The euro trasher

March 21, 1997

Would-be leader of the Conservative party and chief Euro sceptic John Redwood savages the singlecurrency enthusiasts' case and tells Martin Ince why proper debate is needed

When politicians call for a great debate, it usually means that they have lost the argument or that they sense the opportunity to make the most of it. In John Redwood's case, both motivations probably come into play. In the run-up to the general election, he is positioning himself as a possible leader of the Conservative party after the anticipated demise of John Major. But on Europe, the focus of Redwood's political campaign, there can be no doubt that he has also chosen a big subject on which a wide range of British electors may well agree with him.

In recent months Redwood's scepticism towards Europe has emphasised the dangers and problems of the proposed union of European currencies, a project that seemed well-established after the Maastricht Treaty of 1992 but, as he sees it, is now showing interesting signs of stress. As the 1999 introduction of the proposed joint currency, the euro, approaches, the project's inherent difficulties will become apparent - to the point, claims Redwood, where it is still possible for the whole thing to be abandoned.

Sitting in the rather modest offices of the Conservative 2000 organisation - set up to campaign against Europe after Redwood's failed bid for the Tory leadership last year - the former secretary of state for Wales is in bullish mood. In the lobby a poster proclaims the prospect of prison for the Whitewater gang - Bill and Hillary included. Upstairs Redwood expounds on the vehicle of his latest attack on European monetary union - a book, published next week, entitled Our Currency, Our Country. It is a riposte to In with the Euro, Out with the Pound by Christopher Johnson, former chief economist with Lloyds Bank, and author, according to Redwood, of one of the few really detailed arguments in favour of a single currency.

Although there have been countries without currencies, and currencies that have circulated in more than one country, the general rule is one currency per country - and the euro is an essential part of the project which Redwood often refers to as "a country called Europe". He says: "Something very vital changes if we adopt the euro, and we need a proper debate before we do it."

Such a debate might cover ground other than the rather arid field of monetary union. Defence, for instance. If a European defence force were created, it could possibly be deployed according to majority voting - so that British soldiers might be killed in a war Britain had voted against fighting. Redwood's sticking point is that none of the main political parties wants such a debate, although they have agreed that the final decision on whether to join a single currency will not be taken without a referendum. Indeed, as he notes, "the political drive towards a country called Europe is relentless".

In his new book, objections to the euro fall into two main categories. One group includes points of principle about national sovereignty and control. Redwood points out that there has been no political process to agree the public spending cuts inherent in the criteria set in Maastricht as a precondition to joining the single currency. These criteria require states participating in the currencies union to hold down their budget deficits, debt, inflation and interest rates in the run-up to the euro.

"It is very hard to have a single currency without a single democratic Europe," he says. "I want to stop the euro for all of Europe, not just Britain, but the priority is to have the key decisions affecting Britain remaining in British hands. The stability pact we now have is a messy halfway house towards a single European budget, but without any democratic control."

It is still open to the United Kingdom to veto the stability pact, which forces governments to tackle their costs, but without spelling out how. Such a move would trigger a massive Franco-German row and quite possibly lead to the euro being abandoned with a sigh of relief. Even now, he says, there is scepticism about the euro in Denmark and Sweden, while the southern European members of the union are terrified they may fail the criteria they need to fulfil to qualify.

In Redwood's book, these admission criteria, set out in numerous "recitals," emerge as a genuine barrier. Only one country, Luxembourg, looks capable of meeting all of them, scarcely an adequate basis for a continental currency. So far, attention has focused on the need to hold down state borrowing. But the wording also allows Brussels to question member states' assumptions about unemployment and other economic targets and to apply to the European Court of Justice to fine countries for not doing enough to stay in line. There is also scope for special deposits to be demanded from delinquent states.

In September 1996 five countries were failing the inflation criterion: four were out on both interest and debt criteria, and five on government borrowing. On gross government debt, only three met the qualifying limits.

Perhaps worse, the exchange rate convergence that is meant to precede complete currency union has so far proved elusive. In Redwood's view, this is not merely down to the fluctuations of the market, but a sign of something more significant. The variations arise because of the different economies of different European countries. And there is no exchange rate for the euro that will satisfy all corners of Europe: if it works in Stockholm at a particular rate, it will cost jobs in Barcelona or Birmingham. If the European Union expands, with countries such as Poland or Slovakia entering the equation, the economic disparities will gape even more starkly.

This opens up the possibility that even if the euro is established, there could be an enlarged European Union in which other currencies are in use. Redwood thinks this is as it should be. Britain's freedom to devalue against other currencies is a significant asset that would be lost under the euro. Instead, large social transfer payments would be needed between different areas of the EU, on the lines of those now paid within the United States. Perhaps, he thinks, there are too few European currencies. It would be useful if Liverpool could devalue against London to help generate jobs, just as Ireland can. "The case for a separate Irish pound is a sound one politically and economically as well as emotionally," he says.

Could legal objections to the euro prove fatal even before the project gets going? The Maastricht Treaty states that the European Currency Unit is to be the new European currency, but the ecu has been badly hit by inflation and has declined heavily against the Deutschmark. At the 1996 Dublin summit, a regulation was adopted to turn ecus into euros. But ecu bonds have been sold all over the world. If the euro turns out to be weak in international markets, someone in the US who has bought an ecu bond may well decide to reach for their lawyers. By contrast, if it strengthens, people who have borrowed ecus might take to the courts to avoid repaying in the stronger currency of euros.

Redwood says that when he first raised this issue it was regarded as trivial, but concern has since grown. The European Commission has produced a paper to the Council of Ministers stressing the seriousness of the problem. The City of London euro working party has also taken fright. It wants the state of New York to pass laws to prevent such actions being taken, but ecu bonds are owned too widely for this to be a solution.

Such objections may be dismissed as tactical, but they make the point that the idea of the euro has run way ahead of political and economic reality. Redwood's hope is that the growing scepticism towards the euro in Germany, where the Social Democrats are moving against the single currency, will encourage a rethink of the idea. "They are the first democratic political party in Europe to see the problems of the euro," he says. "I would rather it had been the Christian Democrats, but that can't be helped."

As he sees it, the currency union is really a German concession to France, made to allow the German project of political union to go ahead. Now the Germans are becoming angry about the costs of the single currency; almost five million Germans are unemployed and the Deutschmark has slumped from 2.21 to the pound to 2.70. "The idea of the euro was for us to join with a strong, responsible Deutschmark," says Redwood. "Now look at it." At this stage in history, support from trade unionists is as welcome as Conservative backing. Redwood notes with pleasure the growing awareness of the social costs of currency integration, costs highlighted last week when workers angry at threatened redundancies took to the streets of Paris and Bonn.

There is encouragement to be derived, too, from the growing scepticism among business leaders, especially the dampened enthusiasm of the Confederation of British Industry. But he is less delighted by the role British academics have taken in the debate. Despite the fact that it crosses so many disciplines, academic interest has not been engaged, with a few exceptions, such as a discussion between Redwood and European Commissioner Lord Brittan at the University of Warwick.

Part of the problem, he thinks, is that the debate has been taken over by economists who submerge it in detail. In his view, these technicalities ought to take second place to the politics, and so far the political debate has been pretty scrappy.

At present the former cabinet minister is airing his anti-Europe message at up to five meetings a week, some but not all organised by Conservatives, and he claims that people are "fascinated" to hear of the problems of the euro project when so many assume it will all happen automatically.

For a rightwing politician trying to push something he feels strongly about as well as trying to position himself for the potential Tory fallout from the election, the euro is a perfect subject. Redwood's ability to campaign on it, the main business of the Conservative 2000 organisation he set up after his bid for the Tory leadership last year, is in marked contrast to the cabinet omerta that rival rightists such as Michael Portillo must observe. To succeed, his campaign will need to win friends far beyond the right wing of the Conservative party. But his ambitions are large enough for that to be a positive asset to his plans.

Our Currency, Our Country is published on March by Penguin, Pounds 7.99.

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