Britain and the euro: Blair should be bold

Date: 15/05/03

By Dick Leonard

If the British premier and his ministers were more frank, they would admit the tests for euro entry had been met and push to rejoin the exchange rate mechanism

IN THE near future, the UK government will release a statement of - at best - doubtful veracity. It will say that the five self-imposed economic tests it needs to pass in order adopt the euro have not, or not yet, been met - an assertion with which few economists agree.

If Prime Minister Tony Blair and his ministers were more frank, they would say that the tests had been met, but that they had no confidence that they could win a referendum on the issue before the next election.

As European Voice went to press, a furious row was reportedly taking place between Blair and Gordon Brown, the chancellor of the exchequer. Brown, apparently, wanted to slam the door on a referendum during the course of the present British parliament, which could continue until June 2006, whereas Blair wanted to keep it open.

Blair's position has received some heavyweight reinforcement in recent days:

• A commission of experts, led by Professor David Begg, published a damning indictment of The Consequences of Saying No (Britain In Europe: Homepage);
• 30 leading international economists, including Nobel Prize winner Robert Mundell and Paul Volcker, former head of the US Federal Reserve, backed UK entry;
• Britiain's former foreign secretary Robin Cook called for the setting of a firm date, by January 2007, for entry;
• London's Mayor Ken Livingstone said that the UK's capital city was losing out financially from its exclusion from the euro;
• mass resignations from the government-backed pro-euro campaign group, including its director, Simon Buckby, were threatened, unless the statement sets out "a clear road-map to membership of the euro".

With this degree of pressure, it would be surprising if Blair did not succeed in heading off Gordon Brown's determination to postpone the issue indefinitely.

Yet a mere decision to review the question in a year or two will not be sufficient to persuade the premier's partners in Europe of the seriousness of his intentions.

As an absolute minimum, concrete steps must be announced to ensure that all possible preparations are taken between now and whenever the referendum does take place, to ensure that there would be no further delays thereafter.

One step which has not been much discussed is the need to ensure that Britain meets the criteria for adopting the euro, set out many moons ago in the Treaty of Maastricht.

These centred on four basic requirements, concerning inflation, exchange rates, interest rates and the avoidance of excessive budget deficits.

It has long been assumed that Britain could meet these criteria with flying colours.

This is true of three of the four, but - ever since 'Black Wednesday' in September 1992, when Britain crashed out of the Exchange Rate Mechanism, (ERM) it has been in breach of the fourth.

This is that its currency should have been within the narrow band (+/- 2.25) of the ERM for at least the preceding two years.

Continued failure by Britain to meet this requirement would open the way for any other member government (or a disgruntled President Jacques Chirac?) to block UK entry.

This issue may appear less academic if Sweden votes to join the euro in its 14 September referendum.

It is not in the ERM and may have to wait another two years for entry, while it meets this requirement.

Denmark, the other euro 'out', has remained within the ERM since its creation in 1979, and will face no such obstacle if, as many expect, it holds another referendum before long.

Yet entry into the ERM is not only a prerequisite to joining the euro, but - as Cambridge economist John Grieve-Smith recently noted in The Observer newspaper - very much in Britain's own interest.

It would give the UK one of the two main economic advantages enjoyed by members of the eurozone - a stable exchange rate.

It would not, of course, secure the elimination of transaction costs, but half a loaf is certainly better than no bread.

The instability of sterling under the existing regime of floating exchange rates has been a disaster for much of British industry.

Grieve-Smith cites the example of steel. "Since the merger of British Steel with the Dutch company Hoogovens", he writes, "the competitiveness of the British end has been hit by the strength of sterling, as have many of the manufacturing firms British Steel supplies.

"Loss-making plants, closed when sterling is temporarily strong, are lost for good".

The scars of Black Wednesday have still not healed: the mistake was not in joining the ERM, but in delaying the decision for far too long, and then joining at an unrealistically high rate.

These errors were compounded by the then chancellor of the exchequer, Norman Lamont, who rejected suggestions from fellow EU finance ministers for an orderly adjustment to the exchange rate.

The recent fall in sterling, and the rise of the euro, has brought the current exchange rate much nearer to a realistic level. Only a relatively small adjustment would need to be made to set a viable rate against the euro and the Danish krona.

Blair and Brown should now announce that the UK will adhere to the ERM just as soon as such an adjustment can be negotiated.

In doing this they will be sending the clearest possible signal of their intention to fight to get into the euro, while giving a shot in the arm to the British economy.

The UK government is due to publish in June 2003 its assessment of the five economic tests, which it has said the UK economy must pass if the country is to join the EU's single currency.