Letter to Cardiff Chamber of Commerce

The euro debate may continue in the UK for some time and on occasions it may be helpful to take a step back and look at the core issues, without the political spin to confuse matters. Here, I attempt to set out the main reasons why I believe that the limited advantages to be gained from Britain adopting the euro are far outweighed by the disadvantages.

The pro-euro lobby contends that we need to join EMU in order to support and develop the trade between Britain and the euro-zone. But the fact is that the rest of the world is more important to British trade when our trade in services and investments are taken into account. Our overall trade with the euro-zone accounts for only around 43% and we trade as much with America as with Germany and France together. Only 19% of our exports of goods are invoiced in euros or other EU currencies compared with 27% in dollars and 52% in sterling. As our industrial base inexorably declines, the importance of our service sector increases and with it so does our trade with the rest of the world.

EMU stands for economic and monetary union. Joining the euro-zone means that we would lose the ability to control our own monetary policy and interest rates would be set by the European Central Bank. This is a one-size-fits-all policy that only works if our economy is sufficiently synchronised with those of the other participants. Real life isn't that convenient. Gordon Brown might claim that it is not yet possible to assess his five economic tests, but others have already done the job for him. Barclays Capital have concluded that the conditions would not be right for the next five years because there are too many structural differences between our economies for a single interest rate to work properly.

It is likely that if Britain joined the euro-zone, we would see a rise in our taxes. Currently, Britain's overall tax burden is around 38% of GDP compared with the euro-zone's 44%. In Europe, tax harmonisation is an open agenda no matter how vociferously our government denies it. To make things worse, the euro-zone has enormously expensive social policies and massive unfunded pension liabilities which represent over 100% of GDP in Germany, France and Italy compared with 20% in the UK. EMU means that we would have to help to fund that liability.

The EU budget is only 1.27% of GDP and this is not enough to provide adequate financial support to poorer regions to compensate for them having the wrong interest rate. The United States get around this problem by creating large flows of capital through the federal tax system. The euro-zone doesn't have much room to manoeuvre with the very limited budget at its disposal unless taxes are increased dramatically.

Unemployment in the euro-zone is nearly double that of Britain and the gap is getting wider. Their economies are over-regulated and the labour market is inflexible. By comparison, Britain has the lowest unemployment for decades and the greater flexibility has been one of the major attractions resulting in the lion's share of inward investment in Europe. The jobs thereby created far outweigh losses claimed to have resulted from sterling's "unfavourable" exchange rate. Those who would have us join the euro now would condemn British industry to the existing exchange rate for all time.

The majority of British businesses do not trade with the euro-zone at all yet they would have to bear all the costs of joining without sharing any of the benefits. A trade and industry select committee concluded at the end of last year that these costs would be around £30 billion.

So these are some of the main "economic" arguments against Britain adopting the euro. On top of these are the potentially emotive constitutional issues and whether the real agenda in Europe is a move towards a single "super-state". If EMU does result in political union, and to my mind it's difficult to see how it can work in the long-term without such union, we would see the power of the British parliament ceded to Brussels and Frankfurt. In Wales, we have only recently been given, for better or for worse, our own governing body in the form of the Welsh Assembly. Do we really want to give away the power to Europe?

The Welsh economy accounts for only about 0.5% of total GDP in the EU. The suggestion that Wales will benefit from membership of the euro-zone is fanciful as Wales will not feature in the decisions made in Brussels. We would be forced to toe the line of the larger countries, as Ireland has been reminded in recent times. Wales can continue to gain the benefits of EU membership such as structural funding and access to the EU market place but we can also keep the advantages which attract new investment to Wales. We can have the best of both worlds by saying no to the euro.


Jonathan Hodge
Managing Director, The Carlyle Trust Limited