The Europound's Effect
CAN the British behave like Germans economically? That's a way of questioning whether the entry of Britain into the European Monetary System (EMS), announced Oct. 5 by Chancellor of the Exchequer John Major, will succeed in its basic purpose of reducing inflation. Despite the decades since World War II, some British dislike the idea of their nation joining the German-mark bloc. But in a loose way, that is what entry into the EMS means. Sterling will be anchored to the deutche mark, the currency of the dominant European economic power. A united Germany should become even more powerful. Its independent central bank, the Bundesbank, has managed to provide something Germans value highly - a stable currency.
France was a member of the EMS when it was formed 11 years ago. At first, because its economy suffered more inflation than that of Germany, France had to devalue the franc periodically. But in recent years, France has followed a more conservative economic policy and has been lowering its inflation rate by about 0.8 percentage points per year. Next year, with the costs of reunification pushing up German prices, it could be that France will have lower inflation than Germany. But ``competitive disinflation,'' as the French call it, has required monetary and fiscal discipline. France paid a price in low growth and high unemployment.
Under Prime Minister Margaret Thatcher, Britain too managed greater monetary and fiscal discipline for most of the 1980s. Indeed, Britain was enjoying faster growth in output and productivity than West Germany. Britain was catching up slowly on Germany.
But the British economy got away again from its governmental managers late in the decade. Retail prices now are increasing at more than a 10 percent rate. The British government has had to boost short-term rates to 15 percent to rein in the booming economy. It must somehow restrain wages to a noninflationary growth rate, something it was unable to do in the 1980s.
Membership in the EMS could provide some external discipline for the British. The government and businessmen will be able to point to the requirements of maintaining Britain's new exchange-rate relationship to the German mark (and other European currencies in the EMS) as a rhetorical weapon in seeking more wage moderation. One economist says, however, it could take four years of slow growth and higher unemployment for Britain to cut inflation in half. The French now think their struggle was worthwhile. Will the British follow?