Spin of a Coin May End Monetary Union

The Mail on Sunday (London, England), January 18, 1998 | Go to article overview

Spin of a Coin May End Monetary Union


Byline: WILLIAM KAY

A POSSIBLY lethal flaw has emerged in the mooted European Monetary Union, which is due to begin next January.

While the Wall Street Journal's prose is hardly in the bodice-ripping league, even by the standards of weighty broadsheets, last week it recounted problems that have plagued previous monetary unions in the US and Europe - and highlighted a crucial chink in EMU's armour.

The most striking image the Journal painted was of 19th Century arbitrageurs taking the ferry from Denmark to Sweden to exchange sackfuls of Danish crowns for the more valuable Swedish version on a one-to-one basis.

They returned to Denmark to use the Swedish crowns to buy even more of the Danish to take back to Sweden, and so on.

Sweden's cash became more attractive because Danish inflation hit the value of its currency.

At the same time, a monetary union of France, Italy, Switzerland, Belgium and Greece foundered on Italy's fondness for budget deficits, cheapening its coinage.

Lo and behold, the country of origin will be stamped on each EMU euro coin, recreating the possibility that people will prefer to hold the euro of one country rather than another.

To prevent mon-tary union collapsing under a speculative tide, the new European Central Bank must be allowed to set monetary policy for all its members.

If that breaks down, for whatever reason, so will the euro.

WAR Loan, the notorious undated government stock, has touched [pounds sterling]58, its highest since 1963 when the Beatles were but mere lads.

That is nearly three times the [pounds sterling]18.70 it fetched at its low point in the terrible year of 1974.

This is a testimony to the success of the fight against inflation, for every nominal [pounds sterling]100 of War Loan carries an interest coupon of 3.5%. The price fell to [pounds sterling]18.70 because investors effectively demanded a yield of 18.7%. Now they are content with only 6.5%.

As some economists see inflation and interest rates rising this year, it may be time to sell War Loan.

Unlike modern government stock, it contains no promise to repay the capital.

Alternatively, it is time the government did the decent thing and repaid longsuffering holders. Even [pounds sterling]75 for every [pounds sterling]100 nominal would be something for investors who have seen their savings virtually wiped out.

Nigel Lawson had the opportunity to do this in the Eighties when he was Chancellor, but scuttled behind the pitiful excuse that many of the original holders were '

dead, so repayment would merely benefit people already sitting on a profit. …

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