<html><head /> <style type="text/css"> <!-- .style1 { font-size: x-small; font-weight: bold; } --> </style> <body> <META http-equiv="Content-Type" content="text/html; charset=UTF-16"><title>The Euro Debate</title><meta name="keywords" content="britain,boom,bush,business,christopher,currency,ecb,economy,emu,european,exchange,gdp,germany,global,inflation,janet,johnson,kingdom,market,monetary,oecd,pound,rate,referendum,single,sterling,trade,uk,Union,united,euro,"><table style="font-family:Verdana; font-size:larger; " align="center" border="0" width="50%"><tbody><tr> <td style="background-color:silver; border-color:white; border-left-style:none; border-style:none; " width="730"><span style="font-family:Verdana; font-size:larger; ">The Euro Debate</span></td> </tr> <tr> </tr> </tbody></table><br><table style="font-family:Verdana; font-size:medium; " align="center" bgcolor="white" border="0" width="50%"><tbody><tr> <td height="131" width="669"><span style="font-family:Verdana; font-size:x-small;"><strong>Editors Introduction </strong></span><span style="font-family:Verdana; font-size:x-small; ">The fate of the pound is a highly emotive issue in Britain. Should Britain opt for European Monetary Union (EMU)? In this piece, Janet Bush, director of the anti-euro lobby group New Europe, battles it out with Christopher Johnson, an adviser to the Association for Monetary Union of Europe. By joining the European single currency, would Britain lose financial sovereignty to the Continent, or will the promise of increased competitiveness, business investment and a rise of living standards be enough to convince the sceptics?</span><br> <br><span style="font-size:x-small;"><strong>Setting the stage</strong></span><br> <span style="font-family:Verdana; font-size:x-small; ">The new single European currency, the euro, started life on January 1, 1999. Eleven member states of the European Union have irrevocably fixed their exchange rates and will abolish their national currencies altogether within three years, when euro notes and coins start circulating. Britain is one of four countries which chose not to join economic and monetary union: the Blair government is sympathetic to the idea of joining at some stage, but has pledged to hold a referendum before committing the UK to membership. The issue remains highly controversial, crossing traditional political boundaries, dividing old colleagues and uniting former political enemies. Emotion often clouds the debate, making it difficult for those undecided to work out where the balance of the argument lies.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">In an attempt to clarify the views of those for and against joining, <I>CentrePiece</I> asked Janet Bush, director of the New Europe campaign which is pro-Europe but against UK membership of the euro, and Christopher Johnson, a leading figure in the Association for Monetary Union in Europe, to engage in debate.</span><br><br><span style="font-size:medium; "><span class="style1">Is the euro a success?</span><BR></span><br><span style="font-family:Verdana; font-size:x-small; "><B>CentrePiece:</B> Can we now say the euro is a success? Why or why not?</span><br><br><span style="font-family:Verdana; font-size:x-small; "><B>Janet Bush:</B> It is far too soon to judge whether the euro is a success or a failure. All that we have discovered over the past few months is that the European single currency goes up and down--mostly down, so far, but that will surely change in the future. In short, we have discovered that the euro is a currency like any other. Current weakness is no more proof of the euro's failure than a bout of strength would have signified its success.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Nevertheless, the euro's slide does appear to reflect deep concerns in the market about how the euroland economy is faring within the straitjacket of economic and monetary union. Germany is sinking into recession while a country such as Ireland is battling to contain an inflationary boom. Neither can do anything about it. Both are being forced to live, quite inappropriately, with the same interest rate. What the euro's first few months have highlighted is the beauty of floating exchange rates, designed as they are to act as a natural restorative when things go badly.</span><br><br><span style="font-family:Verdana; font-size:x-small; "><B>Christopher Johnson:</B> The euro is a success so far by several criteria. Its convergence criteria made not just 11, but all 15 EU countries undertake unprecedented efforts to reduce both inflation and fiscal deficits. It began on time on 4 January 1999. It is starting to be used as a trading currency, and as a financial currency, with euro bond issues exceeding dollar bonds so far this year. It has not yet caught on as an investment currency, because the stock markets of the euro area cannot yet compare with Wall Street in size, liquidity, or performance.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">The fall of the euro exchange rate against the dollar has been a big surprise, but it has benefits as well as drawbacks. The depreciation of the euro could give a boost of up to 1 percent of GDP to the euro countries, spurring on their hesitant recovery. The cut of 0.5 percent in the euro interest rate will stimulate domestic demand in the major countries. The idea that the hawks of Frankfurt would pursue a strong euro policy as a proof of machismo was always absurd. Germany more than any country requires a cut in interest rates. It is important that the Germans, more reluctant than others to lose their national currency, should see euro monetary policy as being in their interests.</span><br><br><span style="font-size:medium; "><span class="style1">Should Britain have joined?</span><BR></span><br><span style="font-family:Verdana; font-size:x-small; "><B>CentrePiece:</B> Should Britain have joined on 1 January 1999? If not, why not?</span><br><br><span style="font-family:Verdana; font-size:x-small; "><B>Bush:</B> Britain would have been mad to join on January 1. In the short term, it is at a different stage in the economic cycle from most of euroland. At European interest rates, Britain would soon face an inflationary boom that would put Ireland's in the shade. There are, however, many far more fundamental and long-term reasons. While the pro-EMU camp seems to struggle for convincing economic reasons for joining, those opposed to the single currency are spoilt for choice.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Euroland is not an optimal currency area. Its economies are far too different to make monetary union work and the dangers of a one-size-fits-all interest rate is already evident in the cases of Germany and Ireland. The institutional structure of EMU enshrined in the Maastricht Treaty compounds this imbalance. The European Central Bank was conceived in an era when inflation was public enemy number one and its remit is simply to achieve price stability. At a time when the major threat is deflation, the ECB's task is too narrowly defined. The Stability and Growth Pact's strict budget deficit limits mean that fiscal policy is not available as a counterweight to monetary policy.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Even if euroland's prospects were more promising, Britain is still not a suitable candidate for membership, simply because it is so different from most Continental economies. Take the example of interest rates. Britain has a far greater penchant for variable rate borrowing, which means that Britain's GDP is four times as sensitive to changes in interest rates as the average for European Union countries. Britain has the most advanced economy in Europe in high-tech industries. It also has a higher proportion of biochemicals, aircraft, scientific instruments and telecommunications industries than France, Germany and Italy. In addition, Britain is an oil economy unlike any other in the EU.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">During the 1980s, Britain went through an often painful supply side revolution which took us firmly down the Anglo-Saxon economic route. Having made these choices, Britain must resist being dragged backwards. France and Germany are pushing tax harmonisation, arguing that this is necessary to make EMU work. For Britain, it is hard not to be suspicious that this is nothing more than an attempt to hobble an economy which now benefits from the lowest corporation tax of any industrialised country in the world.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">More worrying still is Germany's campaign for wage harmonisation. What motivation could there be other than an attempt to force other European economies up to Germany's wage levels? In a fiercely competitive world economy, gravitating towards the least competitive economy in terms of labour costs would be disastrous not just for Britain but for the rest of euroland.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Britain has no need to join the euro in order to thrive. Britain exports around 44 percent of its goods and services, and less than half of that goes to euroland. More than 80 percent of foreign investment in Britain comes from outside the EU, and more than 80 percent of British investment goes outside the EU.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Britain is exactly the kind of economy that should do well in a global economy where the winners will be high-tech, entrepreneurial, relatively fleet of foot, deregulated, excellent at high value added service industries. Britain certainly isn't a perfect place. Nevertheless, it certainly has no need to lack self-confidence.</span><br><br><span style="font-family:Verdana; font-size:x-small; "><B>Johnson:</B> By not joining at the outset, the UK has missed the chance of taking part in the euro-11 Council of Finance Ministers and influencing the running of the ECB. The Bank of England may or may not prove to have installed a better standard of openness than the ECB, but it has little chance of influencing the ECB from outside. British influence on other, related EU issues, such as taxation, has been weakened by remaining out. Tony Blair's forward policy on European defence was seen as a gesture of goodwill by the other EU countries. It did not compensate them for the UK's refusal so far to join the most dramatic and central form of European integration since the formation of the EEC, in 1958. The City of London has set up markets in euros, but it is likely to lose share in the domestic financial markets of the euro area.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">The government's changeover plan has set out a series of time intervals but no date for joining. It is unlikely that Mr. Blair will decide to join before the election. The most optimistic schedule is then as follows. The election is likely to be held in May 2001, after four rather than five years. The government will announce a decision to join in June 2001, having inevitably indicated during the election campaign that it was about to do so. The referendum will be held in October 2001, and the result will be yes, perhaps by not a very large majority. The UK can then lock the pound to the euro in January 2002 and take two rather than three years over the transition period. Any longer delay would run the risk that the UK and the euro countries might diverge further, and that the single market would begin to break up because of exchange rate instability between the pound and the euro.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">All the economic variables will be improved by the UK's entry into the euro, particularly given that 11 other countries will already be reaping the advantages. Economic growth will be faster, thanks to lower interest rates, high business investment, and the scale advantages of buying and selling in a bigger market. Inflation will be reduced, because the ECB will have greater credibility than the Bank of England, prices will become more transparent, and transaction costs in intra-European trade will be cut. The elimination of different exchange rates will benefit trade, direct investment, and portfolio investment. Both borrowers and savers will have access to wider banking, bond and equity markets, as fragmentation is reduced and competition increased. Fiscal policy will have to remain prudent, and private sector bond issuers will be crowded into the market vacated by government borrowers.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Under independent economic management, Britain has seen its living standards fall below those of the richer European countries, including even Ireland. In EMU, British living standards will have a chance to catch up with the rest of Europe. Europe as a whole will have a chance to catch up with the US, where the advantages of a single currency in a single market are evident.</span><br><br><span style="font-size:medium; "><span class="style1">Is Britain on the fringes of Europe?</span><BR></span><br><span style="font-family:Verdana; font-size:x-small; "><B>CentrePiece:</B> How important is UK membership of EMU to the UK's role within the European Union? Is Britain now on the fringes of Europe? Can the UK now be at the heart of Europe?</span><br><br><span style="font-family:Verdana; font-size:x-small; "><B>Bush:</B> Those who know him say that Tony Blair's main (and only apparent) reason for wanting the UK to join EMU is to enhance Britain's influence in European affairs. I think that he might be dismayed were a referendum ever held and won. He would be swapping total domestic control over the levers of economic policy (as well as the sovereignty of Parliament) for one voice out of 12. Some argue that, in a global economy, no nation state enjoys true autonomy over economic policy but this is too glib. Simply contrast the aggressive, growth-oriented programme of interest rate cuts delivered recently by the Bank of England compared with the head-in-the-sand conduct of monetary policy by the ECB.</span><br><br><span style="font-family:Verdana; font-size:x-small; "><B>Christopher Johnson:</B> The economic advantages of the euro are not sufficient to persuade those eurosceptics who believe that the UK should remain an independent country, sovereign in all respects. For europhiles, the economic advantages are compounded by the political benefits of playing a leading part in the world's second super-power. In fact, political influence vis-&amp;#224;-vis the United States also increases Europe's leverage in global negotiations about trade and finance. The UK punches above its weight in defence and foreign policy, and could take a lead, alongside France, in formulating European policies so far lacking in these areas. Britain's role should be, not to bolster US policy, but to influence it as one of the leaders of a European confederation.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">EMU and the EU have a better chance of long-run success if the UK is a leading member of both organizations, rather than a fringe player. Euro financial markets need the City of London, and the City needs euro financial markets, if both are to realise their full potential. It is not a zero sum game. Both the UK and its partners will benefit from closer integration. If we do not like the way the rest of Europe is developing, it is up to us to try to change it. Britain is too important to euroland, and euroland to Britain, for the two to stay apart for long.</span><br><br><span style="font-family:Verdana; font-size:x-small; "><B>CentrePiece then gave both the opportunity to respond to the points each had made.</B></span><br><br><span style="font-size:medium; "><span class="style1">Janet Bush: The argument against</span><BR></span><span style="font-family:Verdana; font-size:x-small; ">The deadline of January 1 1999 certainly spurred the 11 countries that joined the eurozone to cut their deficits and bring down inflation. What Christopher Johnson conveniently doesn't mention, of course, is that the Maastricht convergence criteria were widely fudged, outrageously in some cases, in order to meet that deadline. This has left many of the eurozone countries with unsustainably high debt levels. We shall see how these countries get on during the current economic slowdown. While deficits and inflation have been brought down, Europe's real economic problems--feeble growth and high unemployment--have been neglected.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Christopher Johnson is quite wrong to say that the fall in the euro against the dollar was a big surprise. It was not. It was perfectly obvious before its launch that, far from being an oasis of stability as Wim Duisenberg boasted, euroland would suffer from the implosion of demand in emerging market economies along with others. The slide in the euro will, of course, help to cushion euroland from recession, but the conviction of many of euroland's finance ministers and central bankers that the euro would swiftly challenge the dollar's status as the world's reserve currency already looks misplaced.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Even in the warm afterglow of Labour's landslide, Tony Blair would have been hard put to win a referendum. Opinion polls before May 1997 and afterwards have consistently shown a firm majority of the British people against the euro. My bet is that this majority will solidify and grow over the months ahead, particularly as the public become aware that a vote for the euro is a vote for a drive towards political union.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Sometimes, the pro-EMU case smacks of desperation. How many times have I read that we should join because we enjoy holidays in Tuscany or the Alps and glory in French cuisine? Or that we must join, despite deeply important questions of economic and political sovereignty, because it is "our destiny" or "inevitable"? Or that the only people who argue against the single currency are right wing, old, backward looking, xenophobic? This debate has got to be lifted to a higher standard if the British people are going to be well informed, as they should be in a mature democracy, in time for a referendum, if one is ever held.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Those who argue for early membership sound panicked as if somehow Britain will wither away and die outside euroland. Why are the British so lacking in self-confidence? Why not enjoy the relative luxury of the opt-out and wait and see patiently to see how things develop in euroland before making a decision? EMU is an unprecedented leap in the dark. It has never been done before. But don't assume, for all its ambition, that EMU is going to be a success. Even its most ardent proponents in Brussels are not, at heart, confident. A high level official from the European Commission expressed fury to me about what he regarded as Britain's lack of courage. However, asked whether he thought EMU would be a success, he said: "It had better be, for all our sakes."</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Christopher Johnson makes extravagant claims for the euroland economy. A long list of economic variables, he says, will improve: growth, business investment, inflation, trade, direct investment, portfolio investment. The one economic variable that he doesn't mention happens to be euroland's most damaging and intractable problem: unemployment. The acid test of EMU's success or failure will be whether Europe can end its growth sclerosis and begin to tackle mass unemployment. I remain to be convinced that the ECB will deliver higher European growth rates. Without that, unemployment will remain far too high and EMU will become deeply divisive and politically unpopular.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">We would all like to see a European Union that, in a united and competent way, challenged America's virtual monopoly on military and defence questions. Christopher Johnson rightly says that the US does not have a monopoly of wisdom on foreign policy. However, he appears to suggest that Britain cannot play this role outside euroland. Why not? EMU is a choice about monetary-policy arrangements. It should have no bearing on foreign policy choices.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Finally, Christopher Johnson rolls out the well-worn argument that, if Britain doesn't like the way the rest of Europe is developing, it is up to us to get in there and work hard to change it. It is a reductio ad absurdum to argue that Britain must give up influence in order to gain influence. As a full member of the EU, Britain ought to be able to exert its views outside euroland. If that is not the case, then euroland is a deeply undemocratic beast that we should avoid.</span><br><br><span style="font-size:medium; "><span class="style1">Christopher Johnson: The argument for</span><BR></span><span style="font-family:Verdana; font-size:x-small; ">The euro is not "a currency like any other." Even its detractors admit this when they point out that there is not a single government in charge. It also differs in ensuring exchange rate stability among countries doing well over half their trade with each other, by the simple expedient of abolishing exchange rates. There would have been no "beauty" in keeping floating exchange rates in the EU in the last year or two. Far from being a palliative for misalignment, they cause it. However, the fall of the euro against the dollar was just what Europe needed to regain competitiveness and stimulate the recovery.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">A decade is far too long to wait to see if the euro works. Business cycles are unlikely to have the same amplitude as they did in the 1970s and 1980s, which were exceptional in the postwar period. By 2010, the UK may well have diverged too far--in the wrong direction--to be able to take up its rightful place in EMU.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Britain could have joined on 1 January 1999, if the policy mix had been tilted towards a tighter fiscal policy and a looser monetary policy. Those who want Britain to have monetary independence have blamed the Bank of England for having raised rates too high. Over the years, the UK's inability to manage its own monetary policy has been all too obvious. The cut in interest rates that would have been needed for Britain to join EMU would have meant less of a dip in economic growth, with little inflationary danger. The divergence of the British and European cycles is due mainly to divergent policies which could have been convergent, not to differences of economic structure.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">The Organisation for Economic Co-operation and Development (OECD) (in its economic outlook in December 1998) surveyed 14 models for the UK and other major European countries. In only three of them do interest rates have a bigger effect on output in the UK than in the other countries; in two they have the same effect, and in nine they have less effect. Interest rates have varied more in the UK than elsewhere, but this means that moderate interest rate changes are less effective, and that large ones are needed.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Few existing uninational monetary unions are optimum currency areas. The UK and the US would both fail the test. But the EU is moving in the right direction, with policies to speed up the movement of capital--already free in many respects--and of employees. So this is no reason for not joining.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">The European Central Bank has to operate within the general EU policy framework, so it cannot ignore objectives such as employment and living standards. Its relaxed attitude to the fall in the euro, and the 0.5 percent cut in the refin rate to 2 percent, show that it is not skewed towards deflation. The UK's industrial structure cannot, in general, be more modern that that of other leading European countries, because their productivity is higher. The mix of industries is remarkably similar, more so than across the United States. Oil and gas extraction accounts for 2.2 percent of British GDP, so this is not a sector in which any important asymmetric shock could occur.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">The idea that Britain would lose competitiveness by joining EMU does not stand up. By most yardsticks, the UK is way down the league. Greater competition within EMU would improve competitiveness, not damage it.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">It is a fallacy that the UK's 31 percent corporation tax rate means a low tax burden for industry. UK taxes on corporate income and property are 6 percent of GDP, compared with 2 percent in Germany. The UK's effective rate of tax on capital is, according to the OECD, the highest in Europe. Let us by all means harmonize business taxes, if that means bringing them down to the German level. Let us level up to German wages--provided that we can emulate German productivity and flexibility of working hours.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Britain does not have too little self-confidence, but too much. Smugness about the economy is the besetting sin of successive British governments. New Labour had an unusual bout of frankness in its first year, when it exposed the depleted legacy of 18 years of Conservative government. Now, the espousal of Thatcherism by New Labour is hardly the best basis on which to improve its economic inheritance. Only a firm decision to join EMU will break the mould.</span><br> <br><br><span style="font-family:Verdana; font-size:x-small; font-style:italic; ">This article is taken from CentrePiece magazine, Volume 4, Issue 2, Summer 1999, published by the Centre for Economic Performance at the LSE. </span></td> </tr> </tbody></table> </body></html>