Ready for a joint account?

The Impact of the Euro - A Diet of Brussels
May 19, 2000

Leon Brittan was undoubtedly an excellent European commissioner, and we were fortunate to have someone of his ability and commitment in the key roles of competition and external trade. His term now having come to an end, he is back in Britain and a Euro-enthusiast. This book is partly a memoir of his time in Brussels, but it is also clearly addressed principally to a Conservative audience and intended to advocate a full British engagement with the European Union, including an early entry into the euro.

Most of his discussion of the economics of the euro follows textbook lines, with the cons perhaps being a bit thinner than the pros. But there is one unusual argument to which he gives prominence that I think is an error. In one of his few references to academic economics, he quotes a study from 1996 by Charles Engel and John Rogers that argued that the border between the United States and Canada imposed barriers to trade equivalent to the expense of transporting goods 1,780 miles within a country. This, according to Brittan, "would show the extent to which the different currencies created segmented markets, which would therefore be less efficient in their operationI than integrated markets".

Now, one might have thought that advocates of the euro would prefer to advance data relating to Europe, if it were available, so this reference already looks like a pyrrhic victory. But more important, the Engel and Rogers data comes from the period 1978-94. Overwhelmingly, then, the figures are from before the North American Free Trade Agreement was struck.Even that agreement does not go as far as the European "internal market", which seeks to remove "non-tariff" barriers as well as tariffs. So the effect that Brittan attributes in its entirety to separate currencies is actually the result in part - and presumably a large part - of good old trade barriers. The case for economic and monetary union gains nothing from this study.

On the vexed question of sovereignty, Brittan seems to feel that much of the opposition to the euro comes from a more or less metaphysical, but anyway inchoate idea of what the constitutional dangers are. These he feels, arguing in a somewhat lawyerly mode, should not concern us any more than other formal sacrifices of sovereignty have. And further, there are many ways in which British governments have already accepted that internationalisation is good for our welfare. In this connection, he gives the Major government's support for the BMW takeover of Rover special favourable mention.

But when he addresses the issue of economic policy, what he says does not seem to square with this view. He says that "to participate intelligently in this debate it is necessary to be clear about what a country will no longer be allowed to do on its own if it joins Emu. It is simple: it gives up the right to set its own interest rates, or its currency's exchange rate." On that basis, the most straightforward, and indeed one of the most powerful, arguments against the euro is that it will, at least some of the time, result in the setting of interest rates inappropriate to British conditions. The governor of the Bank of England was only stating the obvious when he recently said that had Britain already joined the euro, thereby having lower interest rates, by now we would surely have had an inflationary boom. If one prefers to label the origin of that problem "lack of sovereignty" over interest rates, so be it, but fundamentally the issue is that joining the euro inevitably makes the suitability of interest-rate policy for each member country into a lottery. If we join, then, we face a bad policy. The problem cannot be dissolved by arguing that the constitutional arrangement from which it arises involves no special issue of jurisprudence.

Furthermore, that account of the costs of the Emu project is not complete,because there is also the issue of the "stability pact". Brittan says that the pact requires "governments to adopt the objective of balancing their budgets in the medium term" and that it creates "deterrent financial sanctions" (ie fines) for those countries that breach its limits. Since Brittan believes that the stability pact is "an essential part of Emu", these restrictions clearly have to be counted among its costs. All that the advocates of the euro have to offer in response is the disputable claim that following these rules is always good policy. They are entitled to argue that Britain should opt for a permanent commitment, on pain of international fines, to follow what the fashions of 1991 happened to think good policy. But to say that there is no loss of sovereignty worth worrying about is an abuse of language.

A third issue that Brittan addresses in assessing the EU, and certainly one that continues to exercise both the government and the Eurosceptics, is regulation of the labour market. Here, in his view, the EU has moved so far in advancing policies Conservatives believe in that it makes no sense for Conservatives not to be enthusiasts. His own commitment and effectiveness as commissioner for competition and external trade have, I am sure, a good deal to do with this advance.

Although his discussion of the Social Chapter does not take much space, it is probably the issue that will attract the most attention. Brittan's position is that the agreeing of the Social Chapter was something of a high-water mark for that kind of interventionism in Europe, and that since then attitudes have shifted far in the deregulationist direction, with the result that there is now really nothing to fear. There is no doubt that the Social Chapter has produced much less regulation of the labour market than might have been expected when it was agreed, and this surely reflects the fear that such regulation will damage employment and growth. On the other hand, the signs do not all point in one direction. March's Lisbon summit was extensively trailed as one that was going to make a real difference, but in fact it resulted in purely an expression of desires. There was no evidence at Lisbon of a sea-change in perceptions of the kind Conservatives ought to welcome. Meanwhile, we have seen the French government tearing itself apart over the decision to chuck away a whole slice of the promised reforms. The timing of these things was unlucky for Brittan, but a valuable reminder for everyone.

It would be interesting to know how Brittan would react to some of the pro-euro contributors to The Impact of the Euro, edited by Mark Baimbridge,Brian Burkitt and Philip Whyman. The editors are hardly known for being advocates of the euro, but they have written a balanced introduction to the 17 contributions from different points of view. They describe the book as an attempt to facilitate public understanding and hence debate. Unfortunately, one consequence of having so many contributors is that neither side of the argument receives a quite coherent presentation.

The Social Chapter is a case in point. One pro-euro argument is that it will lead to continental-style labour market regulation in Britain. Therefore, it is said, trade unionists should support it. Whether this is true, relevant or desirable could clearly be debated at some length. But how long are we going to be in a position where one group is being told that Europe is converted to deregulation and another that Europe is the great hope for re-regulation?

Another detracting aspect is that the book appears dated. Although published in 2000, some of the authors will be embarrassed by their present-tense references to 1996 or 1997. One even advocates joining the euro as soon as possible because the pound is so low! Some of the issues debated are crucial. Richard Layard, for example, wrote in support of British membership, but he is specifically critical of the "stability pact", pointing out, among other things, that the United States seems to get by without federal-level rules imposing those kinds of constraints on state governments. But then, he says, we are better placed to argue against the pact if we join the euro. I do not know when he wrote this, but it is too late to argue this case. So I take it that his is now an argument against joining.

One of the most distressing arguments for joining the euro is produced by John Edmonds. He says that "any hint that Britain intends to follow a policy of narrow self-interest is likely to produce a very sharp and concerted reaction from Brussels" and that there are a "host of measures that the 11 can use against Britain". Well, it could be true, couldn't it? But would this not mean that the enthusiasts for integration had misunderstood the process from the beginning? The EU is supposed to be a liberal and consensual organisation, working for the common interest of free societies. Edmonds invites us instead to fear the bully boys of Brussels who have lured us so far into their gangland activities and intend to break a few arms and legs to get us to go along with whatever else they propose. If this is really the way the EU operates, we shall all have to reconsider the views of some of those whom I imagine Edmonds has least time for, with the name of Nicholas Ridley readily coming to mind.

For the moment, though, I prefer the picture of the EU as it stands offered by Brittan. Much as I disagree with him about our future policy, to date the EU has done great things. It has facilitated and encouraged many of the best developments in economic governance in Britain and elsewhere. It has achieved a huge amount in promoting trade and economic wellbeing within its frontiers. It has been an inspiration and a magnet for many of those without. In world trade, although less than perfect, it has on the whole, at least in manufactured goods, been a force for enlightenment and progress. And on a whole range of other issues it has promoted and developed cooperation among sovereign states. May it long continue so.

James Forder is a fellow of Balliol College, Oxford. He is the author, with Christopher Huhne, of Both Sides of the Coin: A Debate on the Euro .

The Impact of the Euro

Editor - Mark Baimbridge, Brian Burkitt and Philip Whyman
ISBN - 0 333 73579 X and 77847 2
Publisher - Macmillan
Price - £45.00 and £16.99
Pages - 241

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