UK and The Euro

Date : 05 January 2003

To : The Editor, The Business

From : Nagindas Khajuria

Subject : UK & The EURO

UK & THE EURO

Sir - In your editorial (An unhappy birthday for the euro, 22/23 December), you mention that ideal interest rates for Germany would be 1.7%, for Ireland 12.5% Portugal 9.9%, Italy 5.2%, Spain 7.8% and France 3.8% because of their differing levels of inflation and output.

Such research is ludicrous, for a number of reasons. Historically, central banks have used several methods to expand or contract the economy or aggregate demand: interest rates, open market operations and reserve ratios. National banks will continue to engage in open market operations and standing facilities on low, medium and high levels, as they have been doing for years.

Second, the governors of the 11 national central banks and the six executive board members of the European Central Bank comprise the governing council of the ECB and these 11 national banks will continue to play a vital role in monetary policies of the euro. This is quite different from the centralized control of the US Federal Reserve.

Third, prices or inflation in the above countries is only marginally higher than in the UK. Unemployment may be higher partly because of the way statistics are prepared.

Fourth, growth could be slightly lower in the Euro countries than the UK, but for decades their public sector services have been superior in quality and far cheaper in price than in the UK.

Fifth, it is nonsensical to have different interest rates applicable to countries which have the same exchange rates. Finally, there has never been one interest rate that fits all in the EU: there has always been base rate, Lombard rate, short-term rate, long-term rate, real interest rate, nominal interest rate and effective exchange rate, all different for individual EU member countries.

It is high time your paper acknowledges the positive aspects of the far sighted vision that the euro encapsulated, rather than just lingering on its short-term difficulties. The UK media, by playing all the time the tune the reader wants to hear, is doing a great disservice to this country.