Euro currency no threat, claims Bank of England

10 January 1997

Euro currency no threat, claims Bank of England

By Philip Clarke

BRITISH farmers have little to fear from a single European currency, whether the UK is a participant or not.

Speaking at this weeks Oxford Farming Conference, deputy governor of the Bank of England, Howard Davies, said the odds were heavily in favour of the Euro going ahead on Jan 1, 1999.

"One should not underestimate the political will in favour of economic and monetary union in France, Germany and elsewhere in the EU," he said. "While there may be doubts about the popular support for a single currency, especially in Germany, the majority of political leaders are determined to make the project happen on time. So it probably will."

Core countries such as France, Germany, Belgium, Holland, Luxembourg and Austria were all likely to meet the "convergence criteria" (the basic pre-conditions for inflation, interest rates, public debt and exchange rates) during 1997 – or at least would be sufficiently close for the project to go ahead.

The UK would have to decide whether to join this first tranche by the end of the year. "Economically, we have as good a chance as anyone to qualify," he said. "But there must be a serious doubt about us being in the first wave for political reasons."

Being part of a single currency would have advantages and disadvantages – both nationally and for farmers, said Mr Howard.

"There would be positive effects on trade from the removal of transaction costs and the creation of greater certainty throughout the Euro zone." But the down side would be a lack of flexibility in domestic policy. It would no longer be possible to devalue a currency to compensate for inefficiency.

For farmers the effects will depend critically on whether the UK is in or out of EMU. Once it is up and running, all agricultural subsidies will be set in Euros. If the UK is outside, there will have to be some form of agri-monetary system to convert farm payments back into sterling. What form this will take is uncertain, though proposals are expected from the European Commission later this year.

"You are all familiar with the problems inherent in the existing conversion arrangements. There have been winners and losers, but overall they have presented farmers with additional risks arising from the unpredictability of green rate changes.

"The farming industrys particularly complex linkages with European budgetary policies put it in a uniquely difficult spot."

But there were reasons for optimism. The last four years had seen the UK develop into a much more stable financial environment. "I see no reason why life with the Euro, whether we are in or out, should be a nightmare, as long as we keep a tight grip on inflation," he said.

But farmers too would need to keep tight control of their own costs and productivity. "In an environment with no devaluations, there will be no place to hide if production costs get out of line." &#42

Howard Davies says that farmers will not be able to rely on devaluations to help them in future.

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