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Powerful organisations- the government, Brussels, multinational businesses- are trying to persuade you to give up the pound for the Euro. You should not. This letter tells you why.
1. The Euro is a step towards political union in a United States of Europe- a European super-state. A single currency requires a single state to make it work. Already for a start there must be 'co-ordination' of budgets, under the 'Stability Pact'; and there are proposals for common tax rates and common social 'charges' (i.e. taxes) on employers. These would make the British economy uncompetitive. But they would be followed by much more intervention from Brussels under the excuse of 'making the single currency work'.
All these plans are backed up by great centralising powers held by the EU- the European Court now overrides our courts and even our Parliament, Brussels directives passed by majority voting have to become British Law, and because of the expansion of the EU to take in more countries majority voting is intended to extend to more and more areas in order to stop decision-making being 'too unwieldy'. All this power could be used within the Single Currency to set our tax rates, our public spending priorities and our ways of doing business.
So the Euro would mean we British would lose our sovereignty as a democratic nation- something we fought two world wars to preserve would be given away at a stroke.
2. The Euro is a huge experiment which will not work even for the 12 countries now enlisted in it. There have been such experiments in the past century. In Germany there were several monetary unions before Bismarck united Germany under Prussia. There was a Latin Monetary Union led by France in the middle of the last century. All of them broke down. The problem they all faced was the same one the Euro faces; setting interest rates and the Euro exchange rate against other currencies, especially the dollar. By having a Single Currency the 12 members must also have a single interest rate and of course a fixed unit of exchange against each other. But having the same interest rate and exchange rate for all the very disparate parts of the Euro area, from fast-growing Ireland to stagnant East Germany, is full of problems which massively outweigh the modest gains from having to change money less often. It is bad enough managing the different regional needs of a single country with a single currency; think of the way the North of the UK in the late 1990s attacked the strong pound and high interest rates because of their effect on manufacturing while the South was enjoying a service-dominated consumer boom which needed those things to control it. We cope with these strains in the UK in a lot of complicated ways; we help regions in trouble by a national system of taxes and benefits that automatically transfers more money to them, their MPs scrutinise policy generally to see how else they can be helped; then people are free to move from region to region; and finally we have developed a flexible, competitive labour market so that wages respond flexibly to regional problems. None of these mechanisms are available in the Euro area. When these strains occur in response to shocks, like regional recessions, the burden is entirely on the European Central Bank to adjust the Euro-wide interest rate and exchange rate. This adjustment could be right for the average region but will be too tight for the regions in recession and too loose for the regions that are still doing well. The lack of regional monetary flexibility will add to the size of recessions and of booms in every region. People in countries in recession will rebel against the inflexibility of policy that prevents them cutting their interest rates to end their recession.
This rebellion will be the more violent because unemployment on the continent is already dreadfully high - on average over 8%; on top of that Europe's citizens are paying high taxes (nearly 50% of their incomes; ours are under 40%) and facing yet higher taxes to deal with their states' debts which are large and rising rapidly, and with their bankrupt state pensions schemes. Ordinary people will rightly judge that Europe and the Euro are not working. There will be political instability and economic unrest - the Euro is likely to collapse sooner or later.
3.The Euro would damage our economy too.
-- First, we would suffer from having the same interest rate and exchange rate as the continent. We have close links with the USA and the other Anglo-Saxon countries, not just on manufactured trade but also in services and most of all in investment. Those links would be upset because the Euro exchange rate would fluctuate much more against the dollar than the pound does. Furthermore we usually need to set very different interest rates from the continent as our economy has a very different structure to the continent's- we are bigger in services, we have more unskilled workers, we have much higher employment and work participation, we have many more mortgages that make the economy much more sensitive than theirs to interest rates. All this was well illustrated when we joined the Exchange Rate Mechanism in 1990; under that we were forced to keep our exchange rate fixed against European currencies in a sort of dress rehearsal for the Euro. It was a terrible failure and we were forced out of it by the speculators because of the dreadful recession it created here.
--Second, continental 'co-ordination' in the name of the Euro would damage our competitiveness and ability to create jobs; our economy is relatively flexible and deregulated and this has been the engine behind our success in bringing unemployment right down in Britain, making us the entrepreneurial centre of Europe. Continental-style taxation and regulation in the name of the Euro would destroy all that- unemployment here would rise to the same terrible levels as on the continent.
--Third, our living standard would be at risk from having to bail out continental debts and pensions. Most continental states face greatly increasing deficits on their pensions; for example the OECD has estimated that Italy will probably need to raise taxes or pension contributions by around 10% of national income, meaning about 15% of wages, within the next 20 years; in other words its state pension fund is technically bankrupt. Germany and France's systems are barely in any better shape. The UK's state pension fund is by contrast solvent, with prospective contributions roughly equalling pension commitments. On top of these pension problems continental countries have severe general public finance difficulties. Tax rates are already very high as we have seen, their public debts are in several cases close to or above 100% of their national incomes and yet they have deficits of about 2-3% of their national incomes because the pressures for spending are so great. In theory we would not be liable for their debts; but in practice we could well be under great pressure to bail them out under the new arrangements building a Euro super-state- just as we do not let a local authority go broke in the UK, so in the United States of Europe with countries, which will be little better than local authorities.
4. There is no disadvantage in staying out, as the propaganda claims; on the contrary staying out will allow us to preserve our competitiveness and flexibility as a great trading nation.
The propaganda claims that other countries in the Euro would raise trade barriers against us- a trade war in other words. Ridiculous! First of all, protection is totally illegal under the very Treaty setting up the Euro. Just as importantly, because we import far more from the continent that they import from us, a trade war would hit them far worse than us; they would be mad to try it. This threat conjured up by the black propaganda for the Euro is a fiction and a bluff.
The other, related, propaganda claim is that job-creating foreign investment would stop coming here if we stay out of the Euro. The contrary is the case. That investment comes here because we are competitive, purely and simply - our costs are low, our workers rarely strike, we have less red tape and we speak English, which most foreigners find easier. Investors also know that our policy, in line with market forces, is to keep the pound competitive over the long run. So there is not only no need to be in the Euro, there is also the severe damage to our competitiveness from going in that we saw earlier.
What it all amounts to is this: by joining the Euro we would lose our sovereignty, our competitiveness and our ability to control our economy so as to stop slumps. It is not just bad economics, it would be to give away our birthright as a free nation. Say no to such dangerous nonsense.
© Patrick Minford, October 2002
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