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Tue, Nov 27, 2001 - Page 19 News List

Nobel laureate helped to father the euro system

A univeristy professor played a big role in setting up tshe European currency, and he's optimistic about its chances

THE OBSERVER , LONDON

Robert Mundell does not claim paternity of the single currency, although it is often ascribed to him. But the Nobel prizewinning economist is not guilty of neglect -- he merely sees himself as "one of several godfathers" to the euro, rather than its inventor.

"I'm very gratified that it is coming to fruition. A single currency is close to being absolutely necessary for Europe," says the Columbia University professor.

In 1972, Mundell worked as a leading member of the EEC's Study Group on Economic and Monetary Union in Europe. This followed his published works on "optimal currency areas," and a seminal 1973 article called "Uncommon arguments for common currencies."

These were the theoretical bases for the process that will end with the launch of euro notes and coins on Jan. 1 next year.

"I think Europeans have a mixture of anticipation, excitement and worry. It's a psychological challenge to shift their unit of account, especially for older people. "Think back to America, say, in 1792, when they shifted from pounds and shillings to Spanish dollars. They didn't sort that out for decades."

So far, Mundell is fairly upbeat about the euro's 30-year journey from textbook to the high streets of Europe.

"Every single economy in the Eurozone has a better monetary policy than it did before," he says. "Every country in Europe, and every citizen within, will have a world class currency and all, bar Germany, have lower interest rates than before. We are already starting to see the benefits of price transparency.

"The euro has the chance to change the power configuration of the world economy."

That's not how the currency markets have judged the fledgling currency to date. The virtual euro has lost a quarter of its value against the dollar since its launch in 1999.

"That's turned out to be a blessing in disguise. The fall in the euro exchange rate has helped sustain European growth," Mundell says.

He believes that the European Central Bank's monetary policy record to date has been impressive. The euro's depreciation has had nothing to do with alleged transparency and credibility deficiencies, he argues.

"I'm not sure how much secrecy is optimal for a central bank. If it was completely open, individuals wouldn't give their real opinion and decisions would be difficult. The less transparency there is, the more discretion is left for policy."

Further moves on transparency are not necessary, he says. "I don't think that publishing minutes really matters all that much, like I don't think it'll make much difference if you have [Bank of France governor Jean-Claude] Trichet as governor.'

Mundell habitually picks out episodes from economic history to illustrate his views. On transparency, his example is Montagu Norman, Bank of England governor from 1920 to 1944, whose portrait imperiously stares down on today's British monetary policy decision-makers.

"Montagu Norman was known as `the mystery man of high finance' and he excelled in his era of mystery, until his psychosis was discovered," he says.

"You know, the Bank for International Settlements was set up in Basel only because it was close to his psychiatrist."

As you might expect of a Nobel prizewinner, Mundell seems to know too much about his specialist area. But he has a refreshing desire to make his theoretical concepts relevant for the analysis of policy-making and of history.

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