The
Economic Consequences for Britain if She Joins the Euro
Surrender of Monetary and Economic Controls
Previous
Experience - Britain's Membership of the ERM
The One-Size-Fits-All Interest Rate
The International Exchange Rate
Britain's
Economic Cycle in Relation to Europe
The
Likely Effects on Employment
The
Likely Effects on Public Services Spending
The
Inevitable Development of EU Taxation and Spending Powers
The Cost of Failure
SURRENDER OF MONETARY AND
ECONOMIC CONTROLS
If Britain joins the euro she
will have handed over control of her currency to the European Central Bank. She will have handed over the setting of her domestic
interest rate, the setting of her monetary policy, the level of her public
sector borrowing requirement, and responsibility for her international exchange
rate. In addition ownership of the assets of the Bank of England will have to be
transferred to the European Central Bank in Frankfurt.
Chancellor Gordon Brown has already sold off a large proportion of the
gold reserves of the Bank of England and bought euros with them (which have
since declined considerably in value). There is no provision in the Treaty on
European Union for a country leaving EMU or getting back its former gold
reserves and assets. Britain
will have effectively handed over control of her economy and economic future to
the European Central Bank.
PREVIOUS EXPERIENCE - BRITAIN'S
MEMBERSHIP OF THE ERM
The Exchange Rate Mechanism
existed between 1979 and 1993 and was the method whereby European countries tied
their currency exchange rates together within certain bandings to achieve
'convergence' as a preparation for full monetary union.
Britain joined the ERM in 1990 on the advice of the then Chancellor of
the Exchequer, John Major. Anyone
who had a loan, owned a business, or had a mortgage in the early 1990s will
remember the financial pain caused by the ever-rising interest rates.
Britain was eventually forced to abandon membership of the ERM on Black
Wednesday in September 1992. It is
estimated that at least one hundred thousand businesses and one million jobs
were destroyed in Britain as a result of membership of the ERM.
European Monetary Union is like the
ERM but without the escape hatch.
THE COST OF JOINING
If Britain adopts the euro then
there will be a direct cost to government, public services, and every private
business. This figure has been
estimated as at least £31.2billion (Trade & Industry Committee) and
will certainly run into many billions of pounds.
All existing banknote and coins will have to be handed in and exchanged
for euros. All accounting and
computer systems will have to be changed or adapted.
The list of changes is almost endless.
There will be a direct cost to every business big and small.
Prices will inevitably be 'rounded up' at conversion. The cost of converting will be passed
on to consumers as increased prices.
THE ONE-SIZE FITS ALL INTEREST
RATE
The single most important thing
wrong with the euro is the 'one size fits all interest rate'.
The European Central Bank will set a common interest rate to apply to all
EMU member countries. It is quite
obvious that the economies of the countries of the European Union will require
different interest rates at any given time.
Too low a rate means inflation can take off, and too high a rate
restricts spending and growth.
Sir Eddie George, Governor of the Bank of England, said in November 2000
that: "If we had joined at the start Britain would now be suffering a
job-destroying inflationary boom". He went on to say that: "The techniques for
influencing domestic inflation would have to look more to fiscal rather than
monetary policy". This
means that a British government without the ability to set interest rates could
only combat inflation by using tools such as higher taxes and wage restraint
policies. These were the type of
policies used by British governments during the 1970s and which failed.
By joining the euro Britain will have
lost a vital lever of economic control.
THE INTERNATIONAL EXCHANGE
RATE.
By joining the euro Britain
would lose responsibility for her international exchange rate.
The pound has a floating exchange rage, like the euro, and most other
important world currencies. European
Monetary Union required the member countries exchange rates to be 'irrevocable'
fixed against each other on 1st January 1999.
Britain will have lost the self-regulating mechanism of a floating
exchange rate in relation to the other EMU economies, and Britain will suffer
further if the euro's international exchange rate is inappropriate for her
economy.
THE BRITISH ECONOMIC CYCLE IN
RELATION TO EUROPE'S
Britain's economy is
fundamentally different from those of the European mainland.
Britain's economic history is one of an international trading nation.
Britain has been a 'global economy' for a very long time.
In 1913 the ratio between Britain's exports and her gross domestic
product was 31%, in 1995 it was 33%: Britain's economy was almost as
'globalised' at the beginning of the 20th century as it was at the
end. At the present time: the majority of Britain's international
trade is done outside the EU; the vast bulk of our own international investments
(at least £1.4 trillion) are outside the EU; the City of London is a world
financial centre like Hong-Kong or New York; and Britain attracts enormous inward investment from
countries outside Europe. A greater
proportion of people are mortgage owners in the UK than in most other EU
countries, and they are very susceptible to interest rate rises. This is quite a
different profile from most other EMU member economies.
Britain's economic cycle is much
closer to that of the USA than it is to that of Europe.
Monetary policy and interest rates that the European Central Bank sees as
being necessary for EMU countries as a whole might be completely the wrong for
Britain.
THE LIKELY EFFECTS ON
EMPLOYMENT
To see what might happen to
employment figures in Britain should she join the euro look at what has happened
to employment in the EU since monetary union has been pursued.
The first attempts to lock the economies of Europe together began in the
1970s with the 'Snake', 1970-1975, and the Exchange Rate Mechanism 1979-1993.
From 1993 the 'Maastricht' convergence criteria were applied to the prospective
euro-zone members. From the 1970s the employment rates for Europe began to
diverge from the rest of the industrialized world. The problem throughout most of this period was that
when exchange rates were locked together Germany had a lower inflation rate and
a more competitive economy than most of Europe.
As a result the other ERM countries had to pursued deflationary economic
policies in order to avoid balance of payments problems.
As about two thirds of Germany's exports go to other European countries
this in turn pulled down Germany's growth rate.
The combined economies of the
European Union have therefore been run with a deflationary bias over the last 30
years. The overall effect has been
to increase the level of unemployment in the EU compared to the rest of the industrialized
world. Britain has a much
lower unemployment rate compared to other European countries. The pursuit of the
political objective of monetary union has had the economic cost of causing lower
growth and higher unemployment in the participating countries.
Joining the euro is most likely to
maintain or increase Britain's unemployment level.
THE LIKELY EFFECTS ON PUBLIC
SERVICES SPENDING
The deflationary policies of
the ECB and its control of the rate of borrowing by euro-zone governments have
an obvious effect on the amount of available funds that governments can spend. The lower growth and higher unemployment rates that characterize
the euro-zone economies mean that many European countries have to
tax businesses and those in work at a much higher level than in Britain.
If Britain had joined the process for monetary union at the start then it
has been estimated that cuts of £18 billion would have been required from the
public spending budget in order to meet the Maastricht convergence criteria.
Substantial cuts were made in European countries, which caused widespread
protests and demonstrations even in euro-heartland countries such as France and
Germany. Britain
joining the euro could see a decrease in available funds for spending on public
services - unless this was matched by higher taxation rates.
THE INEVITABLE DEVELOPMENT OF
EU TAXATION AND SPENDING POWERS
The Treaty on European Union (Maastricht)
states quite plainly that the EU intends to, 'adopt provisions for the tax
harmonization of legislation concerning turnover taxes, excise duties and other
forms of indirect taxation'. What
this means is that one of the next steps in the process of European integration
will be for the EU to acquire the power to decide the rate and application of
indirect taxes across the EU. VAT was created so that a percentage of the
revenue that it raises could be used to fund the EU budget.
The EU intends to have the power to 'harmonize' indirect taxes throughout
the EU so that no country (such as Britain) can avoid applying VAT on goods and
services currently exempt, thereby giving itself an 'unfair' economic advantage.
The EU intends to bring about a rate of at least 15% VAT on almost all
forms of consumption throughout the EU - many of which are currently zero rated
in Britain.
One of the driving forces
behind the EU's call to have taxation powers lies in one of the inherent
weaknesses in the single currency itself. Because
of the disparities in the economies of the euro-zone the EU will want the
ability to raise taxes to spend as regional development grants or investments in
under-performing regions of the euro-zone.
It will certainly want this power if the euro continues to decline in
value and looks like disintegrating. Existing
single currency areas like the United Kingdom and the United States have the
power to raise and spend taxes as 're-distributive budgets' within their
borders. A great deal of the EU
budget has already been spent over the years in its economically underdeveloped
regions (much of this has been lost to organized crime in corruption and fraud).
The issue has been summed up by Herr Hans Tietermeyer, former President
of the German Bundesbank: "It is an illusion to think that states can
hold on to their autonomy over taxation policies".
If Britain joins the euro then it will inevitably mean - VAT
on almost all goods and services currently exempt.
THE COST OF FAILURE
What will happen when the euro
inevitably comes under international pressure on the money markets? The EU will do everything it can prevent the euro collapsing.
Billions have been spent, and billions more will be spent, in supporting the
euro. The euro is a very
uncertain experiment that, based on all previous experience of single currency
areas, is most likely to fail. The cost of the euro's failure to the EMU member
states will be incalculable and its will be a major economic disaster for them.
If Britain joins she will be taking a
tremendous risk, and what is more a risk for very little or no discernable
advantage.