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280 Unemployment and Monetary Policy in the European Union
poratism, lack of competition and mounting unemployment needs a co-operative
frontal attack.
That there is another way is demonstrated by Switzerland, Italy, and the U.K.
Switzerland has interest rates of less than 5 percent, far below Germany’s. The
U.K. when it was pushed out of the ERM last autumn opted for growth and is
well on the way, without signs of strain or loss of financial stability. Italy’s demise
at the hands of speculators became the foundation for growth and for far-reaching
domestic reform. Italy demonstrates that unions can be far-sighted and willing
to co-operate in a growth strategy that does not translate into inflation.
Interest rate cuts cannot be accomplished without some depreciation of currencies.
Only with the expectation of an appreciation relative to the D-Mark can
a currency have lower interest rates than Germany. The practical question then
is how much the French franc, say, must decline to support moderate interest
rates. Our view is that the necessary depreciation is very limited, perhaps 5 to 7
percent. After all, France is just moving ahead of German rate cuts by six to
twelve months or so, and that hardly warrants big swings. Much the same argument
applies to Belgium and Denmark. Thus the extent of depreciation need not
be large and stabilising speculation can be counted on to limit the fall.
There is, of course, a strong argument for limiting unnecessary volatility and
uncertainty by broadly and informally co-ordinating the strategy among the
floaters. For the most part they should be able to cut interest rates in line with
one another, and that will limit excess volatility. Where they part company will
depend on their attitude towards unemployment, their performance on inflation,
and their success in reducing rates without overly large depreciation.
If interest rate targeting takes advantage of the new room for letting exchange
rates move and growth resume, there is also the question of when to tighten the
margins and return to the EMU project.
The immediate priority is flexibility and that precludes formal commitments
to unsustainable exchange rate targets. There is no reason, however, to rule out
pragmatic trading ranges around newly found levels of the exchange rates, once
interest rates have been cut. Thus we do not expect extreme volatility, just because
the margins are wide. Ultimately, 18 months or two years from now, Europeans
can reexamine whether the preconditions for stable rates or even monetary union
are in place, how to remedy shortcomings, how to assure better co-ordination,
and how to proceed.
Whether ultimately there is a common money or not, a common Europe has
already shown its worth in the establishment of a market where goods and services
flow freely. The good name of Europe will be all the better if further integration
yields prosperity and not mass unemployment.