The euro is alive and kicking in twelve EU countries. So far, it has survived its early tests including the relatively smooth introduction of notes and coins at the beginning of this year. As yet, however, it has only had to fend off some minor ailments and it has yet to prove itself on the world stage in the face of a major global economic cold. For all our sakes, let's hope it survives such a test when it comes, as the alternative would be unthinkable. In the meantime, we in the UK may be faced with the choice at a referendum as to whether or not to join this unproven experiment from which there is no return. The significance to our business and daily lives is profound so if you are still in the company of the large group of business people who have their heads firmly stuck in the sand, be warned, the time may be fast approaching when it will be necessary to stand up and be counted.
In terms of the fundamental arguments for and against the euro, the introduction of the new notes and coins across the continent is an irrelevance. Sure, it will be nice to have the convenience of using a common currency at many of our favourite holiday destinations, but little more than that - a convenience. Would our retailers in Wales benefit from accepting euros from foreign visitors? Perhaps, but I would suggest that the cost of doing so would outweigh any small competitive advantage thereby created. Certainly, if I were visiting the UK from the continent I would use sterling in the sure knowledge that I would have enjoyed a better exchange rate than a local trader is likely to offer.
Other irrelevancies in this context are the perceived high level of prices in the UK and the alleged lower mortgage rates in the eurozone. Wales in Europe say that joining the euro will result in price transparency leading to a harmonisation of prices. This is a wonderful theory but it relies upon the false assumption that a perfect market exists in Europe and that consumer spending power will move to where goods are cheapest. The fact remains that there are all sorts of barriers, physical and otherwise including the cost of transport, language difficulties, social trends, tax regimes, regulation and good old inertia that work against the shift in demand. Also, differential market pricing actually suits the manufacturers and distributors and nowhere is this more starkly demonstrated than in the motor trade where price differentials within the eurozone actually worsened during 2001 according to a European Commission report issued this February.
It is also widely accepted on both sides of the euro debate that sterling would need to lose value against the euro before the UK could join EMU as otherwise UK manufacturing would be locked in forever to an exchange rate that is not conducive to trading in the eurozone. Such a reduction in the value of sterling would automatically result in the lowering of the relative level of prices in the UK as compared with the eurozone without any benefit from real price cuts.
As for mortgage costs, I would just refer you to the latest statistics issued by the European Mortgage Federation. Because of the highly developed and competitive mortgage industry in the UK, throughout 2001 average mortgage rates in the UK were consistently lower than in the eurozone notwithstanding their lower official interest rates.
But let's get to the real heart of the matter. In economic terms, it is all about business risk and stability. We all want to be able to plan for the future with a reasonable expectation that external forces, such as interest rates and exchange rates, remain stable, or at least manageable and appropriate to our circumstances. A little over 70% of Welsh exports of goods go to the EU so Wales in Europe claims that Wales needs to join the euro for exchange stability. This sounds plausible, but it is simply not valid to look at Wales in isolation as we are dependent on the rest of the UK for our economic survival. Something like three-quarters of all Welsh output is consumed within the UK. In fact, well under half of the UK's export trade is with the eurozone and we export more to the USA than to Germany and France put together.
Wales in Europe is economical with the truth when it quotes figures for trade in goods only and it ignores the massively important trade in services which have created so many high value jobs as our indigenous heavy industries have declined inexorably.
According to HM Customs and Excise only about one fifth of the UK's international trade is invoiced in EU currencies compared with one third invoiced in US dollars. A half of all our trade with the EU is transacted in sterling. Furthermore, breaking my own rule and looking at Wales in isolation, well over twice as many Welsh companies export outside the EU than export into the EU.
All this does not mean that I would advocate hitching up to the US dollar. Far from it, but as the UK is the fourth largest economy in the world and for a change it is currently the most dynamic of the G7 (despite being outside the eurozone!) sterling can stand on its own very successfully as an international currency.
Next comes the thorny issue of control over our own economy. EMU stands for economic and monetary union and one of its main planks is that interest rates are set by the European Central Bank. This is a one-size-fits-all strategy which has no room to cater for the particular circumstances experienced by a small region such as Wales which accounts for only about one half of one percent of the EU's GDP.
There are no compensatory mechanisms to help to reduce the impact of having the wrong interest rate for areas which are out of 'sync' with the rest of the eurozone. In the USA, a federal tax system allows the transfer of significant funds to areas in need of economic assistance. This was demonstrated by massive federal grants to New York following the atrocities of the 11th September. No such fund exists in Europe until it is decided to levy a special tax for such purposes. Otmar Issing, a board member and chief economist of the ECB, was refreshingly candid when he readily admitted such weaknesses exist in the euro 'experiment' during his lecture at the Julian Hodge Institute of Applied Macroeconomics last Spring. In the relatively short period since the ECB started setting interest rates in the eurozone we have seen how the smaller "peripheral" countries such as the Netherlands, Spain and Ireland have had difficulty in coping with the rates which have been clearly wrong for their economies.
Economic and monetary convergence will inevitably lead to a call for the harmonisation of tax systems and we are already seeing this with a suggested common corporate taxation platform. Pascal Lamy, the EU Trade Commissioner, has been reported as saying "a natural first step would be to harmonise the tax bases and to adopt minimum tax rates but the ultimate goal should be the creation of a European corporate income tax whose proceeds would either finance the EU or be allocated to Member States". Despite the denials of our own government, the writing is, as they say, on the wall.
Economic and monetary convergence will also lead inevitably to the sharing of the heavy costs of the social policies which the eurozone countries have so dramatically failed to reform. The eurozone has massive unfunded pension liabilities that represent over 100% of GDP in Germany, France and Italy compared with around 20% in the UK. Economic convergence is like having a group of companies that have provided cross guarantees to their bank. The liabilities of one have to be supported by the assets of the rest. Wales in Europe is being disingenuous when they say that the law prohibits any requirement for one country to pay another's pension bills as in the long run economic and political pressures will dictate otherwise.
Another battle ground in the euro debate is inward investment. Wales in Europe claims that we need to join the euro in order to ensure the continued high level of inward investment into Wales. This is a fallacy. A report published in March by the Economist Intelligence Unit concludes that our flow of inward investment will not be affected by a decision to stay out of the euro. The most important factors in attracting inward investment in competition with the rest of Europe are our stable economy, flexible labour market and relatively low levels of regulation. Unfortunately, the constant stream of directives coming out of the EU under the Social Chapter which we are obliged to pass into legislation are doing nothing to help this situation. The latest on temporary workers almost seems designed specially to kill that part of the labour market in the UK as we have around a half of all temporary workers in the EU. The Welsh Economic Review produced by Cardiff Business School predicts that by 2010 the foreign sector could account for around one half of Welsh manufacturing employment. It is therefore vital to Wales that we maintain an environment conducive to continued high levels of foreign investment.
To set out adequately the economic arguments against the UK's adoption of the euro would require a book. Indeed there is a splendid one available to be downloaded from the no campaign's web site at www.no-euro.com. But to conclude this short review of some of the issues, in economic and social terms Wales' interests are best served by remaining outside the euro because the euro would be bad for our economy, bad for our businesses and bad for jobs. If we go in we will have to stay in whatever happens and that is a gamble that Welsh and UK business cannot afford to take.
Managing Director, The Carlyle Trust Limited
Welsh council member, Business for Sterling and the no campaign
5 April 2002