If you heard a cacophanous caterwauling yesterday morning, it was the sound of finance ministers all over continental Europe singing in the privacy of their bathrooms at the relief of having the European Exchange Rate Mechanism removed. The prospect of lower interest rates everywhere except Germany means that recovery should be able to start in the major economies led by France. It’s very good news for Compagnie des Machines Bull SA, but sad to say, so much damage has been done there that any Bull that emerges from recession will be a very different and much smaller creature than the one that went it. Like the UK, Italy is largely on the sidelines, so that while Ing C Olivetti & Co SpA should benefit modestly from recovery in France, its other major continental market is Germany, where hope of recovery has been driven further into the future by the events of last week, so that the one major computer company that can look for little if any benefit from the collapse of the Exchange Rate Mechanism is Siemens Nixdorf Informationssysteme AG. The reason that the prelude to the collapse has made things even worse in Germany than they were already is that, just like First World War generals sending more and more men over the top in a stalemated battle, central banks had been pouring resources into holding a tiny piece of territory that was not worth defending, at a terrible cost, not in lives but in jobs and failed companies. Central banks were buying Deutschmarks with their own threatened currencies in a vain attempt to hold their exchange rates, and all those marks sloshing around in the system have caused a painful leap in the German M3 money supply – the very indicator that the Bundesbank has been trying to restrain in order to get inflation back under control.
Fairies at the bottom of his garden
The result is that one legacy of the discredited monetary system will be interest rates in Germany higher for longer than would have been necessary without the massive interventions. Where from here? One wonders what world German finance minister inhabits when he announces in the middle of Sunday night that the next step in European Economic & Monetary Union, due to take place on January 1 1994 will go ahead as schedules, but there must be a very large tribe of fairies at the bottom of his garden. Where from here? The events of the past seven days should have postponed into at least the second decade of next century any further talk of a single European currency, but where the will exists, it would be beneficial to reduce the number of currencies in Europe, and to do so on a bilateral basis between consenting countries in private is far more likely to succeed than having it imposed from above in a Grand Plan. Until a few years ago, Ireland used sterling: it simply called it the punt. A single currency for Scandinavia would be feasible, Luxembourg already uses the Belgian franc and it would not be unrealistic for both to switch to the French franc. Until the economic chaos of reunification begins to recede, no country should sensibly want to be tied tightly to the mark, even though the Dutch, whose economy is becoming an extension of the German economy, have put themselves in that unenviable position. Austria and Switzerland are also logical mark users. And a single currency for Iberia, where the Spanish and Portuguese economies are locked together, would make sense. Italy and Greece could look at a new lire. That would reduce the Community to six currencies from 11 and a sustainable phased monetary union.
