UK: Smith on Economics - Britain's troubled flightpath to Emu.

UK: Smith on Economics - Britain's troubled flightpath to Emu. - As the battle over joining economic and monetary union reaches fever pitch, David Smith points out that the rest of Europe may prefer to keep Britain out.

by
Last Updated: 31 Aug 2010

As the battle over joining economic and monetary union reaches fever pitch, David Smith points out that the rest of Europe may prefer to keep Britain out.

Next time anybody accuses British business of short-termism, simply point them to the debate over Britain's participation in European economic and monetary union. A decision on whether to enter the single currency is at least three years away, and it would take two years from then before the euro could be in circulation in Britain. Yet, the business battle over Emu has already reached fever-pitch. Business for Sterling, the grouping of anti-Emu businessmen, has turned a campaign initially based on writing letters to newspapers into something more serious, appointing Lord Marsh, the former labour minister, as its chairman and taking on full-time staff.

Meanwhile, the pro-Emu lobby, led by mainstream bodies such as the Confederation of British Industry and the British Chambers of Commerce is hitting back, claiming that groups such as Business for Sterling and the European Research Group misrepresent majority business opinion. Helpfully chipping into the debate from the sidelines are Fleet Street's finest, The Sun suggesting this summer that Tony Blair could turn out to be the most dangerous man in Britain if he takes sterling into the single currency.

The interesting aspect of this debate and its intensification is how early it has come. Until a few months ago, both sides could justify waiting because there were huge uncertainties about whether Emu would get off the ground at all. Most of those uncertainties were removed in May, when the formal go-ahead was given for the single currency, with 11 initial members (Germany, France, Italy, the Netherlands, Belgium, Luxembourg, Austria, Spain, Portugal, Ireland and Finland).

There is also a desire, particularly among the anti-Emu camp, not to be caught napping. They feel that, as in Britain's 1975 referendum on whether the country should remain a member of the EEC, the government and pro-European businesses will, between them, take a commanding position from the start in the propaganda battle.

The trouble is that we are all going to get very weary with this debate because it could go on for a very long time. Consider, for example, one reason why many businesses appear to have warmed to the euro in recent months. It is, they say, because entering the single currency would remove the competitive disadvantage they suffer from an over-strong pound. I don't blame anybody for thinking in this way. Indeed Germany's Chancellor Kohl used the tactic to persuade sceptical businessmen in his own country that joining the euro was the best way of ensuring an overvalued deutschmark did not price them out of world markets.

The fact is that Emu is for life, not for a year or two, and that by the time Britain is ready to enter, either the pound will have subsided to more realistic levels or many of the exporters currently complaining will have shifted production elsewhere or, worse, gone out of business.

The short-term problems of an over-strong pound are real but they should not be allowed to influence the longest of long-term decisions.

For me, however, one of the most interesting aspects of Britain's flightpath towards Emu - and I have little doubt that, if Emu is successful, we shall eventually join - is the assumption that the timing of entry is within the gift of British politicians, subject to referendum approval.

Cast your mind forward a few years, say, to 2001 or early 2002. A Labour government has been re-elected, albeit on a smaller majority, and has decided to pursue its goal of Emu entry. One intriguing suggestion I heard recently, from a Eurosceptic Tory, is that Labour should have a single currency referendum on the same day as the next general election, giving people the choice of Tony Blair with the euro, or Blair with sterling, leaving the Tories on the sidelines.

Anyway, suppose the domestic hurdles have been overcome, is there anything to stop Britain sailing straight into Emu? Willem Buiter, the Dutch economist who sits on the Bank of England's monetary policy committee, brings a different perspective to the debate.

Strongly pro-Emu himself, he nevertheless sees potential problems for Britain. What is to stop the British Government being 'de Gaulled'? he asked at a recent lecture. Britain's membership of the EEC was twice vetoed by the General. If you were one of the 11 members of a successful single currency, would you want to jeopardise it by inviting Britain in? It may have been coincidental but the most serious turbulence and near collapse of the European exchange rate mechanism (ERM) came after Britain joined in 1990.

Would there be grounds for excluding Britain? The first, and most obvious, concerns the ERM. Because of the bitter folk memories of 1990-1992, no British government will gladly contemplate joining a new ERM as a prelude to entering the single currency. Yet that is exactly what the Maastricht treaty specifies. These things can be fudged but that requires a degree of co-operation from the others, which may not be there.

The rest of Europe could also play hardball over the entry level. 'Sure you can come in,' I can hear the French finance minister say, 'but at your old ERM central rate of DM2.95', to which the response from most British businesses would be a resounding 'no'. Britain's desired entry level, equivalent to around DM2.50 or DM2.60, risks going down like a lead balloon with our European competitors.

Europe could not, of course, obstruct Britain for ever. Where there is a will, there would eventually be entry. But it may not happen smoothly, and it may not happen that soon. A pro-Emu economist close to the Government told me recently that he found it difficult to envisage entry before 2005, and probably not until 2008, both because of a degree of cyclical divergence between Britain and Europe that could not be fudged, and because both sides will want to be sure the decision is right. That Emu debate may have a long, long way to go.

David Smith is economics editor of The Sunday Times.

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today