Tuesday, 18 December, 2001, 12:04 GMT
(UK) economics of the euro
On our next few trips to the continent, we
Brits are poised to discover one effect of euro notes and coins: it will get
harder for us to change money than in the past.
With so many currencies disappearing, there
won't be a need for as many bureaux de change kiosks at every location as
there has been - which won't matter to card carrying members of the
euro-club, but which will not be helpful to people still holding pounds and
But aside from the practical implications,
will the elevation of the euro from a virtual currency to a real one make
much difference to the debate in Britain and prospects for UK membership?
Ask the political correspondents, who tend
to get much of their information from Number 10, and you will be told that
Britain is definitely going to have a referendum on its membership of the
Certainly, we are being warmed up for that
with a series of speeches from the PM himself, and from his lieutenants
Charles Clarke and Peter Hain, and with some apparent remarks of Downing
Street adviser Roger Liddle that a referendum has been pencilled into the
diary for spring 2003.
But ask the economics reporters, and you
get a decidedly more reserved response. Perhaps that's because we are more
influenced by the Chancellor at Number 11, who has stuck firmly to the spirit
of the line that the economic tests really do matter, and that we will only
have a referendum if the conditions are right.
And perhaps the economics brigade has been
more imbued with those crucial words in the official line, that the tests
have to be met in a "clear and unambiguous" way. Few things in
economics are clear and unambiguous!
Of course, if the political will is there,
a referendum can be held - the five tests for entry can easily be fudged to
give an unambiguous answer.
But a referendum will move the euro
argument on from the five tests, to the real economic issues. So what are
those, and what's the evidence on them?
First and foremost is the issue of whether
Britain will get a better economic policy in a "one size fits all"
Membership comes with a pan-European
interest rate and with limits on the government's right to borrow money.
Is that better than an independent Bank of
England Monetary Policy Committee, and Gordon Brown's fiscal rules?
The current situation in Germany is hardly
an advertisement for euro-membership, as it is facing recession and unable to
do anything about it. And Germany has an economy that is closer in tempo to
the euro-beat than ours.
You might be optimistic that at the moment,
with a synchronised global slowdown, we Brits are close enough to the
European economy for their economic policy and ours to match.
That might suggest we would not suffer much
at the hands of the European Central Bank.
But the challenge of membership is in
believing not that we are synchronised right now, but that we will stay
synchronised for the rest of time.
We might - but being a more oil-based,
American leaning and service producing economy, we may not.
In defence of the euro, though, it is worth
saying that the one-size-fits-all policy of the UK sterling zone represents
something of an awkward compromise between the needs of different industries
and different regions.
The manufacturing heartlands might well
have done better in the eurozone than in the pound zone over the past few
years. They have suffered badly against euro-linked competitors and
customers, while UK interest rates stayed high to tame the southern England
So perhaps, economic policy would not be
better in the eurozone, but it may not be much worse either, taken across the
economy as a whole.
And even if economic policy is a little
less suitable for Britain in the eurozone, there may be an offsetting factor:
a more stable effective exchange rate.
That represents the second big issue for UK
membership: the value of the pound.
It's wrong right now - would it be right if
we went in? Or, to put it more clearly, can the UK go in at a pound-euro
conversion rate that reflects a competitive UK?
And will the jealous French allow us in at
such a rate, given that they will then face a more competitive UK?
It is clear that entering at the wrong rate
would unleash damage on our economy, and unlike membership of the Exchange
Rate Mechanism, it would be for life.
Perhaps the third big issue is whether
Britain can really be a part of the European market, while outside the
Will European firms do business with each
other as though the eurozone is one market, but thinking of the UK as another
Will our firms be able to consolidate and
merge with eurozone counterparts as easily as their competitors? Will we be
Will inward investment dry up as US and
Japanese firms stop viewing the UK as a European base?
Well, they may, although it has to be said
that so far, evidence for that is lacking. Inward investment has been
satisfactory. British companies like Vodafone have been in the centre of
Europeanisation, not on the edge of it.
It's unfortunate that no-one can give
conclusive answers on any of these issues. It is a matter of judgement and of
choosing which risks you prefer to take.
It is, in the end, a matter of instinct, and gut
prejudice. Or, dare one say it, a matter of politics.
from the bbc.co.uk: 18.12.01