Britain Can’t Stop March to Single Currency

Skeptics notwithstanding, many European analysts believe that Britain’s decision to link the pound to Europe’s other currencies is probably a step on a road leading inevitably, if slowly, to a single European currency.

Some observers say the government of Prime Minister Margaret Thatcher might find it easier to thwart the drive toward a common currency if the pound is part of today’s collection of loosely linked monetary units.

But John Major, her chancellor of the exchequer, has promised that Britain has no intention of playing the role of a Trojan horse within the European monetary system. And it might well fail if it tries.

“British acceptance of the exchange rate mechanism is part of an inexorable movement toward a single European currency that will be accepted, if not by this government, then by a future one,” said Alan Budd, chief economist for Barclays Bank in London.

What Britain has done so far falls well short of that. As of Monday, the Thatcher government agreed to hold the pound close to its current value against other European currencies that participate in the so-called exchange rate mechanism.

In practice, it is the German currency that dominates in Europe, and Britain has pledged not to let the pound stray more than 6% from a value of 2.95 deutsche marks. European central banks will intervene in the currency markets if the pound wanders too high or low.

For the other participating countries, the close link with the German currency has brought the blessings of Germany’s low inflation rate and steady economic growth. Thanks in large measure to a tight monetary policy, Germany ran a 2.5% inflation rate last year, compared to 4.1% in the United States and an alarming 6.7% in Britain.

Now Britain hopes that it can reap the same rewards.

“We’ve been trying for 10 years to achieve these goals on our own,” said Christopher Johnson, chief economic adviser for Lloyds Bank in London. “The government’s decision is an admission that we need help.”

A common European currency is something else again.

The drive for a single currency is spearheaded by Jacques Delors, president of the European Commission. Germany, France, Belgium, the Netherlands and Luxembourg have accepted Delors’ view that the 12 European Community nations should set a fixed timetable for turning their 11 currencies--Belgium and Luxembourg already share a currency--into one.

That is where Thatcher still draws the line. John Lipsky, director of international research in London for the Salomon Bros. investment firm, said Thatcher has not suddenly abandoned her visceral conviction that her island nation would lose an important piece of its sovereignty if it ceded control of its monetary policy to a presumably German-dominated European central bank.

The British have insisted, and continue to insist, that the EC nations must achieve economies that are more alike before they should even consider a single currency. A nation with high inflation and large budget deficits, they argue, cannot live with the same monetary policy as one with stable prices and budget surpluses.

Lipsky said Britain can now make that case more forcefully.

“The decision to join the exchange rate mechanism shows that the United Kingdom is willing to move forward toward some kind of common monetary policy,” he said. “This makes its argument seem sincere.”

Yet, in the end, according to many analysts, Britain cannot stop the rest of Europe from marching toward a single currency. And if Britain does not fall into step, it will find itself isolated alongside a mighty Continental economy.

“There’s not much doubt in my mind,” said Johnson of Lloyds Bank, “that Britain will ultimately go all the way.”