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Tuesday, 16th April 2024
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Small countries to gain most - Mundell Back  
Ireland and Luxembourg were singled out as being amongst the biggest gainers from the euro and the single European capital market by professor of economics at Columbia University and 1999 Nobel Laureate, Robert Mundell speaking in Dublin.
By Eimear O’Mahony

Ireland and Luxembourg were singled out as being amongst the biggest gainers from the euro and the single European capital market by professor of economics at Columbia University and 1999 Nobel Laureate, Robert Mundell speaking in Dublin.

He was speaking at a lecture organised by TCD Economics Department and also at an IFSC lunch organised by AIB Capital Markets at the end of April. He said that small countries, (such as Ireland and Luxembourg), have the most to gain from euro single currency because growth rates become proportionately much higher in these countries than in other larger, fellow members when their market widens dramatically as a direct result of currency union. But it is still, in Mundell’s view, a win-win scenario for both big and small members.

However, Mundell indicated that while Ireland should follow broad European directives, it did not deserve to come under what he regarded as illogical attacks from the ECB, even if they came from personal friends of his. Amongst these he included the Commissioner for Monetary and Fiscal Affairs, Mr Pedro Solbes, pointing out that 'there is no academic theory to support that Ireland can have a lower inflation rate by increasing taxes'.

Mundell also lent his support for globalisation. Surprised by the high level of anti-globalisation protest surrounding President Bush's recent visit to Quebec, the professor insisted that globalisation not only benefits the major economies, but also remains 'the best hope' for developing countries.

He listed the benefits of the EMU, as follows: 1) a common interest rate, 2) monetary and fiscal discipline: (the European Directive demands that countries such as Greece and Italy, with high GDP ratios (over 100), must repay their debt - no longer having the option of inflating and devaluing at will), 3) a common European market for bonds, and 4) better monetary policy, being no longer at the discretion of individual national central banks.

A consequence of the EMU is that we are moving towards currency areas that have price stability, and, according to Mundell, it doesn't make sense to continue a system of flexible exchange rates. At the beginning of the 20th century, the gold standard ensured monetary and fiscal discipline, which gave rise to price stability and fixed exchange rates. By the century's end, a level of price stability has been achieved, but exchange rates remained very unstable. The fluctuation of the euro is dangerous for Europe, he warned, and the US economic slowdown may lead to further euro depreciation.

What can be done to counteract this? The euro changeover will incur a huge amount of work for the remainder of this year and for much of 2002. Mundell thought that when the dust had settled, the time will be right for the implementation of a global currency, the union of the yen, dollar, and euro, settling on an agreeable exchange rate for all, together with a unified monetary policy.

He stressed that certain principles must be maintained in its implementation, such as common agreement on inflation rates, stock exchange levels, decisions about expansion and contraction, and agreement on the manner in which seigniorage (earnings from the net interest margin involved in interest free note issuance by central banks) is divided. This 'G3' currency union could only successfully come about, he believed, if the euro was allowed to become more or less equal to the dollar, with an agreed bottom floor value of no less than 85 cents. To maintain such a floor would require concerted, non-sterilised intervention either by the ECB or the G7.

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