A large number of people have been proposing recently that Britain ought to join the European Exchange Rate Mechanism, and play a positive role in the discussions on monetary union. The latter, at least, is not going to happen as long as Margaret Thatcher is Prime Minister. No change in tactics has altered her implacable opposition to monetary union and a federal Europe. Meanwhile, the new Chancellor has virtually abandoned his predecessor's attempts to maintain an exchange rate target. The pound has fallen by 7% against the Deutschmark since John Major took over. Since 1979, the fall has been 31% against the D-mark and 17% against a trade-weighted basket of currencies.
The Governments monetary strategy for 1990-91 is now clear. Base rates will be kept above 12% this year, but sterling will be allowed to slide - as long as a fall of 4-5% per annum does not become a rout. The lower exchange rate will initially help exporters, but will maintain inflation. In 1991,1-2p off income tax and a cut in interest rates will occur in the run-up to the election.
In the EC, the Government will seek to frustrate all moves towards monetary union by trailing red herrings, including the suggestion that Britain might join the ERM. However, now that its founders are planning to go beyond the ERM, Britannia's coy hints that she might be prepared to name the day are neither here nor there. The important issue is the organisation of the coming European central bank - should it be independent of politicians and charged with maintaining price stability, or should it be politically controlled? In other words, should it be like the Bundesbank or the Bank of England?
West Germany's success in achieving price stability owes much to the Bundesbank, which is one of the most independent of central banks. Its board of directors is appointed by the provincial governments (Lander), which ensures its independence from the Federal Government. The bank is not bound by government directives, although as to 'take account of government policies'; its remit is to safe-guard the value of the currency. Several German Chancellors have disagreed with Bundesbank policies but have been unable to alter them fortunately, in the event.
The contrast with the Bank of England could hardly be greater. When the bank was nationalised in 1947, the then Chancellor boasted, The Bank of England is my creature.' Nevertheless, the Bank's governors were men of standing and influence. If they raised their eyebrows at government policies, it gave governments pause. Thus some Labour politicians talked about 'really nationalising the Bank'. in the even% it was the Thatcher Government which ended any de facto independence, with the first party-political appointment as governor.
The argument against an independent central bank is that it would be' undemocratic'. This is a very superficial claim. Democracy does not require that everything be under the direct control of government. On the contrary, it requires that many things - e.g. the administration of justice - be removed from direct government control and handed over to independent persons acting according to general principles laid down by the legislature. …