EMU would allow greater European growth

From Mr Christopher Huhne Sir: Tony Dolphin takes your leading article (11 February) to task for asserting that a single European currency would "strengthen Europe's position on the global economic stage". The most obvious benefit is that people outside Europe are more likely to want to hold European notes and coin as a store of value and a means of exchange, in the same way they currently hold many US bank notes. In effect, an issue of currency of this sort involves an interest-free loan from the people who hold the currency tothe issuing authority (known as seignorage, in the jargon). One recent estimate was that some $100bn is held outside the United States by foreigners in the form of bank notes. In other words, those people have been prepared to supply the US with goods and services in exchange for a lot of inexpensively printed paper. It seems reasonable to suppose that a third of these holdings might switch to ecu if an ecu-dollar-yen tripod developed. The ecu's growing international role would also save further transaction costs - in exchanging foreign currencies for European ones - to the extent that European companies could deal more frequently in ecu rather than dollars or yen. Moreover, the aggregation of European capital markets operating in a single currency would make them larger and more liquid; it would be easy to buy and sell shares and bonds. European capital markets should therefore become more attractive to foreignersas a home for their savings.

A further international ramification of a single currency is surely that monetary co-operation between Europe, Japan and the US would become easier simply because there would be fewer players. In addition, Europe would carry more political weight in any such negotiations on monetary issues in an analogous way to the political weight that Europe now has in the international negotiations on trade. Within Europe, probably the most important advantage of a single currency would not be the abolition of transaction costs, although that is the point most easily explained to travellers. A single currency would reduce the uncertainty for any European company which invests in another European country. In doing so, it would tend to reduce the target rate of return that such a company would require from its investment, and this would in turn raise the level of investment. This should enable higher European growth than would otherwise be the case. During the last period of free capital flows and genuinely fixed exchange rates - under the Gold Standard before the First World War - the net amount of international investment was very much larger (as a proportion of national income) than it has been since the Second World War. Yours sincerely, Christopher Huhne Economics Director IBCA Ltd London, EC2 17 February