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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

He describes the five tests that British Finance Minister Gordon Brown has devised as prerequisites to the UK joining the euro as "not bad".

"They all make a certain amount of sense, but any one of them could be interpreted subjectively as being satisfied."

Controversially, he believes that Britain could tolerate a joining rate far higher than is envisaged as feasible by unions and business leaders.

"I think that if Britain could get a rate of about 1.5 euros to the pound, it would be about right. If it adopted a lower rate, there would be too much inflation in the service industries. Manufacturing would always want it lower, but this would mean inflation.

"Quite apart from all the economic reasons, it would be no contest because the European countries would not accept too low a rate -- actually Britain may be lucky to get a rate of DM3 to the pound.

His view is that volatility in the euro-dollar rate could prove the crucial test of British membership. "Britain should join but should insist on a system for a more stable dollar-euro exchange rate. Britain will face some trauma if the rate changes too much," he says.

He also sees risks emanating from the regulatory, dirigiste tendencies within Europe.

"Harmonization is generally a good thing. But Britain is rightly worried about harmonizing up rather than harmonizing down. I think that should be a condition that Britain will not have to change its tax system."

Last year Mundell questioned the Britishness of the pound. The word originates from the Roman standard, and the pounds, shillings and pence denominations were first used by the Persians. It's the sort of stuff liable to make a euroskeptic's blood boil.

But on other matters the average Conservative eurosceptic would find little to disagree with. He was one of the University of Chicago economic revolutionaries of the 1960s who espoused the all-conquering mantra of tight money and tax cuts.

As his colleague Arthur Laffer wrote after Mundell won the 1999 Nobel prize, "To Mundell, the only closed economy was the world itself. The only meaningful monetary policy was global monetarism."

The intellectual basis for the euro is entrenching monetary and fiscal discipline and shrinking the size and scope of the state. The euro is embodiment of this, more than a symbol of European togetherness.

But Mundell's sights are set beyond Europe. He believes in a global currency -- the Intor -- formed as a G3 monetary union between the dollar, euro and yen areas. "What happens if this recession becomes far worse than anyone imagines? The slowdown turning to recession and even depression, with eight quarters of contraction rather than three?

"This would be devastating for the world economy, but the US could not do much on its own. Neither could Europe or Japan. So you could create some measure, a unit of global purchasing power, and some sort of world central bank."

His idea is that the three biggest currency blocs form a virtual union with locked exchange rates and common monetary policy, but retaining the paper currency.

Mundell is well aware of the political exigencies of this. He has a political roadmap that starts with the formation of an Asia-Pacific dollar-zone, dollarization of Hong Kong, and then a link between the euro and the dollar. A possible global recession makes such arrangements all the more prescient, he says.

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