Pay nothing for your euros!'
proclaimed the notice in the post office. At last, I thought, a free lunch.
But it was not to be. This was not, after all, an offer of free euros. Had
it been so, we could all have forgiven the Post Office for renaming itself
Consignia. But it was still offering '0 per cent commission on all foreign
currencies - all the year round'.
The cost of changing currencies is frequently quoted as one of the reasons
for joining the euro, but it is hardly the overwhelming issue, especially if
organisations like the Post Office eliminate such transaction costs. It was
partly to focus attention on more important issues that the Chancellor
introduced his famous five economic tests. Yet empirical research suggests
that the average intelligent person finds it almost as difficult to recite
the five tests as to recall the details of the Schleswig-Holstein question of
So here they are, in the Treasury's own words, for you to cut out and
keep. One: 'Are business cycles and economic structures compatible so that we
and others could live comfortably with euro interest rates on a permanent
basis?' Two: 'If problems emerge is there sufficient flexibility to deal with
them?' Three: 'Would joining Emu create better conditions for firms making
long-term decisions to invest in Britain?' Four: 'What impact would entry
into Emu have on the competitive position of the UK's financial services
industry, particularly the City's wholesale markets?' Five: 'In summary, will
joining Emu promote higher growth, stability and a lasting increase in jobs?'
One of the oddities of the tests is that the only economic sector singled
out for special treatment is 'financial services', giving ammunition to those
who argue that this country tends historically to be run in the interests of
the City, not of manufacturing industry. This calls to mind a story in
Richard Roberts & David Kynaston's book City State - How The Markets Came
to Rule Our World, (Profile). They tell how, when Paul Reichmann was
considering developing Canary Wharf, his banker friends told him that London
would continue to be Europe's premier financial capital because 'even the
most left-wing government in the UK had always been more beneficial to the
financial services industry than the most right- wing in the US'.
Many commentators seem to regard the five tests as being 'as long as a
piece of string', without saying whether they measure them in yards or metres.
Others regard them as a load of old rope.
The Treasury made it clear in 1997 that the first two were the key ones -
the 'convergence' and 'flexibility' tests. These had not been met then. Why
the Treasury kept the tests to five is a mystery - perhaps there was a
cricketing analogy. My own sixth test is: 'Has the appropriate exchange rate
been determined?' And, of course, the seventh test has to be 'Does it look as
if a referendum can be won?' An eighth test is: 'Is the European Central Bank
going to be reformed in such a way that submission to it can be recommended?'
A ninth test is: 'Will there be an evolution towards sensible, coordinated
fiscal policies throughout the Eurozone?' A final test is: 'Is the EU ready
for the constitutional changes necessary to make it work - for them and us -
in the long term?'
The exchange rate test is the sine qua non , and it was surprising that it
did not figure directly in the Treasury's five tests. Which brings us to the
reported statement by key Treasury official Gus O'Donnell: 'Economics can
never be clear and unambiguous. Ultimately it will be a political decision'.
Of course it will. The significance of the reported comments was to blow
away the fiction - which was public policy for more than four years - that
the decision was economic. But it was Tony Blair, and not the Treasury, who
stated that he would recommend entry (and therefore a referendum) only 'if
the economic case for doing so is clear and unambiguous'. And it had been
obvious for some time that any decent assessment would be unlikely to win the
wholehearted approval of extremists on either side.
The Financial Times recently described the long-term economic judgment as
striking 'the balance between the benefits of eliminating exchange rate risk'
and the benefits of 'domestic monetary autonomy'.
It is worth noting how fashion has altered in five years: New Labour and
the FT used to insist that British economic policy had little chance of
autonomy in a globalised world; now it has become clear that Britain can
indeed pursue domestic monetary autonomy if it so wishes.
The FT sees the question of 'the right exchange rate and how to get there'
as a 'transitional problem'. But the right exchange rate is surely a vital
longer-term consideration, too. At a seminar last week Lehman Brothers
economists expressed the view that the greater the perceived political will
to enter the euro, the more likely the markets were to bring the pound down
from its current levels.
The ultimate bad joke would be if the markets, having kept sterling so
crucifyingly high for so long, were to overreact and produce panic in the
other direction. It should never be forgotten that those 'wise' markets took
sterling from around $1.70 to $2.45 between the late 1970s and early 1980s,
and then back down towards $1.00 in January 1986.
By 1990 the pound was averaging $1.79, and in 2000 its average daily rate
was $1.52. Meanwhile the sterling/mark rate has ranged from 3.08 marks in
1989 to 2.26 in 1995 and back up to over 3.20 for most of 2000 and 2001. Even
last week, at around 3.17, it was well above the exchange rate mechanism
level of 2.95.
Now we all have to think in euros. My tip to readers is to remember that,
for all the fuss about its 'weakness', the euro is close to 90 cents - not
far short of a dollar. Thus, although fortunes can be won and lost on the
finer differences, and business profits and losses hang on small margins, for
tourists a rough-and-ready reckoner is now one and a half for both dollars
(around $1.44 to the pound last week) and euros (around 1.62 to the pound
Of course, if the financial markets became wildly pessimistic about the
pound again, who knows - it could in theory head towards one dollar and one
Even those of us who regard the pound as overvalued would not advocate
quite such a change of sentiment, even if it made the mental arithmetic easy.
In fact, the implications would be so inflationary that the Bank of England
would be raising interest rates to stem the fall well before such a low
exchange rate was in sight.
Adapted from Observer:
Sunday January 13, 2002