far from certain. Medeva group risk manger Peter Easdale is in no doubt that a break-up is possible: “I am not convinced it will hold together. If it does I don’t think it will be because of economics or the population but for political expediency.” He is far from alone in his concern. Bank of England governor Eddie George has voiced serious doubts about allowing France and Italy to join. And one of the German government’s so-called “five wise men” has said the economic window-dressing will put “enormous” pressure on the future European Central Bank. Harvard professor of economics Martin Feldstein warned in a recent essay that Emu is more likely to lead to conflicts between member countries themselves, and even with the US, saying it could “lead to war” (an extract is published on page 37). Like most experts, Paribas Emu economist Sharda Persaud believes that if it is to survive there must be a move towards political union. “There will have to be fiscal transfers between one region and another. National governments will be required to give money to the likes of the south of Italy. For this to work it (the union) will need to be built up and head towards a federal fiscalism and you will need a centralised budget.” But in the words of one FTSE-100 finance director: “Can you see the French lorry drivers or Spanish fishermen accepting paying their taxes so you can subsidise their rivals in Italy? It would be a bloodbath.” This begs the question as to whether eventually one or more countries might be thrown out if they prove too costly for the rest of the union. Say, for example, Italian civil servants went on strike because they were forced to cut their Friday lunch break to two hours and the result was lower output, damage to Italy’s fiscal position, increased borrowing for the whole of Euroland and even upward price pressure on pay. It is a scenario that was never mentioned in the Maastricht treaty and over which there has been “a conspiracy of silence” according to Mark Cliff. “It is the subject of much legal uncertainty. But if you keep in mind that there is a ‘no bail-out clause’ promising that if you misbehave you won’t be bailed out by other countries, then it is a possibility. There is the stability pact to initially penalise those that are misbehaving by profligate borrowing. But it remains to be seen if you could impose severe fines on countries that by definition were already short of money,” he says. Prudent computer software companies, ever on the lookout for market opportunities, are ready for the break-up. Wendy Haylock of the Business & Accounting Software Development Association explains: “Some companies, particularly the larger ones, are developing changes to software so it is possible to revert to the initial currency if Emu were to fail.” So while the Emu bandwagon has already travelled along some rocky roads, the path ahead could be even more uncomfortable. The wagon may be brimming with evangelical politicians but it’s still got to break through the barricades of profit-hungry markets and the populations of proudly independent nations who, at the best of times, distrust each other and can be brought to the boil at the whim of a tabloid editorial.
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