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Analysis
Managing a European multicurrency bloc

Managing a European multicurrency bloc

IMF role on sterling could help tilt UK referendum balance 

by Denis MacShane and David Marsh

Mon 21 Dec 2015

Britain’s up-and-down relationship with the European Union has ended the year on a relatively constructive note with the stage set for a referendum on UK membership in summer 2016. Yet David Cameron, the UK prime minister, has no assurance that the outline deal reached thus far on renegotiating Britain’s EU ties will yield a Yes vote to stay in.

A key factor will be the technical-sounding issue of Britain’s link – as a long-term and probably permanent member of the non-euro group of nations – with the 19 countries making up the single European currency. One way forward would be to depoliticise the issue by making the International Monetary Fund the ring-holder in a new relationship between the pound and the euro.

Appointing the Fund the guardian of the new link – suggested by Paul Goldschmidt, a former EU Commission director general, in a recent paper – could represent a breakthrough. Goldschmidt suggests convening governments and central bank governors representing the main reserve currencies to agree a set of rules prohibiting discriminatory practices that would harm national interests or the functioning of the foreign exchange market.

The currencies linked in this way would be the constituents of the IMF’s composite currency unit, the special drawing right – the dollar, euro, yen, sterling and (from 1 October) renminbi. In this way Britain could find the protection the City, the government and the Bank of England seek without being granted a veto that would unacceptably constrain the euro economic and monetary authorities’ freedom of action.

Liberating monetary questions from the broader search for a UK membership compromise could pave the way for a new international solution aimed at ensuring Europe remains united and London retains its global financial role within the EU.

Such a move would enhance the IMF’s role in fostering multilateralism, a guiding precept since it was established more than 70 years ago. The IMF’s position in helping steer the world economy will be strengthened in coming years by an agreement on quota and voting reform boosting the reorientation of emerging market economies, which at last is being pushed through the US congress after five years of delays.

If the European currency is to survive, it will need to build further political and economic integration. But the UK is increasingly arguing that the euro area’s rules have to develop in a way that does not damage Britain’s access to the European single market in trade and services and London’s position as the EU’s global finance centre.

This concept, enshrined in the UK government request that the EU be redefined as a multicurrency bloc where not all countries have to adopt the euro, has been a feature of several years of OMFIF coverage, reflecting the views in particular of David Owen, a former UK foreign secretary and member of the OMFIF advisory board. Cameron’s own stance has clearly evolved since he announced a referendum on Britain’s UK membership in January 2013.
The UK initially raised the stakes with demands that Britain should control the number of EU citizens coming to work and live in Britain and that Britain should be exempt from EU social legislation.

The refugee crisis has increased populist concerns on how Britain and other countries control access to their territory. Yet Cameron has quietly dropped these demands, or rather reformulated them into achievable aims. Words will be found that can let him proclaim he has built a new relationship between the UK and the other 27 EU member states while reassuring the latter that Britain has no new status, will abide by European treaties, and will not discriminate against other EU citizens.

The better atmosphere in Brussels does not mean the referendum is won. A year ago many thought there would be no referendum as Ed Miliband, the then Labour leader, would enter Downing Street. Today, plaudits for the Prime Minister in Brussels are not votes in the ballot box, and rebellious members of the Conservative party say Cameron has given in on crucial demands. Bringing in the IMF over the sterling-euro relationship may not be a game-changer, but it could help tilt the scales in Cameron’s favour.

Denis MacShane is a former UK Minister of Europe and OMFIF Advisory Board member. He is author of Brexit: How Britain Will Leave Europe (IB Tauris). David Marsh is OMFIF managing director.

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