Jenkins, Roy.

English

Archive of European Integration

AMERICAN EUROPEAN  COMMUNITY ASSOCIATION 100 PARK  AVENUE NEW YORK,  NEW YORK,  U.S.A.  10017 (212)  986-8565 SPEAKING  AT  A  MEETING  AT  THE  UNIVERSITY  OF  NEW  YORK  ORGANISED BY  THE  AMERICAN  EUROPEAN  COMMUNITY  ASSOCIATION  ON  THURSDAY  6TH JANUARY  lQR3,  THE  RT  HON  ROY  JENKINS  MP  WILL  SAY: "  The  world  is descending  into the. deepest  slump for  SO  years.  And  without  a  reversal of  present policies all the  indications are that it will get worse.  Deflation is breeding protectionism,  and  each is feeding  upon  the other and  making  the outlook not merely bleak but menacing. If we  take no action,  present conditions may  in a  year or two's  time  make  today's ills seem almost benevolent.  We shall have  thrown  away  the whole  remarkable  achievement of  the quarter century  from  1948  to 1973,  which gave  the Western world  a  greater prosperity and  unity than it had ever  seen before. In these circumstances  there is an  immense  need for imaginative  and  constructive statesmanship.  Yet little has  so far been  forthcoming.  Western  leaders  have  either turned  inwards  and  concentrated upon  the  problems  of their own  countries,  with little regard to the  repercussive effects of their attempted remedies.  Or,  on the rare occasions  when  they  have  raised their eyes wider,  they have  lectured others to be more  restricti~e.  "Countries which  have overspent and  overborrowed must  reduce their spending  and  reduce  their borrowing"  the British Prime Minister said in November. Taken  in relation to one  country,  this may  sound good  disciplinary doctrine.  But  applied widely across the world,  particularly when  accompanied  by  creeping protectionism, it is a  recipe for  the generation of  a second great wave  of recession.  The  further deflation /of 2 16-· of  overseas markets  can  spell nothing but  further  economic trouble.  Accompanied,  as it may  be,  by  the  financial dominoes  beginning  to knock  each other over,  it could  lead to  a  hitherto unprecedented disaster.  The  interests of the world  ec.onomy  as  a  whole  1  and  of  the United  States and the European  Community  as  economically crucial parts of the world,  are the  same:  to reject deflation and protectionism and  to. work  __ together for  expansion of world  trade  and  the revi  \tal:.:1 •  of growth  in our domestic economies. I  believe that this is the moment  for  the main trading countries  jointly to proclaim a  change of course. The  world  was  catapulted into slump  by  the  two  great oil crises,  and  by  the restrictive monetary policies with which governments  sought to contain the inflationary consequences. The  slump  has  been made  worse  by wildly fluctuating  exchange rates which  have  discouraged  the growth of  investment  and trade.  It is nonsense  to pretend that these fluctuations reflect reality.  They  do  nothing of  the  sort.  How  can they when  the yen  has  been  depressed while Japanese  exports have  been  sweeping  the world?  _ It is no  longer trade patterns which  set exchange rates.  It is, perversely,  exchange rates which  set trade patterns.  This  danger is intensified as  a  result of the  over-~xten4ed positions of many private banks  becau~e -~f -t._heir  in  __itsel~  desirab_i~ lending  to  he_avily indebted countries.  They  are  now  naturally less willing or able to continue to lend  and  the  supply of finance necessary to lubricate the wheels  of trade is being withdrawn. But circumstances are changing,  and  as  they  do  so  a window  of  opportunity for  effective concerted action emerges. The  oil price has  stabilised and is far more  likely to fall than to rise significantly in the foreseeable  future.  The ,J;ate  of  inflation is d~clining around  the  world  and  interest rates have at least temporarily  come  down.  As  world-wide concern  about  unemployment mounts,  circumstances  have become  propitious for  an  international initiative to save /the world . ~ . i I - 3  -the world  from  the disaster which  continued  adherence  to previous  policies will bring.  Opinion is,  I  believe,  turning here  in the United  States.  Monetary targets  are effectively abandoned.  ~here are increasing  numbers,  including  some  in influential places,  who  see  the fight against inflation, while  in itself necessary,  as  an  inadequate_~xclusive goal of  economic  policy.  Concern is also rising in Germany  as unemployment  goes  over  two million even  there.  We  should seize this moment,  now at the beginning  of  1983,  to halt the Gadarene  rush  towards protection  a~d  launch-inst~ad  . . a  carefully wor~~ed-out,  responsible,  but above all coordinated strategy for  expansion of  the world.economy. Such  coordinated action will be  required  on  three fronts  : First,  joint expansion.  If countries are successfully to expand,  it is highly  desirabld~ that they should  do  so together.- Otherwise,  if one  country makes  a  solitary "dash ior growth")  its expansion is likely to be  abruptly ended by balance of  payment difficulties and  the inflationary pressures which  follow  from  a  ~ollapsing exchange rate. Coordinated  expansion is far more  easily sustainable.  It was planned  for  at the  Bonn  Economic  Summit  in July 1978,  in which, as  President of  the European Commission,  I  participated together with  the heads.of  government of  the  seven  Sw~it nations.  There, preVlOUS following/expansionary  moves  by  both the United States and Britain,  Japan  undertook  to raise its growth rate by  1.5%. Germany  in turn took  action to raise its GNP  by  1%.  And France,  Italy and  Canada all undertook to make  contributions of  their  own. The  conventional view  is that this exercise was  misconceived But this is a  superficial view without considering the reason why it did  notachieve  a  sustained drive  to its objectives.  It was  quite simply aborted  by  the  second oil crisis, which  ushered in the general  move  towards  restrictive policies  and  carried us all into the great slump.  That  lion is  no  longer  in the path, and  shows  no  sign of returning.  The  rationale of  Bonn  remains /valid. --- 4  -valid,  and  my  first proposal  is that  now  there  should be a  major political effort to revive it.  Relatively small adjustments  to the fiscal  stance of  the major  countries involved  could produce  significant increases in GNP  and -reductions in unemployment.  The  world  could gradually be  led out of recession by  imaginative decisions  such as  Keynes  propounde?  andyoo~eveit took. There  is  no  contradiction  between  concern  to  correct  the medium  term  ''full  employment  deficit''  and  a  willingness  to apply  some  short-term  stimulus  in  conditions  well  short  of  full employment. Second,  monetary stability.  Coordinated expansion will not succeed upless  exchange.rates are given a  reasonable ~  stabili~~~- If they are allowed to fluctuate wildly and:often irrationally,  they become  the  enemy_ of world  trade and of international investment.  TheYalso  stimulate protectionist forces  in those countries whose  currencies  are forced  too high.  But we  should hot be  utopian.  The  economic performance of countries inevitably varies  in terms of growth  in productivity and  comparative inflation.  We  cannot therefore just proclaim a  new  regime  of fixed  exchange rates and  expect it to stick.  The  simple  re-establishment of the Bretton Woods  system of fixed rates,  great though were  the benefits which  flowed  from it, is not  a  practical option today.  Apart from  anything  ~lse,  the United  States discovered in 1971  that it could  no  longer  sustain the solar role in this  system which it had  so  honourably discharged for  27  years. Yet  there is mounting disillusionment with freely-floating currencies.  Experience of  these has  not been that they adjust gradually  and  smoothly,  keeping  payments  in balance.  On  the contrary,  exchange rates have  lurched wildly  from  one  extreme  to another  - in the  US/British case from  a  pound/dollar rate of 1.60 to  2.40  and  back again. And  not  only have  they been unstable,  but they have  shown a  capacity to stay well out of  line  ~ in terms  of relative inflation competitiveness  and  balance  of  payments -.for long periods.  The  pound  is  oyer~valu~d by  a  good  30%  compar~d,wit~ its  1975  level.  The  dollar  has  been  so  by  about  the  same  amount  -although  less  so  today  than  a  month  ago.  The  yen  ~s  at  least  12% down  from  its  rational  level.  In  Britain's  case,  the  result  has been  to  destroy  competitiveness  and  accelerate  de-industrialisation. In  the  case  of  the  United  States,  the  effect  has  been  to  re~e long  dormant  protectionist  instincts. /  The  markets The  markets  themselves  cannot  and  do  not  ensure that currencies adjust to reality so as  to keep  foreign payments  in balance  and  employment  reasonably full.  \\That is required is a  system of  exchange rates which broadly maintains  the competitive position of  one  econ?my_against another ·and avoids  the short-term fluctuatfcm's  which are damaging  to trade and  devastating to investment decisions • •  :  .- _A; -I  believe that substantial progress  could be made on  a  trilateral basis between  the us,  the members  of the European Monetary  System,  which  should ever more  opviously include Britain,  and ·Japan.  Each  bloc would  define a· "target zone"  for its currency within which the·value would  be free-to vary.  This_should,  in present circum-stances,  be wider'than the old Bretton Woods  margins. :?erha~s the  6%-maroins  which  the Italian lira has within A  J the  m:.s  would  be  reasonable. - From  tirr:e  to time the central ra'tes would  be  shift_ed  upwards  -~-i:  _sqwn~ards. according to mediurr.-ter~_  cha!lg~~- i_~- reiciff.ye_-c9~petitiveness, \Jhich would  embrace  inflation differentials.  Monetary policy would  be  used  to keep  the rates within the  zones.  They  should not be permitted to go  outsid~ in response  to  sp~culative movements  or short-term factors.  Adequate  swap  agreements, which  are not difficult to secure,  can  iron out disruptive short~terrn waves,  although  they cannot  - nor  should  they -obviate the need. for  responding to a  long-term swell of the ocean. The  new  tripod would  form  the basis of  a  new,  stable; but not rigid international monetary  system.  It would  be possible and  desirable for  other countries  strongly dependent on  one or other of  the blocs  to tie their currencies to the dollar,  yen or European  ECU.  To  take European  examples,  the Austrian schilling and  the  S\vedish  krone  would obviously move  in  general  with  the  ECU. Third,  finance for  the  developing world.  The risk of a  knock-on collapse of  the  banking  system cannot be ignored.rt  15 of  course  not  certainlt should  not be  exaggerated.  But it is chere.  And  increased risks mean  that private financial - 6  -lenoing  is being  much  reduced.  If the  expansionary strategy outlined  above  is put  into operation,  and  growth as  a  result rates in.the industrialised world raised/by  an  average annual rate of about  1%,  World  Bank  estimates  suggest that large increases in the  flows. of  bo~~ official and "private finance  to developing countries would  be  needed if general sustained expansion were not to be frustrated by .  . credit  const~nts.  Tnere~should be at least a  doubling of International Monetary  Fu~d quotas  and  a  fresh issue of Special Drawing.Rights- preferably angled in favour  of developing countries;  and  there  should be  a  major extension of  "co-financing",  which means  close cooperation between  the official institutions and  private banks. The private banks  need sufficient confidence to continue  lending  on  the scale required.  This  means  help with debt servicing for  those developing countries  whose  total exports barely cover their  i~terest charges.  It means  support for  the  new  $20 billion IMF  fund  for use  in cases  like the recent one of Mexico.  Thii is not soft-hearted generosity. It is imaginative self-interest for  the Western world  such as was  spectacularly  shown  by  the United States at the  time of the Marshall Plan which  led to the most  economically successful years  in the recorded history of  the world.  It also led to the most  freely accepted period of  unchallenged American  leadership of the West  and  of much  of  the rest of the world  as well.  That cannot be wholly recreated in its old form.  The  past can rarely be set upon its throne again. Leadership must  now  come  from  both sides of the Atlantic and  the United States  and  the European  Community  must be careful not to let their trade differences  undermine  the necessary political partnership. The first two  proposals  would  provide  a  context within which  expansion could restart - measured,  balanced,  sustainable expansion  - and  the third would  ensure that it would  not run into a  barrier of markets blocked by·  penury.  The  essentials are more  stable currencies  and  a  world of good  neighbours. /A far-sighted ------ .. ~  ------------ 7  -A  far-sighted  recognition  of  interdependence  served  us  far  too well  in  the  days  of  mounting  prosperity,  which  did  not  start easily,  for  us  to  turn  our  back  on  it  in  the  harsher  circumstances of  today.  They  are  the  keys  which  will  unlock  the  gate  of  escape from  the  threatening  dungeo~ of  deflation  and  protectionism. They  alone  can  once  again  give  us  the  realistic prospect  of  restorin~ jobs  growth  and  the  expansion  of  trade. 11 ENDS ·---------------------------------------

Speech [on the global economic and financial crisis] by the Rt. Hon. Roy Jenkins [MP] at a meeting at the University of New York organised by the American European Community Association. New York, 6 January 1983

Speech [on the global economic and financial crisis] by the Rt. Hon. Roy Jenkins [MP] at a meeting at the University of New York organised by the American European Community Association. New York, 6 January 1983

Abstract

Similar works

Full text

Available Versions

Archive of European Integration