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A question of credibility

By Mark Leonard. Source: Observer, 1 June 2003

Can the government say 'not yet' to the euro and still claim to have a serious European policy? Pro-euro campaigners will demand a credible road map for entry

When Gordon Brown moves up to the dispatch box on Monday week to deliver his "No, Not Yet" message on the euro he will find it very hard to persuade investors, other European governments and pro-European members of parliament and campaigners that the Government has a serious European policy.

Every single independent analysis of the economic case for joining the euro seems to point to an extraordinary degree of convergence - and the Treasury analysis is expected to show that our economy is already closer to the European average than many countries that are already in the eurozone. And so the decision not to join looks like a political one, rather than one motivated by economic concerns.

And after a six-year diet of warm words and vague commitments, none of these constituencies is likely to be satisfied with assurances - particularly from a government that is irrevocably associated with spin, and is currently reaping the rewards of its over-claiming on WMD in Iraq.

Finding a credible message is of paramount importance. This is not just to save the pro-euro campaign, Britain in Europe, which will face financial collapse if there is no clear plan. It is vital to reassure investors in Britain (who have come here in part because they were persuaded by the Prime Minister's commitment in principle to join the single currency) and our European allies whose support we will need to win in debates about the Constitution on the Future of Europe, debates about European Economic reform. After the events of the last few months we have very little political capital left with them. So what will the Government need to do to show it is serious?

First, it needs to give concrete and credible reasons for saying "not yet" - and show that its recent Zen Buddhist detachment of merely assessing convergence has been replaced by a practical pathway to actively pursue Euro entry. Whether it is reforming the Growth and Stability Pact, the workings of the ECB, looking at the structure of the Housing Market or managing the Exchange Rate, the Government must come forward with achievable strategies for reform. The key is not to hide behind things beyond the Government's control.

Most importantly the Government must put a stop to its inference that France and Germany need to have greater labour market flexibility before we can join the euro. This is both illogical - as our relative flexibility would be a source of comparative advantage to us - and destructive - as it furthers the falsehood that all other Eurozone economies are basket-cases in spite of their higher productivity and greater wealth then the UK. This will only make winning a referendum even harder.

Secondly, the Government needs to put nuts and bolts measures in place to show that it is serious about preparing for the euro. The key confidence-building measures would include introducing legislation paving the way for a referendum; establishing tax-breaks for small and medium enterprises to cover the cost of currency changeover; publishing a consumer code of practice and setting up price-monitoring mechanisms to ensure that traders do not take advantage of the change-over to hike prices. As Giles Radice has pointed out in his recent report How to Join the Euro, the Prime Minister should chair a "Euro Strategy Group" with representation of the Chancellor, Deputy Prime Minister and other senior cabinet ministers to oversee the preparations for changeover.

Thirdly, the Government needs to actively start to make the case for the euro, and stop the rot that has been allowed to set in while eurosceptics have been given free reign. The five tests have been an armlock on the debate, preventing political figures from even mentioning the euro. It was never realistic to expect Business to organise a political campaign for hearts and minds - or to give the task to junior ministers outside the cabinet. The government give the impression that they think that the support for the euro cause is in the lap of the gods - an exogenous force that they can neither predict nor influence - rather than something that their decisions directly affects.

We've now had six years in which the Government have banged on about the need to reform continental Europe's economies, the superiority of the Anglo-Saxon model, and the faintheartedness of the French. In the last two years support for the EU has continued to fall: the measly 33% of the British public who thought that EU was a "good thing" in the 2001 Euro-barometer poll has now fallen to 31%. Those politicians who felt that the introduction of notes and coins in the Eurozone would smooth the way to an easy referendum victory must now face the reality that they cannot win by stealth - arguments must be made with passion, political risks taken and careers put on the line.

But ultimately nothing will change until pro-Europeans stop being so cautious and moderate. To make progress Pro-Europeans must start to change the calculus of risk - both for the political class and the public. The Government need to know that they will pay a political price for staying out. At the moment they face a choice between a ferocious mauling from the tabloids or the genteel irritation of the Yes camp. It's no surprise that they take the line of least resistance every time. If business started to come out an attack Gordon Brown's record as chancellor and his myopia on Europe, if Pro-European MPs made it clear that they will not vote for a leadership candidate that has thwarted Britain's chances of joining, and if cabinet ministers threatened to quit over the issue with the same passion as their opponents - then it would not be so easy to bow to the Sun.

And the public debate also needs to change so that people realise that there will be a price to pay for staying out. At the moment, the status quo of remaining outside the Euro seems to the public like the safe option, whilst joining a new currency seems like a leap in the dark. There is no major problem in the public discourse for which the "Euro" is a solution. This might change if the public knew that foreign investment has been in free-fall since our decision to remain outside. In 1998 Germany received 9.4% of Foreign Direct Investment into the EU, and Britain 28.3%. In 2002, Germany is set to attract 18.1% and Britain only 5.1%. Stark facts like these must become a mantra for Ministers, even if Brown's reputation for economic management loses some of its sheen. If Britain moves from being seen as a 'pre-in', likely to join in the future, to a permanent 'out' then the proportion of investment will fall still further.

Above all the Yes camp needs to shake itself out of self-pity and despair. Like John Major's beleaguered pro-Europeans, they're beginning to feel that they've been two-timed too many times. The danger is of returning to the paralysis of 'wait and see'. If the Government remain unwilling to invest real effort in changing the political climate and the pro-Euro lobby remains defensive and weak, then the issue will die of neglect. The euro debate could go the same way as Tony Blair's earlier ambitions for electoral reform and a Lib/Lab pact - and it will become the received wisdom that Britain will never join.

· Mark Leonard is Director of The Foreign Policy Centre (www.fpc.org.uk ) and writes a monthly online commentary for Observer Worldview. The pamphlet How to Join the Euro by Giles Radice is published by The Foreign Policy Centre.