By Giles Radice. Source: Financial Times, 12 February 2003
Following up his road-map for sucesful entry into the single currency, the FPC-published policy pamphlet, 'How to Join the Euro', Lord Radice again takes up the cudgels for the pro-Europeans. Drawing on ideas elaborated in How to Join the Euro, Radice argues that such a critically important issue requires key members of the cabinet to form a "euro strategy group" to take the debate forward. Read the full text here.
Just as war is too important an issue to be left to the generals, so UK entry to the euro is too big a national question to be confined to the Treasury. I am a great admirer of Gordon Brown, who has steered the economy with such success. But it is high time that both the national debate and the government's strategy for joining the euro went beyond the five tests.
When in October 1997 I supported the chancellor's statement in the Commons setting out the five tests, I did so on the basis that the government was genuinely committed in principle to joining, that the assessment would be open and fair and that the decision would be taken without excessive and damaging delay and in the long-term interests of the country. I could never have imagined that, 5 1/2 years later, we would still be waiting for the assessment of the five tests and that speculation about these tests and Mr Brown's attitude to them would still be dominating the news.
In a recent speech, Ed Balls, the chancellor's chief economic adviser, tried to put the five tests into historical perspective by analysing four occasions - the 1925 return to the gold standard, the postwar re-entry to a fixed exchange rate system with the dollar in 1946, the failure to devalue in 1964 and the European exchange rate mechanism debacle of the early 1990s - when policymakers failed to pay sufficient attention to economics in making crucial decisions.
But there is another lesson that could be drawn from the Treasury's past: that of excessive delay. In 1950, the Treasury was strongly against UK participation in the Schuman plan. In the mid-1950s, it was at best ambivalent about British entry into the Common Market. Even in the early 1970s, when the UK decided to join the European Community, the Treasury dissented. Characteristically, it advised against the UK's joining the ERM when it was first set up and when we could have benefited most from entry.
Mr Brown is right to stress the need to get the economics of joining right. On his crucial test of convergence there can be little doubt that, compared with 1997, in terms of inflation, output gaps, interest rates and trade orientation the UK economy has come much closer to that of the eurozone. Indeed, a number of countries already in the eurozone diverge more from the euro area average than the UK.
However, in deciding whether now is the time to join, it is essential to distinguish the wood from the trees. We must not ignore broader economic questions such as the benefits that entry would bring and the costs of exclusion. In a world of currency areas, medium-sized currencies such as sterling are likely to experience volatility that will adversely affect their trade and investment. Furthermore, while we remain out of the euro, powerful new commercial groups and new trade partners are emerging on the continent from which we may be excluded. Staying out is not a cost-free option.
So we cannot hide behind the five tests for ever. If the government is genuinely committed in principle to joining, it is high time that it had a comprehensive strategy for entry. Quite apart from the five tests, there are other vital issues that the government now needs to tackle. These include satisfying the criteria set out in the Maastricht treaty governing entry to European monetary union; ensuring the stability pact is suitably reformed to be more flexible; dealing with the tricky question of the UK exchange rate; deciding what is involved in the UK joining the European Central Bank and the increasingly influential euro group of finance ministers; setting out the timetable and costs of entry, including the adoption of notes and coins; preparing the legislation that is required for membership; and assessing the long-term economic and political cost of staying out.
In his new year's message, Tony Blair said this year we faced "what may be the single most important decision that faces this political generation - the question of whether to join the euro". If the government is serious about joining, it should set up a euro strategy group. This should include the chancellor, the deputy prime minister, the foreign and trade and industry secretaries, the leader of the House and the Lord Chancellor. It should be chaired by the prime minister himself, who is, after all, First Lord of the Treasury and main arbiter of the national interest.
Lord Radice is chairman of the House of Lords European sub-committee on economic and financial affairs and author of How to join the Euro www.fpc.org.uk