Cassandra in Euroland

April 24, 1998

Ex-Thatcher guru Patrick Minford tells Kam Patel why we should not swap our pounds for euros and why new Labour are such good Tories.

To have been a raging free-marketeer in Liverpool in the mid-1980s, with the 1981 Toxteth riots casting a heavy shadow over the city, could not have been easy. To have also been a high-profile economic adviser to the then Conservative prime minister Margaret Thatcher, as Patrick Minford was, was surely asking for trouble.

Among fellow economists, anecdotes of Minford's days on Merseyside, when he was a professor of economics at Liverpool University, are legion. Some, like the one about him not stopping at a red traffic light in a certain area of Liverpool for fear of being mugged, are, alas, apocryphal. "A shame!" he says laughing. What he did get, though, were nasty letters and phone calls which forced him to go ex-directory. "There was a lot of aggro around. But I never really felt threatened. Liverpudlians are a sporting bunch. Even when I received threatening phone calls I never believed they wanted to harm me... they were just winding me up, creating a bit of unease," he says easily.

Minford left Liverpool University last year to take up a chair at the University of Wales College, Cardiff. His combative, controversial nature has not dimmed since what he calls the "exciting, challenging" days of the Thatcher project. Recently he has been pouring scorn on a project he believes could end up destroying Europe: Economic and Monetary Union.

Started decades ago, backed in particular by the French and Germans, the project reaches a climax next Friday when the 15 heads of government of European Union countries gather in Brussels for a special summit. There they are expected to announce which countries will be the first to join the monetary union. The next milestone will be January 1999. Then the exchange rates for all Emu countries will be frozen and they will begin trading with a single currency. After a three-year transition period, in 2002, euro notes and coins will begin to be circulated.

The Swedes and Danes have already refused to sign up. Britain has ruled it out for this parliamentary session but may join after the next general election, which can be no later than 2002. Tony Blair's government has further committed itself to a "triple lock" system, which means getting the agreement of the cabinet, Parliament and the people (via referendum) before entering Emu. Minford, of course, would prefer that none of this happen, but says that at least the triple lock system is the most democratic arrangement for joining that anyone has yet dreamt up.

How will it affect ordinary people if Britain joins the "Eurozone" ? Well, says Minford carefully, they would first notice that interest rates were the same everywhere in "Euroland". They would also notice that the Bank of England would no longer be responsible for changing interest rates - that would become the remit of the newly created European Central Bank in Frankfurt. People would also notice that sterling's exchange rate against the dollar would no longer be under the control of anybody in Britain. Instead it would be determined by the average behaviour of currencies in Euroland.

But surely there are some arguments in favour of Emu? Minford sighs and says these are all what economists call "microeconomic". It is argued, for instance, that the single currency will reduce the costs of cross-border financial transactions by removing the need for currency exchange. But estimates for the savings to be made here are disappointing. Minford says politicians tend to use the example of tourists who lose out when physically changing currencies, but the volumes of money involved are tiny compared with those exchanged by computer between firms. He points to a European Commission study which found that for a sophisticated country like Germany, Britain or France as little as 0.1 per cent of GDP could be saved in transaction costs through having a single currency. Furthermore, the reduced uncertainty between, say, sterling and the Deutschmark, resulting from the fixing of exchange rates, could be easily offset by increased volatility between the dollar and sterling. The euro, Minford points out, is not a world currency, it is a bilateral arrangement between union members.

And there is "nothing magical" either, Minford contends, about business leaders saying they are in favour of Emu: "They don't think about the economy as much as they do about their businesses, and quite rightly so." For some firms with heavy involvement in Europe joining might be advantageous. They might think the reduction in uncertainty over exchange rates worth having. The bigger, truly international multinationals do not have much to worry about since they have the muscle to absorb regional uncertainties. But, says Minford, small and medium firms which trade both internationally and with Europe are more vulnerable; they can see there could be great uncertainty vis a vis the dollar. Minford says: "You will get hugely varied opinions among business people depending on what their interests are... they are all biased. A business leader says this or a business leader says that... it's not terribly interesting. We've all got our axes to grind." Minford reckons only 30 per cent of the UK business vote is in favour of Emu.

One of his biggest problems with the concept is the straitjacket it will impose on interest rates. The argument is that even in Britain - which effectively is a monetary union, the currency being sterling - there is already a gross distortion in the economy with the Southeast booming while the North suffers serious difficulties, particularly in manufacturing which is slipping into recession. Britain's current high interest rate, combined with the strong pound (which does not help exports), is inflicting real pain on the North. Minford's argument is that if setting a single interest rate for one nation causes such difficulty, the situation could be far worse when a rate is set to operate across countries by the European Central Bank.

The result could be huge "transnational dislocations" which range booming regions, say an axis of the UK, Northern Italy and Spain, against a depressed France. "And there is no mechanism to deal with it. The people who dreamt up this Emu idea created a paper constitution wherein the European Central Bank just sits there in its ivory tower, doing things. But there is no political substructure to it, so the bank has no legitimacy. If people riot in France because of high unemployment and high interest rates, French politicians are just going to say that the rates are decided by a foreign bank. What is the legitimacy of the project to the French people? They didn't vote for it. Monetary union is saying, quite prematurely in my view, that France, Germany, Italy, Spain, Portugal and the others in Euroland are, to all intents and purposes, the same economy which can have the same interest rate. And that is a tremendously ambitious idea, and from the point of view of modern economic management is asking for serious regional trouble."

Minford further believes that the creators of the Emu project believed that such problems would actually enhance the monetary union's political legitimacy: that the pressures it would create for greater cooperation across Euroland would move the countries inexorably towards political union. "What they did was create a monster in order to generate some dynamic in the political direction they wanted the union to move in. That is a tremendous gamble, and from the point of view of those who want to build Europe, I think they have created something that could destroy it."

The continent is going ahead in political fervour, he says, with politicians paying little attention to the economic arguments. "If you start to raise economic issues with German politicians, they look at you totally bored - they think it's silly stuff. And over here, it's extraordinary... the Heseltines, the Clarkes and the Browns, they all say it's not a political project which is a really blatant lie. It is a totally political project." Minford's advice to Blair therefore is "Don't Join!" - the risks of staying out are minimal. He might yet be listened to. While chancellor Gordon Brown is regarded as a keen advocate of Emu, Blair appears more circumspect.

So, how does Thatcher's economics tutor think new Labour is shaping up in power after 18 years in the wilderness? Minford pauses for a moment. New Labour, he says, is "very confused". Its instincts to intervene socially keep popping up through the layer of free-market thinking the party has plastered around itself. There is, he says, a deep contradiction between these instincts and what new Labour was forced, for electoral reasons, to portray as its new free-market approach. "They have effectively been forced to be Tories. Marked on a mark sheet, I would say they are quite good Tories... In a way, I had the same problem with Major, he had this idea he could put a layer of caring on top of Tory free-market policies. But what has happened to both these revisionist governments is that they have been caught by the Thatcher straitjacket."

Minford's reputation among fellow economists is mixed. There are probably quite a few who bear him grudges. One leading economist says: "He is quite charming but he can be extremely difficult - he has put many people's noses out of joint. His behaviour is impossible at times. He can be a difficult bugger and this is an important reason why quite a few British economists are wary of him. But it has to be said that he thinks deeply about economics and is not frightened of coming to conclusions which are against the grain. He is one of the few genuinely interesting economists to have emerged over the past 20 years."

There have been strong rumours that Minford left Liverpool University under a bit of a cloud. He says, however, that the reasons for his departure were complex and that it was a "great source of sadness" to have left the institution after 21 years. "I have a research team and I need lots of money to keep it going. Liverpool has had a difficult time with the emergence of the new universities and a difficult research assessment exercise which has deprived it of money. The financial environment became very difficult and there were suggestions for change which would not have suited me." Under such circumstances, he says, it was inevitable that there would be political and personal cross-currents. "I would not deny there were some angry exchanges but I did not leave because of some unholy row. There were lots of rows between lots of people and they were an element but not the key reason for me leaving."

Of his reputation as a bit of bruiser, Minford says he does not mean to be personally abusive towards his antagonists, that he regards arguments as a professional exercise. But he adds: "I do not regard economic policy as an optional extra. When I have arguments about economic policy I regard it as important to win. These are important issues and if I am gentle then people get the impression I don't really care."

One suspects he misses very much the cut and thrust of being directly involved in government policy. Not surprisingly he has never been called upon by Blair or his team for advice: "I don't think I could expect it to be otherwise. I am identified with the enemy." In principle he is willing to advise anybody but appreciates it is important for politicians to feel that that they can totally trust the people who are advising them. "The present lot would never trust me. And in some sense they would be right not to."

In any case, if Blair is ever interested in Minford's views, the stuff is all in the public domain. "The way policy is often accepted is when it is divorced from its original authors, when its origin has been forgotten, when it is mainstream and in the air. So I am not bothered about not being plugged into one of Blair's inner circuits. In this country there is a broad band of policy debating and that is healthy. I enjoy what I do and I do not feel excluded."

Is Patrick Minford right? Should Britain join Emu?

Martin Weale, Director, National Institute of Economic and Social Research "The idea that Britain can dissociate itself from Emu simply by keeping a separate currency is absurd. If Emu fails there are likely to be sharp downturns in the economies of Britain's major trading partners, which will have a severe impact on the United Kingdom."

Paul Ormerod, chairman of Post-Orthodox Economics "Patrick Minford is always interesting, even when he is right for the wrong reasons. Monetary union is bad for both the UK and Europe. In Britain now, some areas are in recession and need expansionary policy. This problem will be magnified across countries under Emu."

Charlie Bean Professor, centre for economic performance, LSE.

"I am more agnostic than Patrick Minford on the consequences of Emu. In 20 years' time I think we'll wonder what all the fuss was about. Retaining the pound would indeed allow us to set interest rates for domestic ends, but monetary policy only facilitates adjustment to disturbances, it does not offset them permanently. So losing the ability to set interest rates nationally is not that serious a loss. On the other hand, Europhiles tend to overstate the gains that come from reduced exchange rate volatility. Emu is really of more political than economic significance."

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