When will the UK join EMU?

When will the UK join EMU?

Norbert Walter on Tony Blair and the euro

Almost all of us in the EU have now switched to the new money. This has brought the single European market one step closer to completion. But there are still deficits as regards EU member countries that participate in the single currency. Some of the EU states have not yet joined, which leaves the Economic and Monetary Union (EMU) as Europe’s “Unfinished Symphony”. Three countries – Denmark, Sweden and the United Kingdom – are missing even though they essentially meet the Maastricht criteria. The absence of our British friends is of key importance. Is this more than a cosmetic flaw? A matter for the British to settle alone? In my opinion, the answer to these two questions is a clear “No”.

Euroland would have an entirely different stature if the world’s most important international financial centre, i.e. the UK, with its broad equity base were on board. The financial markets would function better if the fourth of the large EU countries were helping to shape EMU from the inside. And: in the long run there is no way a member of a common market can claim the right to manage the exchange rate of its currency according to its own discretion. After all, an exchange rate is the price of two currencies. And it is scarcely likely that the effects which fit one’s own way of thinking at a given time will invariably be the mirror image of those desired by the rest of the internal market: this might happen once at best, coincidentally, but surely not systematically.

So what are the prospects of the UK’s embracing the euro?

While there is no constitutional necessity of a referendum, Tony Blair has pledged one to the electorate. Thus it appears inevitable. The question is, will Blair set a date for a referendum and, if so, when? Political pundits argue that Blair will only call a referendum if he feels he has a good chance of winning. If this is true, then it would be worthwhile to keep tabs on the opinion polls – or, better, forecast them in order to find out the date. I take a more serious view of the British prime minister’s European orientation. Since September 11, Tony Blair has assumed a different attitude in a number of key policy areas. He has changed from being a mood-managing politician into a very serious government leader with positions oriented to fundamentals. The impression I have today is that he attaches greater significance to his record for posterity than a third term in office. He may possibly be seeking with great commitment to document his orientation to Europe, combining this with the clear vision either of arriving in Euroland in 2003 or arranging a timely departure before the next election to leave crown prince Gordon Brown a then isolated UK. My idea is that we will see the UK stage a referendum on EMU participation in early 2003.

If people were to vote today, the result would probably still be “No”, although not nearly as clear-cut as would have been the case several years ago. The best support for a British “Yes” would be sweeping gains by the euro between the beginning of 2002 and the start of 2003. This is not impossible, but probably not very likely. To be sure, the euro changeover went smoothly, the notes and coins had a good reception, and the ECB has been successful in securing price stability. Moreover, more and more European countries outside the EU are gearing their monetary and exchange rate policies to the euro. But what is missing is a strong exchange rate versus the world’s No. 1 currency, the US dollar. If this materialised, the pragmatic British would probably get up and join the parade. However, their willingness to do so would probably be boosted even more if the Continent were more resolute in pursuing market-oriented policies, especially in getting their endangered social insurance systems b ack into shape and finally increasing the flexibility of the rigid labour markets. The Berlin government can make a decisive contribution to this end, best of all before Germany’s own elections on September 22, 2002, but at the latest afterwards.

Norbert Walteris chief economist of Deutsche Bank Group.

For more analyses by Mr Walter, see

‘Walter’s Web Wisdom’.