The Euro Arrives-but where are the British?

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The Euro Arrives-but where are the British?

In the first of a new series of personal commentaries, Ian Davidson doubts whether the launch of the euro will really transform the British position on Europe on joining the single currency.

The euro has finally arrived in the 12 participating members of the euro-zone, and the transition has been so smooth and so successful, that even the holdout Swedes are impressed enough that they are starting to talk of the possibility of joining. Why, even the normally loud-mouthed British euro-sceptics, standing ready to jeer as usual, have been struck dumb.

Unfortunately, the good news from the Continent has not had any beneficial impact on the posture of the British government. Ostensibly, the government says it might be in favour of membership if the conditions are right; apparently, Tony Blair’s personal view is substantially more positive than that; but in public, the government still remains shackled to a declaratory policy which is misleading, illusory and unsustainable.

The heart of this declaratory policy is the pretence that membership of the euro is a purely economic question, and that the decision will be taken solely on economic grounds.

This is bad enough, because it rests on a stupid denial of the obvious. None of the 12 participating countries treated the issue as a purely economic decision, because it isn’t; on the contrary, all of them – from the Germans, for whom the purely economic choice was easy, to the Spaniards and Italians, for whom the economic choice was very demanding – all of them decided to go ahead essentially for political reasons. And since the replacement of 12 separate national currencies by a single new currency is patently an event of massive political symbolism, it must be silly to pretend that it is a purely economic event.

But a bad starting position has been made worse, first, by the pretence that this purely economic decision will be based on five economic tests formulated by Gordon Brown, the Chancellor, in 1997; and then by the further pretence that these economic tests will be conducted “objectively”, as if without human intervention.

Gordon Brown’s mantra for this final reductio ad absurdam is that the tests must be “clear and unambiguous”. When Gus O’Donnell, a senior official in the Treasury, was quoted as saying, in a private meeting, that the final decision would, in effect, be taken by the politicians, the media went to town at the ostensible revelation that this would, after all, be a political choice. There was panic in Whitehall, and Downing Street woodenly trotted out the mantra: the decision, it said, would be based on the five tests, which must be “clear and unambiguous”.

Intellectually, this is obviously an unsustainable position, since almost nothing in economics is ever “clear and unambiguous”. Some aspects of the past may sometimes be “clear and unambiguous”, but the future never is; and it is the future which is concerned by these tests.

In any case, to imply that any such tests can be objective or quasi-scientific is clearly absurd. Economic predictions are inherently uncertain and imprecise, even in the short run: just consider the extent of the uncertainty about what is happening to the US economy now, never mind six months from now. No economic test is at all like taking the temperature of the bath water, or measuring the chemical components of a compound, because the economy is always moving, and is composed of millions of individuals who are constantly changing their minds.

Let us consider Gordon Brown’s Five Tests.

  • “Are business cycles and economic structures compatible so that we and others could live comfortably with euro interest rates on a permanent basis?”
  • “If problems emerge is there sufficient flexibility to deal with them?”
  • ” Would joining Economic and Monetary Union (EMU) create better conditions for firms making long-term decisions to invest in Britain?”
  • “What impact would entry into EMU have on the competitive position of the UK’s financial services industry, particularly the City’s wholesale markets?”
  • “In summary, will joining EMU promote higher growth, stability and a lasting increase in jobs?”

In each case, these are questions addressed to an uncertain future; or rather to at least four uncertain futures: the future of Britain, the future of the euro-zone, the future of the world economy, and the future of Britain inside the euro-zone. Anyone who pretends that the answers to these questions can be “clear and unambiguous” is either a fool or a cheat.

Some commentators have argued that the language in which at least some of these tests have been framed is tailor-made to deliver a negative answer. The first question obviously responds to arguments (recently echoed by the Commission) that a single interest rate may not at present be suiting all the Member States equally well. The second question evidently responds to Gordon Brown’s known belief that some of the euro-zone countries need to go much further in the direction of economic reform and flexibility. The fourth question, similarly, responds to the views of those who fear that the position of London’s financial markets might be threatened by EMU membership. Even if these five tests were not deliberately framed to favour the answer No, they are certainly not biased in favour of the answer Yes.

When the Treasury experts examine the five tests, this year or perhaps next, their most rational conclusion is likely to be that, well, for the foreseeable future (that is, until next week), there could well be pluses and minuses, but yes, OK, on balance we could probably join without suffering any serious disadvantage, and we might be better off, but that’s not certain, and as for the unforeseeable future, well it’s unforeseeable.

But Gordon Brown knows that there will be no point coming to a lukewarm positive conclusion like that, because it will not be strong enough to win a referendum. The government simply cannot claim that this is a purely economic decision, and then go to the electorate saying: “We may be better off, and we probably won’t be any worse off”. The voters will not be interested in the detailed calculations and complexities of the five tests. If the government wants to win a referendum, it must plausibly claim that Britain will be substantially better off, economically, inside than out.

This will be a pretty difficult argument to carry at this juncture, since the British economy is currently performing more strongly than many of those in the euro-zone. Its growth rate is higher, its unemployment level is significantly lower, its inflation rate is lower, and its interest rates are rather similar.

The reason for this is that Britain has carried out all those economic reforms which were required by the Maastricht Treaty for membership of the euro: it has made the Bank of England independent, with clear responsibility for control of inflation; it has reduced government borrowing well below the Maastricht ceiling of 3 per cent of GDP; and it has reduced public debt well below the Maastricht ceiling of 60 per cent of GDP. As a result, it is now reaping the economic benefits.

This is the Catch-22 of the European Union’s monetary union rules. Ten years ago, when monetary union was just a plan on paper, it used to be said by British euro-enthusiasts, that Britain would benefit from membership in a hard-currency bloc, because it would get lower inflation, lower interest rates, and higher economic growth. What they failed to notice, was that the rules of the euro-zone were the other way round: you cannot join unless you first achieve lower deficits, lower inflation, lower interest rates, (and therefore a good chance of higher economic growth).

In other words, you cannot join the euro-zone unless you do not need to, for economic reasons. Therefore, once you qualify for membership, there is much less point in joining for economic reasons; at that stage, the only real point in joining, is for political reasons, because you want to be part of the political process of economic integration. The problem is that the British government has never admitted that there could be political arguments for joining; on the contrary, whenever it has referred to “political considerations”, it has made clear, if indirectly, that it believes that these (unspecified) political considerations constitute a negative argument, though not a complete obstacle.

Public opinion is, by a large majority, opposed to British membership of the euro. Some commentators believe that public opinion could easily change. Some surveys suggest that popular hostility is rather shallow, and could probably be influenced in the other direction: by the reality of the euro notes and coins; by a successful referendum in Sweden; or, above all, by an enthusiastic pro-euro campaign by the government.

This may be so. Personally, I doubt whether the government can win a referendum campaign purely on the economic arguments. There is only one respect in which the core EU countries are much better off than Britain, and that is in the level and quality of most public services: roads, rail, health and education. Tony Blair has implied that Britain can aim to secure a European-level health service; he has yet to say that Britain will pay European-level taxes.

But if by any chance the government does succeed in winning a euro referendum on purely economic arguments, Britain will once again be pursuing a solipsistic European policy, based on false pretences, and above all a false prospectus of the political implications. For even if the government turns a blind eye to these implications, sooner or later it will find that they jump up and bite it.

Ian Davidsonis a senior British commentator on European affairs and a member of the Editorial Board of Challenge Europe.

For more in-depth analysis, see The European Policy Centre’s website:

The Euro Arrives-but where are the British?.  

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