Friday, March 07, 2003
Saying 'No' Gracefully
Posted by David Smith at 08:37 PM
Category: David Smith' s magazine articles

Gordon Brown and Tony Blair have a tricky decision ahead of them. By that, I do not mean the decision on whether to hold a referendum this year on euro entry. I am assuming that, while the formalities have yet to be completed, that decision has already effectively been taken.

Given the state of public opinion, with opposition to the euro growing rather than diminishing, and given the enfeebled state of the European economy (not to mention the prime minister’s battles with EU partners on matters such as Iraq), I would be flabbergasted if Blair and Brown chose to try to win a referendum battle at this stage.

No, the tricky decision is how to present a “no, not yet” verdict in a way that leaves out EU partners convinced that we are still keen to join at some future stage and, more importantly, to persuade footloose foreign businesses that Britain has not turned her back permanently on the single currency.

First a brief recap. The Treasury, as most people will be aware, is engaged on the task of assessing the chancellor’s five economic tests for euro entry (whether Britain is sufficiently converged, whether there is enough flexibility on either side, and whether or not joining would be good for jobs, the City and investment).

In preparation for that exercise it has been compiling 18 separate studies, covering everything from housing markets in Britain and Europe to what is likely to happen to prices in the event of a changeover from sterling to euro notes and coins. The Treasury buzzword in this is “rigour”. This will be the most rigorous, and biggest, exercise that the Treasury has ever undertaken.

Why, if the work has still to be completed, is it possible to be confident about the verdict? Well, apart from the factors described above, the government occasionally gives us a glimpse into its thinking. The Treasury did so in November, at the time of the chancellor’s pre-budget report, when it put out a paper unfavourably comparing the framework under which the euro operates – the European Central Bank and the so-called stability and growth pact – with the system in Britain.

And it did so again in February, this time with Blair firmly on board, when it published another paper, this time on European economic reform. Remember that one of the tests for entry is that there needs to be flexibility on both sides. According to the February paper, EU economies are for the most part unreformed and inflexible.

“Europe’s weakness in the face of a global slowdown has underlined the need for structural reform,” wrote Blair in his introduction. “There remains a daunting amount to be done. EU states are still not doing enough to tackle the fundamental barriers to job creation.”

Flexibility is not going to come quickly, even if EU countries were to show more of an appetite for it. For the Treasury to come up with an early “yes” in this context – its assessment has to be completed by June – would invite ridicule and rejection.

But that leaves the government with a problem. The one test for entry that is met, at least as far as inward investors are concerned, is that it would be good for investment. This may only be a valid view for the short-term, for if euro entry had the effect of shackling the economy that would be bad for investment. It is also the case that Britain is suffering a loss of inward investment for other reasons than the euro, notably the cost competitiveness of the new EU entrants from eastern Europe, and of China.

But a survey in the Financial Times in February showed that 61% of 31 large inward investors questioned said they were less likely to invest in Britain if the government delayed joining the euro. One of those surveyed, Mike Baunton, president of Perkins Engines, the diesel-engine maker owned by Caterpillar of the US, said small suppliers were being hit hard by sterling’s strength, and euro entry would solve this problem.

Interestingly, the pound has been trending lower, particularly against the euro, even in the absence of any indication of early euro entry. Many manufacturers, however, would like something more permanent.

This is why the way the government handles the June decision is important. Some in government prefer “yes, but not at the moment” to “no, not yet” as the language that ministers will use. The idea will be that, while immediate entry is not appropriate, neither has the issue been kicked into the very long grass.

Instead, the word will be that it remains on the cards in the relatively near future. It may be, unlike in October 1997, when entry was ruled out for Tony Blair’s first term in office, the option is even left open for a referendum before the next election. My guess would be that such a referendum is not winnable. But then I’m not a politician.

From Industry magazine, March 2003