Sir Andrew Cook’s article ‘Bring back the Sterling Area – a safe, stable alternative’ (March 16), where he called for a new sterling area of which Malta would form part, is nothing but economic nonsense and nostalgia for a past long lost.
It is well known that one of the main reasons for a currency union is that it eliminates the fluctuations in the prices of national currencies, thus offering predictable and efficient trade and payments.
This was also one of the main reasons for the emergence of the sterling area, as evidenced by the fact that in 1953, for example, imports of the overseas sterling area from the UK accounted for 62.4 per cent of all its imports. The UK’s economy was closely intertwined with that of its ex-colonies.
The sterling area’s demise was caused by a dramatic reconfiguration of the international monetary system. It was the inevitable result of efforts by the countries that made up the area to diversify their economic relations and of tensions about the role of sterling.
Firstly, the overseas sterling area countries were constrained by their inability to obtain more competitive manufactures both in terms of price and quality from other producers. Secondly, the large sterling balances accumulated by Britain’s creditors could initially not be converted into US dollars, and subsequently only limitedly.
By 1959 the share of imported manufactures of the overseas sterling area from the UK had already gone down to 48.2 per cent. By 1976, Australia’s commitment to the sterling, as evidenced by its reserves of the sterling, had fallen from 90 per cent in 1960 to five per cent.
Devaluations of the sterling and almost annual crises in confidence finally put a quiet end to the sterling area, as the member countries realised that the sterling’s fate was being decided not by a collective discussion in advance or a coordinated response, but by events and by what suited the British government.
Monetary integration has complex and profound political facets. The eurozone crisis of 2010 amply showed that. At this stage, the monetary union among the sovereign EU states is giving them a greater integration of economies through pegged exchange rate regimes, conferring the benefits of policy credibility combined with a plausible exist strategy should circumstances change.
Of course, this implies a stableanchor economy, which Germany has so far provided.
Sir Andrew suggests that Malta should come out of the eurozone and join a new sterling area. Who would be in it?
Small countries with strong trading ties with larger partners stand to gain from giving up their currencies and joining a union
Rather than a currency union of 19 countries, with a population of 341m, and a combined GDP of €11.6 trillion and €4.5 bn in international trade (20.3 per cent share of the world’s GDP and a three per cent share of world trade), we would go into a currency union of nine countries, with a population of 66.4 million, and a combined GDP of €2.5 trillion (4.4 per cent share of the world’s GDP). We would be in the august company of the Falklands, the Pitcairn Islands, and St Helena (no disrespect meant) and the UK.
The 27 countries which, by comparison, use the US dollar as their currency or their quasi-currency would probably think that we have gone mad.
But seriously, why would Malta want to join a new sterling area, even if there was an appetite for it? Malta’s economy and trade are closely intertwined with those of the EU. Almost 59 per cent of our merchandise trade is with the EU, and that with the eurozone is 48 per cent.
By comparison, our merchandise trade with the UK is a mere six per cent. Our trading status vis-à-vis the EU has changed very little since 2006 while that with the UK has fallen by almost three-eighths from 9.9 per cent.
And, then, why would Malta want to associate itself with a declining currency? Over the last 20 years, the value of the sterling versus the US dollar has fallen by 19.3 per cent.
By comparison, the value of the euro relative to the dollar has risen by 10 per cent over the same period. Sir Andrew should also mull over the fact that the euro accounts for some 20 per cent of the world’s currency reserves. Compare that with a puny 4.5 per cent for sterling.
Sir Andrew repeats British arguments that the eurozone cannot be a successful monetary union because it does not satisfy so-called classic conditions, in particular a sufficiently flexible labour market and direct fiscal transfers between the member states.
The death of the euro has been called several times by eurosceptics, Milton Friedman famously predicting that the euro would not even survive its first crisis. Well, let’s forget that.
But let’s draw on real-world experience. The 74-year-old, 14-country franc zone has proved largely stable and durable in spite of the fact that it is a much looser political union than the EMU.
It lacks an intergovernmental system of direct fiscal transfers, does not possess a unified labour market, has very limited freedom of movement, and exhibits pronounced variances in levels of economic and political development.
While the eurozone lacks certain features, the strong social insurance of eurozone countries, along with the ability to borrow cheaply from international markets in order to fund such expenditures, enables them to navigate asymmetric economic shocks to their economies.
Also, indirect mechanisms for transfers do exist, for example the Common Agricultural Policy, which acts as a systemic automatic stabiliser when agricultural production diverges in different member states.
Recent research shows that small countries with strong trading ties with larger partners stand to gain from giving up their currencies and joining a union.
Other benefits that accrue to the European periphery countries include increased credibility, macroeconomic stabilisation, and enhanced trade. Sir Andrew’s call for Greece, Ireland and Portugal, among others, to exit the eurozone is laughable.
Sir Andrew rightly bemoans the Brexit shambles currently engulfing the UK. I don’t think we need lessons from British policymakers.
Frans Camilleri is an economist and former journalist.
This is a Times of Malta print opinion piece