The sad final days of the Deutschmark and the meaninglessness of economic league tablesby John Plender / May 20, 1998 / Leave a comment
Published in May 1998 issue of Prospect Magazine
So it’s goodbye to the once mighty Deutschmark. After last month’s grudging fiat from European central bankers, economic and monetary union is inevitable. Schadenfreude all round, as the Bundesbank is condemned to the status of a sub-post office in the European central banking system. This abandonment of national currencies is clearly momentous. But European idealists should not let it go to their heads. Emu’s origins, remember, lie in French economic diplomacy that could fairly be described as war by other means. I first understood this when I interviewed the then head of the Bundesbank, Karl Otto P?hl, for the BBC’s Money Programme in the late 1980s. Having mouthed economic platitudes on screen, the great man opened up once he knew the cameras had stopped rolling. Emu was all a French plot, he said, to knock him off his perch and muscle in on the Bundesbank’s monetary act. In the event it was Helmut Kohl who did for Karl Otto by imposing unification on terms that outraged the Bundesbank boss. But the Bundesbank had its revenge on the French by insisting that Emu should be underpinned by the least accountable central bank of all time. That is the price Europe must now pay for Deutschmark extinction. A curious postscript is that the Bundesbank has acquired devaluationist instincts in its twilight months. We have even had an explicit Deutschmark devaluation in the European exchange rate mechanism against the humble Irish punt. No one noticed. It was, of course, described as an Irish revaluation. u u u as was pointed out in Prospect’s “Curiosities” column last month, the British are remarkably unchauvinistic about their currency. Who else would put two and a half foreigners on a committee to set interest rates? The fully paid-up foreigners are DeAnne Julius (US) and Willem Buiter (Dutch). The half is Charles Goodhart who is Anglo-American (and uncle of the Prospect editor). What concerns some Brits is not so much nationality as craft skills and demarcation lines. A very senior ex-Threadneedle Street dignitary recently told me of his deep shock that mere economists had been allowed out of the backrooms to have majority say in monetary policy. His gist was that the monkeys had been put in charge of the zoo. Meanwhile we have had the governor, Eddie George, a supposed inflation nutter, restraining the hawkish economists. But economists could hardly make a bigger hash than that made by politicians, abetted by civil servants and central bankers, over the postwar period. The miracle is that europhobes still love sterling when it has lost so much of its value since 1945. u u u another endearing quality of the British is that despite their monetary misfortunes, their inferiority complex is less acute than that of the French and the Italians. Back in 1987, the Italians puffed up their GDP by including fancy estimates for the black economy. They then announced, to the sound of trumpets, that they had overtaken Britain in the economic league tables. By the mid-1990s il sorpasso, as it was known, had been reversed. Yet no one in Britain noticed, let alone celebrated. With the rise of sterling the Italian economy will have lost around a tenth of its value relative to Britain since then. The overshooting antics of the currency markets underline the silliness of economic league tables. The rupiah’s plunge, to take an extreme case, shrank the Indonesian economy by three quarters, in dollar terms, in a matter of months. What sort of yardstick is that? Nor will the pound stay high for ever. As Gavyn Davies has pointed out, the new European central bank is to be run by a gaggle of very central bankerly central bankers. I share his view-they will be more hawkish and produce a stronger euro than people think. u u u should british national pride be dented by the sale of Rolls Royce to the Germans? Of course not-this is Cool Britannia. As we all know, British comparative advantage lies in pop music, modish couture and high finance. The trouble is that the pop stars have no manners and the financiers run rings around the regulators. The latest hilarious regulatory failure concerns a Ruislip chemist, Jayesh Manek, who recently raised ?100m from the public for a new unit trust. Manek’s claim to fame is that he won an investment competition in the Sunday Times. Yet the competition’s rules were badly flawed; and Manek has now admitted that he won by exploiting a loophole. He selected his portfolio later than other entrants, after waiting to see which companies’ shares were rocketing at the start of the week. This did not prevent him from issuing a prospectus in which the competition was the chief selling point. “He beat them all, now you can join him” ran the message in giant print. Yet it was the Sunday Times he had outsmarted. Not a peep came from watchdogs IMRO and the Personal Investment Authority. Either they were asleep on the job; or their rulebook was as full of holes as the Sunday Times competition. On past form, probably both. That’s cool for you.