Roy Jenkins – 1986 Speech on the Exchange Rate Mechanism

Below is the text of the speech made by Roy Jenkins, the then SDP MP for Glasgow Hillhead, in the House of Commons on 29 January 1986.

I beg to move,

That this House urges the Government to bring the United Kingdom into the Exchange Rate Mechanism of the European Monetary System forthwith.
The European monetary system, which this motion calls upon the Government to join forthwith, will be seven years old in a couple of months time. It was the most recent major initiative taken by the European Community and it was put into place remarkably quickly, partly because it did not involve a great series of interlocking individual decisions and therefore did not fall foul of any unanimity rules or even the need for a qualified majority.

I tried to relaunch the idea of a monetary route forward in a speech in Florence in the autumn of 1977. The European Council after that, in December, showed polite interest, but to say that there was any great sense of urgency or serious intent at that stage would be an exaggeration. The whole thing changed dramatically in the late winter and early spring. For most of its life the EMS has had to contend with the dollar being too high. Paradoxically, that changed because of the temporarily collapsing dollar in the early months of 1978. I vividly remember the occasion when I went to Bonn and Helmut Schmidt told me that he had changed his mind and he thought it was essential to go forward straightaway. He believed that he could get it on board as soon as the French legislative elections, due that year, as this year, were out of the way. So it happened.

The scheme was unveiled at the Copenhagen European Council that spring and was in place exactly a year later. I do not think there is serious doubt about its limited but substantial success for the participating countries. It has established the fact that it is a lasting entity, despite the fact that the buffeting waves of a violently fluctuating dollar, in particular, have been much greater than anybody expected when the scheme was being put into place. The EMS has survived well.

There have been many changes of central rates affecting nearly all the currencies in varying degrees but they have been carried through remarkably speedily and smoothly. That is a dramatic contrast to the delayed and traumatic devaluation under the otherwise admirable Bretton Woods system. Those changes have gone through with remarkable speed. When the Foreign Secretary held the post of Chancellor of the Exchequer he presided over a number of meetings of the Economic Monetary Council which put them through. That is an extraordinary example of presiding from outside over a thing which was working extremely well internally.

Some of the changes have not been such as to render the system nugatory. The Italians asked specially for a wider margin of 6 per cent. either way for the lira compared with the margin of 2·25 per cent. for the other participating currencies. When the Italian lira moved sharply last July, that was the first move for three years. The idea that there has been constant instability and change is certainly not true.

The fairly recent International Monetary Fund study calculates that the EMS has taken about 30 per cent. off the fluctuations between the participating currencies that would have occurred otherwise. That has been extremely valuable, particularly in view of how much Europe has been plagued by currency fluctuations within the Community, especially in the mid-1970s. This is one of the things that set my mind moving in this direction in 1977. Europe had been doing well throughout the 1960s and the early 1970s compared with America or Japan, but in the mid-1970s it suddenly started to do much worse. I was convinced that one of the major reasons was that the 1960s and early 1970s were a time of relative currency stability in the world, whereas the late 1970s were a time of violent currency and exchange rate fluctuations. That was internal, in Europe—outwith Japan and the United States. There was a considerable effect, but it was external to those countries.

In addition, there has been a remarkable recent development in the past couple of years in the private use of the ecu, paradoxically, perhaps, more than in the public use of the ecu. It is now a major borrowing and lending currency.
Therefore, there is no question but that the system which, by our own choice, we are outside, is successful. I think that all the participants value it and other potential participants are eager to join it. For instance, Senor Gonzalez told me just before he came into the Community that he believed that he could bring forward by a year the date of Spanish adherence to the EMS, and he would regard that as very desirable from the point of view of full Spanish membership of the Community and influence within the Community. We might well take a little notice of that point.

How was it that we did not join at the beginning? Three countries had doubts, although at slightly different stages. Italy and Ireland went away from the last European Council leaving serious doubts as to whether they would join. Then they took their courage in both hands and cam:, in. I am sure that neither of them has regretted that decision at all. Why not us? I heard the reasons given by two successive Governments. Indeed, they are engraved on my mind. I remember that in November 1978 I went to see the right hon. Member for Cardiff, South and Penarth (Mr. Callaghan), and he assured me that, in principle, he would like the Labour Government to bring Britain into full participation in the exchange rate mechanism. However, he added, “I am extremely worried at being locked in at too high a rate, which would inhibit our ability to deal with unemployment.” Almost exactly six months later I went to see the right hon. Lady who still presides over the Government, and she assured me that in principle she was extremely anxious for Britain to be a full participant, but, she said, “I am extremely worried about being locked in at too low a rate, which would inhibit our ability to deal with inflation.” So we did not join. As a matter of fact, all the participating countries had lower unemployment and lower inflation than we did in the two years that followed.

Therefore, it is difficult to believe that such fears—no doubt legitimate—as well as an endemic offshore mentality were not at work in both those Governments. That worked still more strongly than the reasons given. It was careless and sad that we should have repeated for the third time the mistake of joining late. We did so with the European Coal and Steel Community in 1951 and the ​ European Community in 1957. If one is joining an organisation it is sensible, if possible, to be there at the beginning because one can influence the organisation’s shape. It is better to do that than to stand aside for the third time, never learning the lesson, and saying that the shape does not fit, when one has not been there to influence its creation.

Mr. Douglas Hogg (Grantham)

Will the right hon. Gentleman comment on the point that the volatility of sterling, because it is an oil currency, makes membership of the EMS more difficult for this country than for the non-oil economies?

Mr. Jenkins

That will make British membership more difficult for the European monetary system rather than for this country. In a way, we are lucky that it has been, and is still, willing to have a more volatile currency in full membership. We want to try to control the volatility of sterling as much as we can.

In view of the fear of the right hon. Member for Cardiff, South and Penarth—[Interruption.]—what happened to sterling subsequently—(Interruption.]—

Mr. Deputy Speaker (Mr. Ernest Armstrong)

Order. If the hon. member for Bolsover (Mr. Skinner) wants to intervene in the debate, he should come into the Chamber.

Mr. Jenkins

Following the fear of the right hon. Member for Cardiff, South and Penarth that he would be locked in at too high a rate, what happened was that, with us outside the EMS, sterling appreciated beyond the wildest fears of anybody in 1978–79. Over two years it rose from $1·60 to $2·40. The result was that our competitive index worsened by 60 per cent., on the scale measured by the IMF. The result of that was the destruction of one fifth of our manufacturing industry and the associated increase in unemployment.

Nobody should suggest that membership of the EMS would have obviated all that. However, I believe that it would have reduced it substantially. It is a great mistake to believe that any monetary scheme or monetary mechanism can or perhaps should resist the long-term swell of the currency ocean. It can substantially take the top off the waves, particularly when, as happens too often, exchange rates are reacting not to differing levels of inflation, not to differing rates of productivity growth, not to trade imbalances, but much more to changes of sentiments or capital flows. The monetary system can do a great deal to cut the top off such waves.

That was very much the case in 1980. Everybody knew that rate could not be sustained. It was just a question of when it came down. If we had been in the EMS, the bubble would have been pricked much more quickly, and the damage to our industry and employment would have been much more limited. We would have avoided much of the ridiculous parabola in the sky of sterling going up from $1·60 to $2·40 and then coming down within 18 months back to $1·60, and, for a short period, down to $1·07.

Mr. Nigel Spearing (Newham, South)

I should like to take the right hon. Gentleman back to some of the possible disadvantages he mentioned in relation to my right hon. Friend the Member for Cardiff, South and Penarth (Mr. Callaghan). Is it not a fact that the EMS is ​ much more than a smoothing insurance mechanism? Are there not potential disadvantages in a Government’s requirements in respect of a general economic policy to maintain parities? Is not the ruling mechanism—that of the central banks—likely to create difficulties for any member Government which they might not have if it were not a member of the system, bearing in mind particularly the strength of the Bundesbank and of the market?

Mr. Jenkins

I hear the hon. Gentleman and his colleagues, but I think that the hon. Gentleman has himself complained about how British economic policy has developed over the past seven years. He has complained that we have had by far the highest unemployment rate in years. I do not understand how his dedicated, dogmatic anti-Europeanism can lead him to say that he would rather have what has happened outside the EMS than operate on a co-operative basis. In my view, we would have been able to avoid a significant part of the sterling fluctuation. That would have given us a substantial and healthier base for our economy.

I have been dealing in detail largely with the past. I shall now consider the position today. Although it would be better to enter the exchange rate mechanism at any time than never to enter it at all, there are obviously some times when it would be much better to enter. This is a very good time because there is a particular conjunction between the sterling-dollar rate and the sterling-deutschmark rate. Those are the two factors of primary importance at which people have been looking in seeking the most favourable juncture.

Last February, 11 months ago, there was a good occasion. The right hon. Member for Guildford (Mr. Howell) noted that in his interesting publication, which I read carefully. That opportunity was allowed to slip away, but now there is another good occasion. The pound is approximately 3·33 deutschmarks, down from 3·75 a month ago — a devaluation of more than 11 per cent. against a major European currency.

I believe that most of the decreases in oil prices may have occurred. The price was $30 a barrel in November. The price is moving, but let us assume that it settles down somewhere between $17 and $20 a barrel. We will have a very uncertain market, but at least the really substantial move has probably occurred.

Sentiment in the oil markets is very uncertain, and the price is likely to fluctuate with every rumour about what Saudi Arabia is going to do, or about the date of the next OPEC meeting. The problem is how to tame the impact of the short-term changes in sentiment without hopelessly disrupting the domestic economy.

Outside, interest rates are almost the Government’s only weapon. If we were fully in the EMS, support from our partners would provide an alternative means to manage short-term fluctuations. We would have a much better chance of living through a period of see-sawing expectations without disruptive alterations to either exchange or interest rates.

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)

I am following the right hon. Gentleman’s argument with great interest. He talked about interest rates and the damage that fluctuation of the pound has done to manufacturing industry. The right hon. Gentleman knows Birmingham almost as well as I do, so he realises the effects. Control of the EMS would not rest on good will, ​ which does not exist between central banks—only logic does. Because of what has happened to the pound as a result of the influence of the petrocurrency, and because of the present interest rates structure, would not interest rates be 2 to 3 per cent. higher now if we had been in the EMS? Would that not be more dangerous for us than the present system?

Mr. Jenkins

I think that interest rates would be lower if we were in the EMS. I would not say that interest rates would in all circumstances be lower in the EMS, but I would say at the present time in my view—one can only express one’s own view—interest rates would be lower, and the immediate prospect would be one of lower rather than higher interest rates.

Mr. Tony Blair (Sedgefield)

The motion says that we should forthwith join the exchange rate mechanism. Suppose we had joined in October or November last year and the best rate we could have achieved was 3·60 or perhaps 3·50 deutschmarks to the pound. Considering the pressure on the pound last week, is it not the case that we would have been raising interest rates?

Mr. Jenkins

I am saying that we are now at the best juncture we have reached for some time. There have been other good ones. I would not have joined last October. I would have joined last February—

Mr. Dennis Skinner (Bolsover)

The right hon. Gentleman said “at any time”.

Mr. Jenkins

I said it is better to get in, rather than never to get in. Over the past seven years we have become like lift dwellers in a department store. We have gone into the lift, and it has gone up and down past every floor. The attendant has called out, “Soft furnishings, hard furnishings, sports goods, toys” and we have said “No, we want none of those.” We always want to move on to the next floor. Lifts are very useful objects, but they are not suitable for permanent living. If one is always to say that there is never the perfect opportunity and thus try to get out before it is suitable, it would be more advantageous to get out on the floor that suits one, rather than on the floor that does not suit one. I would not stay in the lift indefinitely, and that is what the policy of the Government is about.

Apart from the short-term fluctuating position, there is also the medium and long-term position, and without the oil price shocks of recent weeks we would anyway have been in for a rough landing as our oil surplus runs down. What I am saying is that our huge surplus of oil will certainly be given to Russia, and it seems to me that we greatly want the assistance, if we can have it, of our other European partners to try and make that landing smoother. Be in no doubt that having reserves 10 times ours, which are those that are at the disposal of the EMS, is a considerable benefit. We are lucky that they still want us in.

Why do they? I think the reason bears upon another more general reason. They want us in more because of the importance of the City of London as a financial centre, rather than because of the importance of sterling as a currency. It is not nearly as important as the deutschmark.

It is greatly in the interests of every trading country and every economy to make sense of the world monetary system. Be in no doubt, with the fluctuations that we have had recently — and I am in favour of changes in ​ currency rates which reflect realities in the performance of different economies—nobody is suggesting that we can or should resist the violent changes which make the free-floating rate the enemy of international trade, of international investment flows, and bring into being the grave danger of creating protectionist forces to a strong degree with currencies such as the dollar, which are forced up and kept at artificial lengths for some time. I do not think we can possibly put Bretton Woods back on its pedestal again, but we can create a tripod of greater stability, and if we are to do that, it manifestly has to be on the basis of the dollar, the yen, and the ecu as the currency of the European system.

As long as Britain is outside the mechanism, the European leg of the tripod will be hobbled by the absence of the City of London more than by the absence of sterling. It is as though New York and Chicago were outside the dollar area. That is why Britain is still welcome in the exchange rate mechanism. It is also an additional reason why we should be in favour of entering it. Enlightened self-interest is our motive for getting some sense and stability back into the international monetary system.

I am convinced that so long as Britain remains outside the ERM—outside the only major Community initiative in the past 10 years— and so long as she manifestly repeats the old habit of 1951 and 1957, we shall inevitably diminish our influence on other matters concerning the European Community. Spain noticed that fact as soon as she entered the EEC. She said, “We want to have full influence and we must be a fully participating member.” It is curious that somehow we cannot see that.

On direct and indirect grounds, the case is strong. The moment is as good a one as we are likely to get. I urge the Chancellor to overcome what I fear has now become the Prime Minister’s prejudice and, in accordance with what is now a substantial balance of informed opinion, to get on with it.

Roy Jenkins – 1978 Speech at the European League for Economic Co-operation

Below is the text of the speech made by the President of the EC Commission, Roy Jenkins, at a dinner held by the European League for Economic Co-operation at the Mansion House in London on 17th April 1978.

If the mechanisms of the European Community are economic its aims are political.  This statement, commonplace enough now, after twenty- five years of the Community’s existence is still likely, in Britain at least, to provoke from some quarters cries against federalism and resonant pronouncements reminiscent  of the books of A.V. Dicey about sovereignty.  But the economics of the Community involves jobs and declining industries  – monetary stability; regional policy; energy options – all these are the stuff of politics not of bureaucracy.  And, although there may be some who believe to the contrary, the institutions of the Community have been carefully constructed, and indeed adapted over time, to allow for the interplay of argument and its resolution at both technical and political level.  They are not perfect.  The enlargement of 1973 put them under strain.

The future enlargement from nine to twelve will require changes, but the framework for decision is there.

I make these introductory remarks because I firmly believe that there is at the present time an opportunity to use the Community machinery to begin to resolve the economic problems which face all Member States and so enhance the political and economic stature of Europe.  The size of the stakes we are now paying for in the world economic game is high.  I believe this at least is appreciated in the United Kingdom.  What I am less sure about is whether, here, there is a full enough or clear enough recognition of the common  nature of the problems and of the advantages of a common Community response to them.

Despite the real benefits of North Sea oil the economy of the United Kingdom remains as vulnerable, particularly given its special dependence on overseas trade, as other Community countries.  It has at least as much therefore to gain from common Community action as the stronger Community economies.

I would ask whether, despite the much- vaunted practicality of the British people, they do not find their view of the practical opportunities of the landscape before them obscured by drifting clouds of unreason, market ‘Beware – federalism’ – or ‘Warning: bureaucracy’.  I should therefore like this evening to try to set before you the main problems we face, the way in which I believe the Community can contribute to ease them, and could, indeed should, in my view, be the response in the United Kingdom.

There are three principal areas of difficulty: the internal Community economy, our external economic relations, and world monetary instability.  I take each in turn.

The average growth rate of the Community remains sluggish. We are well short of our target  for this year, and behind the other main industrial  units in the world.  The consequence of a persistence of present levels of performance would be depressing.

First, there would be no prospect of making an impact on unemployment.  It now stands at 6 1/2 million for the Community as a whole.  No Member State is unaffected.  40% of those out of work are under 25 years of age.  Other things being equal the situation will get worse and no better over the next few years, as 9 million more young people come onto the labour market than those who leave it.  Second, a sluggish economy breeds business hesitancy and trade union resentment.  It creates a bad climate in which to carry out the adaptation and restructuring of industry which is urgently necessary to restore any real chance of lasting competitiveness in many sectors.  Third, it slows down the full integration of the Community market, and puts at risk much of what has already been achieved.  Intra-Community trade grew by only 2% in 1977 compared with an annual average of 9% in the previous decade.

It may be tempting to argue that we are still witnessing a delayed response to the shock of the 1973 oil price rise.  But that is, in my view, self-deceiving.  That shock was severe but it has been a fact of life for nearly five years and if we were fundamentally healthy we should by now have absorbed it.

Nor, when the other main industrial countries are expanding faster than we are, can we put the major blame on the rest of the world.  As the world’s biggest trading bloc we have a major responsibility.  We must offer our own solutions and not simply press others to substitute for us.

Second, we face acute problems in relation to what is now becoming known as the “international division of labour”.  Beyond its intensive internal trade between the Member States the Community is more dependent upon external trade than either the United States or Japan; its interest, therefore, in the maintenance and development of an open world trading system is immense.  In addition, the Community, more than the other industrialised parts of the world, has an especially close interest in its relationship with the Third World.  This is true of trade and true of politics.  We have been in the lead in the North/South dialogue.  We have invested a lot of political, capital in this relationship, the Lomé Convention has been one of our major success.  We are the threshold of its renegotiation.

At the same time it is from the Third World, together with the non-Community countries of Europe, that our surpluses come.  Yet we are competitively very vulnerable not only to Japan and to other Far Eastern countries which have developed in its wake but also to the “industrialised pockets” in the Third World.  The impact of this competition on our industries is great.  The Community has had to undertake a series of difficult negotiations, notably in steel and textiles, to gain a breathing space for these industries.  But some of these actions give us only a short breathing space – time in which we have to restructure industry or face the alternative of growing and permanent uncompetitiveness.

Our lack of growth and the potential frailty of our external trading strength are two of our major continuing problems, but the most pressing is the interlocking crisis in the international monetary system – or rather the lack of system.  Since 1971 we have lived without the rules of Bretton Woods.  The experience of the last seven years, compared to that of the preceding decades, does not suggest that the absence of such rules is a rewarding national freedom.  But the one feature of Bretton Woods that remains is the monetary predominance of the dollar.  This is something separate from the weight and importance of the economy of the United States, which is necessarily great and will continue to be so.  But the weight of the dollar is still greater and more pervasive.  It remains the only effective medium of international exchange.  Its position greatly affects our intra-Community relationship and the nexus of the Euro-currency markets as well as our trading position with the rest of the world.  The present weakness of the dollar leaves Europe, and the world as a whole, unstable and vulnerable.  To say this is not to be hostile to the United States, any more than it was hostile to Britain to try to deal with the over-extended role of sterling in the Sixties.  I do not join with those who put the main blame on American policy.  It is much more that the system is out of joint, with a large part of the legacy of Bretton Woods remaining but its central mechanisms having been removed.

These are the central economic and monetary and, therefore political issues, which we have to tackle at the present time.

Alongside these is the fact that our problems have to be seen in the context of the imminent enlargement of the Community to ten member and in the not long delayed enlargement to twelve.  What is obvious is that such an enlargement will be a weakening factor for the Community unless, in advance, it is given greater internal coherence both economically and institutionally.  The need for Community resources is bound to be increased by the inclusion of three new relatively poor members.  At the same time, it would be quite unacceptable politically to treat the new applicants more favourably than parts of the existing Community where the need is equally great.  In this respect, there was an important but so far publicly neglected recognition by the European Council in Copenhagen that the pursuit of greater internal coherence in the Community implies the determined reduction of regional imbalances.  This is indeed in the words of the Council one of the key objectives of the Community enterprise.  The result is a commitment to deal not just with our existing regional differences but, if we are to make a success of enlargement, as we must, we have to think from here forward in terms of twelve and not of nine.

The prospect of enlargement has proved again, as did the enlargement of 1973, the Community’s power of attraction.  And that attraction is not just for membership but for relationship – especially from the Third World.  The problem is how to match that with equivalent internal strength.  I believe the opportunity is there to do so in the central economic and monetary field and that there are short-term steps and long-term strides which can be taken.

Let me first comment on the longer-term prospect for Community action.  From the autumn of last year, both in public speeches and private discussion, I have proclaimed and defended the thesis that an economic and monetary union of the Nine is not a distant academic dream but a necessary future reality.  The problem of monetary discrepancies within Europe threads its way through all our policies, disrupting the mechanism of the common agricultural policy through monetary compensatory amounts and weakening our external trade negotiating position.

What could our strength be if we had to currency stability between Hamburg, London and Rome, that there is between New York and San Francisco or Tokyo and Osaka?  It is no accident that of the three major industrial areas we are both the one with the weakest economic performance since monetary disorder became endemis, and the only one which suffers that disorder internally as well as externally.  The cost of disunion in terms of internal and international trade is becoming increasingly obvious and heavy.  On these two points at least the number of the converted now seems greater than the number of sceptics.

But there remains a good deal of scepticism about some of the internal effects of union and about its practicality – about the effects on prices, jobs, and standards of living.  I hope you will agree that as this is not an academic lecture but an after-dinner speec h I can proceed, at this stage, by assertion rather than argument.  First, the current economic situation places all our traditional assumptions in flux.  The old familiar relationships between reflation and employment and the balance of payments are like  navigational aids which have lost their validity as we sail into strange seas.  And their invalidity breeds intense discontent – in all countries.  But given the existing interdependence of the European economy, a break-out from the straight jacket of nationalist monetary policy could alter these relationships in our favour.  A single, homogeneous monetary policy could set, and maintain, a common high standard of price stability provided it were based on a well- prepared currency reform.  There are, of course, buried here a whole range of both political and technical issues.  All will have to be solved, but the prospect in their resolution would be a new economic environment, with stronger internal monetary disciplines and more relaxed external constraints.  The process of transition will require a mechanism for adjusting internal economic differences.  It would, therefore, have to be coupled to greater Community budgetary and financial powers, to give better geographical balance both, for example, in cyclical conditions and in the structural reconversion of declining industries.  The need for such action is already there within the Community in the disparities between its regions.  The prospect of enlargement underlines its importance.

The discussion of economic and monetary issues at Copenhagen was interesting and useful.  There we neither aimed at nor took decisions in this area.  But the common understanding of our problems was clear.  What we now need to do is to prepare with vigour proposals for common action.  Between now and the next European Council at Bremen we need to work out new dimensions of Community activity in the perspective of economic and monetary union.  President Giscard d’Estaing has pointed to our need in terms of a zone of monetary stability in Europe. In my view we can achieve this by seeking greater exchange rate stability between the currencies of Member States.  For this purpose it would in the judgment of the Commission be necessary to extend the Community exchange rate system beyond the snake; to create scope for the Community to develop new dimensions to the European Unit of Account – doing better service as a point of reference and a unit of account for credit and settlement in  our internal exchange rate relationship; and to increase the functions and resources of the European Monetary Co-operation Fund.

I hope the United Kingdom will be able to play a major part in producing achievement out of expectation, as much in its own interest as that of the Community.

Britain has now been in Europe for five years and the Community that now exists has been in part moulded by British influence.  Some of that influence has been beneficial.  For example, on the vexed question of the harmonisation of laws there is now a much greater recognition  than there was that the objective should not be as much as possible but as much as necessary.  But there is still in my view too great a tendency to concentrate attention on the minor issues and dodge political debate on the major ones.  There are historical reasons for this.  I know them better than most.  But to discuss Community policy we do not need to enter the realms of political theology although we do need a conception of what the Europe is about.  That view can be very simple.  The Community is, in part, a recognition that the economic conditions of coexistence in the late twentieth century are such that the scope and effect of decisions cannot be limited to a narrow national area.  We are interdependent, and that includes the world outside the Community as well as within.

Indeed, we work for an increasing degree of complementarity and common decision making on a worldwide scale.  Of course, the greater the scale, the greater the difficulties involved and often the greater the time that decisions can take to be realised.  But here in Western Europe we have been fortunate and intelligent enough to work out procedures and machinery for taking decisions in common on common problems.  It would be remarkably foolish to fail to co-operate fully in this established framework on the pretext of seeking wider solutions in a much vaguer framework.  Better European co-ordination should be the foundation and not the enemy of world advance.

I have put before you this evening what I believe some of these problems are and one major, systematic route of policy which could underpin our ability to deal with them all.  It is also a policy route along which real practical steps can now be taken.  It is time to think in these terms.  For too long Member States have tried  to grapple largely on their own with the most serious continuing economic situation we have know since the War.  We have wasted too much effort in arguing about whose responsibility it was to go for higher economic growth.  Let us now replace the outdated locomotive theory of economic advance with a plan for common action.  The four months which began with the Copenhagen European Council present the Community with an unusual combination o f test and opportunity.  We need to present a common and powerful front at the Western Economic Summit in July.  In order to avoid the confidence- weakening cynicism of a flabby outcome to that meeting, we need a clear sense of our own direction.  But that is an occasion and opportunity not the reason for advance.  The reasons exist already in our lack of growth, our need for external strength in a world of monetary instability and in the prospect of enlargement.  We can out of the present fragility of the European and world economy pluck a set of decisions which can lead to a strengthened European Community.  And that is in the interest of Britain in Europe.  The European League for Economic Co-operation has played that part in the past.  I hope that all of us here today will do so in the future.

Roy Jenkins – 1978 Speech to the Basle Society

Below is the text of a speech made by Roy Jenkins, then the President of the Commission of the European Communities, to the Basle Society of Statistics and Political Economy on Monday 13th November 1978.

This is the right place to talk about money, and in particular the monies of Europe. I intend to take full advantage of the opportunity you have given me today.

Next year it will be the 10th anniversary of the decision taken by the Heads of State and Government of the Community to work towards an economic and monetary union. The progress which has been made since then has been disappointing, but the objective remains intact. We are now making our second major effort to move towards it through the establishment of a zone of monetary stability in Europe to be achieved through the creation of the European Monetary System. If we succeed we shall give our Community the most creative impulse since the first achievements after the signature of the Treaty of Rome; if we fail we shall risk not just a minor seatback but the frustration of one of our fundamental purposes with all the political and economic consequences which that would entail.

Before looking at the choices which now face the Member States of the Community, I want to say a word or two about how and why we arrived where we are. Just over a year ago I tried to set out in a speech at Florence the reasons for re-examining the case for economic and monetary union. I wanted thus to take the issue out of the realm of academic debate and bring it back into that of live politics.

I do not need to rehearse the main arguments I then advanced but I will briefly mention them. I drew attention to the need for a more efficient and rationalized development of industry and commerce in Europe. I spoke of the so far unexercised ability of the Europeans to create a currency of their own, based on a spread of wealth and power comparable with those of the United States: in doing so I said that although I thought floating exchange rates were here to stay, they should be between continents rather than between the countries of Western Europe, all of which are intermingled in thickly populated half continent, and nine of which are united in a common market and pledged to political and economic integration. I said that control of a single European currency by a single European monetary authority could achieve a measure of anti-inflationary discipline beyond the reach of most individual Member States. I argued that policies which would favour stability and expansion, strengthen the demand on a broad geographical basis, and avoid exchange rate crises, would give a much needed new impulse on an historic scale to the European economy with the effect of reducing unemployment and creating new wealth throughout the system. I referred to the need for redistribution and transfer of resources within the system so that public finance could be channelled to poorer areas and the imbalances which continue to disfigure Community Europe could be counteracted. I called for decentralization in some fields to balance the centralization which would be necessary in a limited number of others. Finally I spoke of economic and monetary union as a means towards political integration and the ultimate European union to which the Members States of the Community are committed.

Since then things have moved further and faster than I – or I think anyone else – thought possible. Perhaps I should single out two main reasons for this change of climate. The first is that people became better aware that the differential movement of European currencies against each other was making nonsense of the notion of a common market, and still more that of a Community, and indeed affecting the ability of national governments to run their own economies alone or with other members of the Community. Those countries in surplus, most strongly export oriented, found that decline in demand from countries in deficit held back their ability to stimulate their economies; while those in deficit were frustrated in their efforts to achieve higher growth by a succession of exchange rate crises.

Hence in part the relatively poor productivity of Europe, the relatively poor rate of growth and the relatively high rate of unemployment, all of which stood in market contrast with what had been achieved in Europe in earlier decades of relative monetary stability. The United States and Japan, subject to intercontinental but not internal monetary upheavals, performed better.

The second major factor was the continuing weakness of the US dollar and the increasing precariousness of the international monetary system of which the dollar remains in practice, although not in theory (as under the Bretton Woods arrangement), the essential pivot. To keep some sort of system going and discharge their responsibilities in the common interest, the Europeans took in more dollars than they could conceivably want or need. This in turn had drastic effects on the ability of European governments to control their own money supply. In circumstances in which the world system was manifestly failing the Europeans not unnaturally felt that they should try to achieve some stability among themselves both for its own sake and in order to make a contribution to a new and better balanced international system in the future. I shall have a word or two more to say about this point later on.

Now we have been talking about the creation of a European Monetary System, and I hope – as is appropriate – that the birth is about to take place. Since the Copenhagen meeting of the European Council in April much work has been done, thanks in large measure to the impulse given by Chancellor Schmidt and President Giscard d’Estaing. The measure of agreement reached at the European Council at Bremen astonished the world and laid the basis for the detailed and technical work which is under way. As you know, we then envisaged that the European Council at Brussels next month should approve the creation of a European Monetary System to come into being on 1 January next year.

The creation of such a system would not of course be the same as European economic and monetary union, but it would be a major stride towards it. Success, while far from certain, is still well within our grasp. I want in the rest of my talk to consider some of the problems which have arisen and what might be done about them. First let me say as clearly and firmly as I can that there must be no back-sliding from what was envisaged at Bremen. There is a particular responsibility on those who then took the lead. The detailed and technical work to which I have just referred and which is of course essential if we are to achieve anything worthwhile, must not nevertheless be allowed to obscure or diminish the fundamental perspectives of Bremen. Let me recall what these were. First the European Council agreed that the creation of a zone of monetary stability in Europe was a highly desirable objective: the European Monetary System whose purpose was to bring it about must be durable and effective. Secondly the European Council agreed to work on the basis of a specific scheme for the creation of a European Monetary System although it naturally left this scheme open to amendment if necessary. Thirdly the European Council agreed that there should be concurrent studies of the action needed to be taken to strengthen the economies of the less prosperous member countries in the context of a European Monetary System, and stated that such measures would be essential if the zone of monetary stability was to succeed.

The essentials of the scheme on which all agreed to work can be stated as the creation of an ECU (or European Currency Unit) at the centre of the system and as a means of settlement between Community monetary authorities; the depositing of reserves for use among Community central banks (an illustrative but impact-making figure of 20 per cent of the gold and dollar reserves of Member States and 20 per cent of their national currencies was cited); the co-ordination of exchange rate policies with regard to third countries; and the eventual creation of a European Monetary Fund. I recall these points because they are in some danger of being buried beneath the leaves of an autumn of detailed discussion. But the decisions at Bremen and the essentials of the scheme on which all agreed to work are the indispensable basis of what we intend to set in place next year.

Some of the arguments which have taken place in and out of the Community institutions and between governments necessarily have a highly technical character. At the same time most cover points of underlying importance. First there has been the discussion about the choice of a numeraire for the new system. Should exchange rates be defined in terms of a parity grid, as in the present snake? Or should they be defined in terms of a basket of currencies, the basket in this case being the European Currency Unit whose composition would be the same as that of the present European unit of account? There are strong technical arguments for using the grid as the method of intervention but there has also been an underlying division between those countries at present in the snake who fear that the introduction of a basket system would impose unwanted responsibilities on them and promote inflation; and those at present outside who fear that the introduction of the parity grid would tilt the system in favour of creditor countries and impose an unwanted degree of deflation. I will not enter into the details of the argument, which I have no doubt are well known to you, but will simply draw attention to the so-called Belgian compromise which would define intervention obligations in terms of a parity grid, but use the basket as an indicator of divergence, that is to say would show whether creditor or debtor countries were getting out of line, and thus impose a certain symmetry of obligation. This argument is not resolved; but I have no doubt that it can and should be in the near future.

Second there has been discussion about the width of margins to each side of the numeraire, and the possibility of adjustment. Here again there is some conflict of interest between those who are happy to retain the present margins of the snake and those (one at any rate) who would prefer wider margins. This is an argument over percentages into which I shall not enter. The question of adjustment is more important. Any participant in the system must be able to change its central rate if its costs and prices move out of line with those of its competitors or if it has undergone a structural change in its balance of payments. This is already true of the existing snake arrangements. It would obviously be contrary to the spirit of the whole enterprise if certain countries, in particular those with relatively high rates of inflation, availed themselves too often and too easily of the possibility of change and made no sustained effort to bring their inflation rates down to the level of their partners. Nevertheless some flexibility must be built into the system, and some of the fears which have been expressed about its absence seem to me ill-founded.

Next there has been substantial discussion about the extent to the reserves on which members of the system can draw, and the conditions on which they could do so. The Commission’s position is clear: we support the arrangements set out in the scheme discussed at Bremen. This will take a good deal of time to work out.

There are a number of legal and even – in some countries – constitutional obstacles to be overcome but in order to ensure that when the new system comes into operation there will be sufficient financing to back it up we must at least agree substantially to strengthen the existing network of credit facilities. Here I think two improvements could be introduced: first the duration of the very short-term financing – the unlimited bilateral support that central banks can draw upon to finance their intervention operations – could be extended; and secondly the present network of short and medium-term credits should be increased in amount, from around 10 billion European units of account at the moment to around 25 billion.

Obviously the larger the credit facilities, the less they are likely to called upon. The more you have the less you need. There is no economy more self-defeating and short sighted than to fail to provide adequate reserves. The issues underlying the so-called technical points are obviously a great importance. But they must be seen in the wider context of our continuing and now more determined and successful efforts to bring about greater convergence in the economic policies of the Member States of the Community. Any arrangement for the future which was exclusively monetary would be bound to fail. The economies of the Community are now moving along more parallel paths than was the case a few years ago. Their trade with each other is immense. But the differences between them are still substantial. Inflation rates vary considerably. Resources are not evenly distributed. Growth rates are different. Budgetary and fiscal policies are different as well, with each government naturally doing what it finds best for its country’s particular circumstances and with only some regard for the interests of the Community as a whole. Clearly if the new European Monetary System is to be, in the words of Bremen, durable and effective, it must take account of the economic as well as monetary circumstances of each Member State, and be matched by a still greater effort of co-ordination on the part of member governments than any have been willing to attempt in the past. The Commission has made a series of proposals for such co-ordination, and has emphasised – as I do again today – the need for such co-ordination to be seen in the framework of an eventual economic and monetary union.

This general point was fully emphasised at Bremen. The specific argument which has since arisen is over the phrase then accepted which said that there would be “concurrent studies of the action needed to strengthen the economies of the less prosperous member countries”, all put clearly in the context of the European Monetary System. This is obviously of crucial importance to those countries which are less prosperous, and I betray no secret if I place in this category Ireland, Italy and the United Kingdom. What action should be taken to strengthen the economies of these countries is still under lively discussion. Some have talked of the need to produce a more rational transfer of resources inside the Community than arises out of such existing Community mechanisms as the Community budget and the Common Agricultural Policy. Others have spoken of the need for extension and reinforcement of such Community instruments as the Regional Fund and the Social Fund. Yet others have spoken of special loans at favourable rates of interest arranged through the European Investment Bank or other mechanisms. None of these questions is settled. The debate about them has opened up some pretty fundamental questions about the functioning of the Community and the equity of its present mechanisms. This is all to the good. But I think we all recognise that the problems of this magnitude cannot be fully settled very quickly with a speed sufficient to meet the stringest timetable – desirably stringent – for the setting up of a European Monetary System. But settled they must be if we are to have a Community which genuinely represents the common interests of Member States.

Before concluding I want to underline one fundamental point. The interests of our Member States are not in all cases the same. There is, for example, an obvious temptation for the existing members of the snake to conceive of a European Monetary System which would in many of its essentials be no more than the present snake writ large. There is another temptation to which my own country of Britain is subject: to see the system as yet another continental entanglement conceived in the interests of countries whose economic performance and problems are different from their own. My answer to those who would like the system simply to be a super snake is that it would simply be unworkable if it included, as it should, all or nearly all members of the Community. My answer to those who see it as a new entanglement in the interest of others is that first they should be less defensively suspicious (such suspicion has not served them well in the past); and second that if it should prove an entanglement it would mean that the system did not properly reflect the common interest and was for whatever reason badly designed. I appeal to all members of the Community to play a full and responsible part in the creation of a new institution in the interest of all.

I now give a warning. If it turns out that all members of the Community do not feel able to join, at least at the beginning, and we are obliged to work out ways of squaring some very uncomfortable circles, then I foresee the real danger of the evolution of a two-speed Europe, or perhaps even of a three-speed Europe when the Community is enlarged. In such circumstances the very sense of a Community would be imperilled. A European Monetary System must be to the benefit of all and take account of the circumstances of all. Responsibility for failure would not necessarily rest only with those who felt unable to join. It would rest also with those who insisted over-much on setting things in a mould which fitted some well, some not so well, and others not at all.

I conclude with a word on the international system of which the European Monetary System would be no more than a part. I repeat now what has been said many times before: that the European Monetary System is in no way directed against the international system nor against the US dollar. The health of the dollar is essential to the health of the international system, and we greatly welcome the measures recently taken by President Carter to strengthen the dollar. At the same time we must face the fact that the Bretton Woods system as we knew it after the war has broken down, and that we must gradually seek some new arrangements to take its place. No-one has suggested that the European Currency Unit should take the place of the dollar for which a leading role in the international monetary system remains necessary and unquestioned. But it is possible to envisage a system in which responsibility is more widely shared and in which both the European Currency Unit and of course the Japanese yen would play a more important part. This is to look further ahead than is perhaps now easy to do. Today I want simply to emphasise that we live in one interdependent world and that what we plan for Europe must from the beginning be seen as something which does not conflict with but assists the interests of the world as a whole.