An obscure economic dispute between Metallists and Cartalists reveals an unnoticed difficulty with Emu. Charles Goodhart, a leading financial economist, says that crises in the foreign exchange markets could simply shift to the bond marketsby Charles Goodhart / March 20, 1997 / Leave a comment
Published in March 1997 issue of Prospect Magazine
The conventional economic analysis of Emu compares the balance of savings in transactions costs-the cost in money, convenience and risk of dealing in more than one currency-against a potential worsening of difficulties in macroeconomic adjustment. After all a country’s declining competitiveness can be mediated, and the blow softened, by a declining exchange rate. If there is no insulating national currency, declining competitiveness must translate directly into unemployment. Proponents of Emu tend to be both more optimistic about the size of the transaction cost saving, and more sanguine about any worsening of adjustment difficulties. Those more sceptical about Emu stress the absence of a trans-European mechanism to aid adjustment by transferring wealth from rich areas to poor areas via taxes and benefits, as occurs now within nations. They also doubt the magnitude of the transaction cost savings, and contest the claim of Emu supporters that without a single currency the single market is threatened. Both sets of arguments quickly progress from the economic to the political.