European Economic & Monetary Union: Resilience Will Prove Strong Point

The Birmingham Post (England), October 20, 1998 | Go to article overview

European Economic & Monetary Union: Resilience Will Prove Strong Point


Scepticism about the euro's ability to stave off financial crisis is a peculiarly British occupation.

Richard Fenton: political scaremongering.

The recent economic turmoil in Asia and Russia has given the euro's detractors a convenient cause for additional concern but Richard Fenton, a partner at KPMG in Birmingham, believes the euro will prove more resilient than some would like to believe.

"The impact of the Asian and Russian crises has been felt in currency markets across the globe, but some countries have fared worse than others in the fallout," Mr Fenton believes.

"As far as Europe is concerned, historically weak currencies, such as the Italian lira and the Spanish peseta, have come under intense scrutiny," he continues.

"There are genuine fears that poorly performing currencies such as these could send the euro train right off the tracks, forcing the European Central Bank to rethink its strategy.

"However, early evidence suggests that those countries which are set to participate in the single currency are becoming increasingly immune to the forces of the macro economy."

Perhaps the best example, says Mr Fenton, is the experience of Finland, which is set to join in EMU, and Sweden, which is not.

"Geographically and economically close, the former's currency has fared much better than its neighbour from the aftershocks of Asia and Russia.

"This phenomenon is particularly interesting because the euro is still an intangible.

"When it is launched, in all its glory, the threat will be less relevant since while national legacy currencies will remain in circulation for three years, they will be euros in all but name and there will be just one exchange rate pertinent to particip ating states and their foreign traders."

Scepticism about the euro's ability to stave off financial crisis is a peculiarly British occupation.

There has, Mr Fenton points out, been a certain amount of scaremongering among some politicians keen to stave off monetary union.

"This is compounded by a general lack of understanding about the currency," he adds stressing that it is vital to make the distinction between the euro and ERM.

He says: "Britain's experience of the latter is undoubtedly one of the root causes of the current cynicism regarding monetary union.

"However, ERM was a means of pegging exchange rates only.

"A common rate was set by Europe, which allowed member states a fluctuation margin of 2.5 per cent.

"While countries were forced to keep their currency movements within this parameter, they did not cede other powers, such as the right to vary interest rates, to Europe. …

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