Monday, May 09, 2005
Euro off the agenda
Posted by David Smith at 09:15 AM
Category: David Smith' s magazine articles

It barely seems like any time at all since we were all abuzz with the question of Britain’s entry into the euro. The issue, often said to be at the heart of the long-running dispute between Tony Blair and Gordon Brown (although personal rivalry explains it better), was expected to dominate Labour’s second term in office.

As it was, that term was dominated by Iraq and the drive to improve public service delivery. That did not mean, however, that nothing happened on the euro. Before the 2001 general election the prime minister committed Labour to publishing a full assessment of whether Britain was ready to join the single currency; an assessment of whether the famous five economic tests were met.

Those tests, to remind you, were, first, are business cycles and economic structures compatible between Britain and Europe to permit the UK to exist comfortably in the euro; second, is there sufficient flexibility to deal with problems?; third, would joining improve the environment for long-run investment decisions in Britain; fourth, what would be the effect on financial services; finally, would entry be good for growth, stability and jobs?

That assessment, together with 18 accompanying studies, was published in June 2003. But the Treasury did not close the door completely. It conceded that progress had been made towards convergence with Europe. It announced a change to the Bank of England’s inflation target to the new, euro-compatible consumer prices index – a similar measure to that used by the European Central Bank (ECB). It also adopted the same target, 2 per cent, as the ECB.

Blair did not give up without a fight. He insisted that his entire cabinet was involved in the decision, and that all ministers were able to study the 18 technical studies in advance (whether they understood them was another matter). He made sure that the announcement was a full and separate parliamentary occasion, while Brown had wanted to get it out of the way in his budget. He also insisted that the Treasury review progress towards convergence with “euroland” and therefore entry into the single currency, each year.

So why has it all gone quiet? It used to be said that Blair’s ambition before he left Downing Street was to get Britain into the euro. It still is, but another European priority has jumped the queue. This is the referendum vote on the proposed EU constitution, due to take place next year. This presumes, I should say, Labour’s return to office in the general election.

While euro entry would involve deepening the degree of integration between Britain and Europe, a failure to approve the constitution could threaten Britain’s whole future in Europe. That may overstate it, but it would certainly represent a crisis in UK-EU relations.

How will the constitution referendum go? Until recently, the general view was that voters would overwhelmingly reject it, scared by talk of a giant step towards a federal Europe. However, recent polls conducted on the basis of the actual question that will be asked in the referendum have suggested a pretty evenly split vote. The question is: “Should the United Kingdom approve the treaty establishing a constitution for the European Union?” It sounds less than alarming, much to the disgust of the anti-constitution campaigners, A bigger fear than federalism may be the worry that Britain will be left behind, which the government will play on.

Would not a “yes” vote on the constitution enable an emboldened Blair to go for “one more heave” into the euro? After all, the Treasury probably cannot keep saying no to entry for ever. Privately, officials concede that the next assessment, if there is one, will have to come up with a positive verdict.

It could happen, so that by the end of the parliament Britain would have both signed up to the constitution and be happily ensconced in the single currency, the European Central Bank (ECB) taking our interest rate decisions.

But that seems unlikely, for several reasons. The first is that to secure a yes vote in the constitution referendum, the government will have to provide certain reassurances. One of those, most probably, will be that backing the constitution will not mean a rush into the single currency. Any suspicion among voters that this is the case could easily swing it towards a no vote.

Secondly, hostility to the euro goes deeper than to the constitution. There was a time when many British people thought the only argument about the euro concerned issues such as whether the Queen’s head would be on the notes, versus the convenience of not having to change currency at each European border crossing.

Things have moved on. There is now an implicit understanding amongst a large swathe of voters that adopting the euro means more than changing the currency you carry in your wallet. People are aware of the fact that Euroland appears stuck with slow growth and high unemployment. This many not be the fault of the euro and the ECB, but it is a reality, Voters may also be dimly aware that the euro’s fiscal rules, embodied in the stability and growth pact, have been flouted by Germany and France, and may never achieve credibility again.

All this is important. To argue the case for the euro, the government has to believe it. As far as the chancellor (who was once a believer) is concerned, that requires two things. One is a belief that the ECB and stability pact would be at least as good as his own fiscal rules and the independent Bank of England. He is a long way from believing that.

The second is that Europe is serious about increasing its flexibility, particularly in labour markets. A recent report by a high level group of experts under the chairmanship of Wim Kok, the former Dutch prime minister, concluded that this is far from the case, and that the EU is proceeding at a snail’s pace in this area. And as long as that is the case, the euro is off the UK agenda.

From Professional Investor, May 2005

Comments