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February 6, 2003

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How to Join the Euro

Giles Radice

2003 is the crucial year in which the UK will either decide to join the euro or remain out, at least for the time being. A decision either way will have major consequences for this country.
The reason why 2003 is the key year for Britain and the euro is because the government has said that its judgement of whether there is a strong economic case for entry has to take place by June at the latest. The basis for the government’s decision will be the Treasury’s assessment of five economic tests, as set out in the Chancellor’s statement of October 1997. If the tests are deemed to have been met, then the government has decided that it will not only recommend joining the euro but will also put its decision to both parliament and to a referendum of the British people.
The purpose of this pamphlet is to examine in detail the hurdles facing British entry. It will not only consider the government’s five tests and the way in which these should be decided. There are also other important questions that the government needs to address if it is serious about entry. These include satisfying the criteria set out in the Maastricht Treaty governing entry to EMU; the issues associated with the European Stability and Growth Pact; how to deal with the difficult question of the UK exchange rate; what is involved in the UK joining the European Central Bank and the euro group of European finance ministers; the timetable and costs of entry, including the adoption of notes and coins; and the legislation that will be required if the UK is to become a member of the euro.
The underlying argument of the following pages is that the government will need to draw up a strategy for dealing with all these matters as soon as possible. This will help to clear its mind about the way to decide whether it should join the euro, assist it during the referendum if one is called and make joining easier once the decision is made. Without such a strategy, there is a danger that the decision about entry could be taken without sufficient forethought or botched all together.
This pamphlet is written from the standpoint of someone who is in favour of the UK joining the Economic and Monetary Union (EMU). It is only realistic to recognise that the euro has got off to a good start. Indeed it could be argued the creation of the euro has been one of the biggest economic and political achievements in post-war European history.
For the first time, twelve independent and democratic European nations, representing over three hundred million people, have freely come together to adopt a common currency. As the Bank of England has concluded, the whole complex exercise from the locking together of individual currencies and the introduction of the euro as a unit of account in January 1999 to the launch of euro notes and coins in January 2002, has been conducted with exemplary efficiency. Prior to that, immense efforts were made by member states, particularly the Mediterranean ones, to ensure that their economies were able to meet the Maastricht monetary and fiscal criteria and thus qualify to join Economic and Monetary Union from the start. Now, continental Europeans, from Helsinki in the north to Heraklion in the south, from Leipzig in the east to Limerick in the west, are able to buy and sell, save, spend and invest in the same currency and in the same market, all to their considerable benefit.
At the launch of the euro the UK was a bystander, as the Government had announced in October 1997 that it would not be part of the first wave of EMU membership. However, although Gordon Brown said in the Commons that the UK was not ready to join, he also declared that the government did not believe that there was an over-riding constitutional bar to membership and, proclaiming their support for entry in principle, said that, “If, in the end, a single currency is successful and the economic case is clear and unambiguous then the government believes Britain should be part of it.”
This is not the first time that the UK has initially decided against participating in a major European project. On three previous occasions since World War Two – over the Schuman Plan in 1950, over the Common Market in 1955-57, and over the European Exchange Rate Mechanism (ERM) in the late 1970s and early 1980s – Britain has missed crucial opportunities in Europe. And when they have eventually joined, they have complained, as in the case of the ERM, that they have joined at the wrong time or that the rules have been set against them. This has been particularly damaging to the UK in the sphere of agriculture. The basic rules of the Common Agricultural Policy (CAP), which from the start favoured the less efficient agricultural industries, were well established when the UK joined and have, overall, worked to its disadvantage. In his resignation speech to the House of Commons in November 1990, Geoffrey Howe warned against ‘missing the boat’ on EMU. “We have paid heavily in the past for the late starts and squandered opportunities in Europe. We dare not let that happen again”.
In this context, it is instructive to consider the record of the Treasury. In a recent speech Ed Balls, the Chancellor’s Economic Adviser, put the five tests into a historical perspective by convincingly analysing four occasions – the 1925 return to the gold standard, the post-war re-entry to a fixed exchange rate system with the dollar in 1946, the failure to devalue in 1964 and the ERM debacle of the early 1990s – when policymakers failed to pay sufficient attention to economics in making key decisions.
But there is another lesson that could be derived from the Treasury’s past – that of excessive caution. In 1950, the Treasury advised strongly against British participation in the Schuman Plan, which Edmund Dell called the “abdication of British leadership in Europe”. In the mid-1950s, the Treasury were – at best – ambivalent about British entry into the Common Market. Even in the early 1970s, when the UK (led by Heath) decided to join the EC, the Treasury dissented. Characteristically, the Treasury advised against the UK joining the ERM when it was first set up and when we could have benefited most from entry. So there is a warning to the Treasury from the past about the costs of delay.
With regard to the euro, the Chancellor has himself acknowledged the benefits of a single currency in terms of ease of transaction, of price transparency across Europe, of the promotion and expansion of trade, and perhaps most important of all, of the economic and monetary stability which comes from the delivery of exchange rate certainty with our main trading partners. It is this stability, which by increasing investment, productivity and economic growth, would help us to improve living standards and assist us in bringing our public services, such as health, education and transport, close to continental standards. It should not be forgotten that, despite the better performance of the UK economy in recent years (in terms of per capita GDP), the UK is still low down in the EU league table, and our productivity remains well behind that of the other two biggest economies, France and Germany. By joining the euro we would become full members of the huge European single market, which takes half our trade, compared with only 16% with the United States. It could also help us achieve the economics of scale and competitiveness that a single currency has made possible in the United States.
The costs of staying out are increasingly apparent. Following the launch of the euro, companies within the eurozone are benefiting from the internal exchange stability while, by contrast, companies in Britain suffer from the continuing risk of exchange rate instability. Already the consequences of this comparative disadvantage are becoming clear. Since 1998, trade in goods between eurozone members has increased markedly, while Britain’s trade with the EU has fallen relative to GDP. Over the same period, the UK’s share of foreign direct investment coming into Europe, which has played a key role in helping to modernise our industry, has fallen, while France and Germany have significantly increased their shares.
It is also worth stressing the political cost of staying out. The Prime Minister, Tony Blair, has rightly stressed the need for the United Kingdom to play a leading role in Europe, which is all the more important when the direction and nature of the European Union is under debate. In the medium term, it is difficult to see how the UK’s position can be sustained if this country remains outside the euro. In December 2002 the Portuguese Prime Minister warned the UK: “You cannot be in the centre if in the most important enterprise – the euro – you are not there.” Outside the euro, Britain’s ability to influence the future shape and governance of the enlarged EU will remain seriously limited.
For all these reasons, it is essential that the government draws up an effective strategy for entry which would then enable us to make up for a late start and to take advantage of the opportunities which joining the euro would open up for the UK.

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