Paper No. 32
Sir Michael Edwardes - 1st September 1998
Michael Edwardes is one of the outstanding businessmen of Britain. He has a special place in the history of 1980s. I first met him in 1982 when he was showing great detemination in putting the British motor industry back on its feet.
Then as today, Michael Edwardes showed he was not afraid to speak his own mind, even if it was against conventional business opinion.
Today the CBI is rather unthinkingly drifting towards supporting a single European currency. Many businessmen simply shrug their shoulders and say the single currency is inevitable. Nothing should be inevitable. Many of the worst things that have happened in history have done so because people gave up and said they were inevitable.
One of the problems with the single currency is that we do not have a single labour market in Europe. In the United States the dollar operates in a country that has one common business language, and much greater job mobility than in Europe. Without a single labour market the single currency may simply exacerbate unemployment in the weaker economies.
Many businessmen talk about the need for lower interest rates, but the more important thing is to have the right interest rates.
Michael Edwardes shows that even if the single currency works for Europe, it doesn’t mean it will work for Britain. Both the structure and business cycle of the British economy have historically been different from that of Europe. It is unlikely to change, and there is not much that governments can do to change it.
The business community would be well advised to pay attention to the wise words of Michael Edwardes.
Speech Given by Sir Michael Edwardes to the Kingston Chamber of Commerce Wednesday 6 November 1996
It’s a funny old world — since France persuaded Europe to have daylight saving all those years ago, Britain has been out of synch with Continental Europe by one hour for much of each year. At last after 17 years of negotiations it seemed everyone had agreed to line up — whereupon France announces she is to opt out, and so they will be out of line with Germany for half the year, and with Britain for the other half. France alone will stay on winter time all year round!
Not an important issue you will say—but to my mind symptomatic of much else that divides us.
When we joined the Common Market, the British people voted for just that—a single trading bloc. We voted neither for political union nor for components of political union, the most important ingredient of which is single currency.
The concept of a single currency has crept up on us in a very subtle way. There has been very little debate about its detailed implications either in the House of Commons or in the media and yet it is the most powerful threat to her sovereignty that Britain has faced since the second world war. The main reason why the enormity of its impact has not been fully debated and exposed is because both major parties are split on the issue and so there has developed a conspiracy of silence. Perhaps the only thing which binds the Labour and Conservative leadership is their desire for the subject and its far reaching implications to remain firmly under wraps. And yet it is a bigger political issue than virtually anything that has filled the newspapers or the parliamentary agenda in recent times.
The Institute of Directors in their excellent paper on the subject, published in 1995, say and I quote:
“The act of monetary union is an enormous step and, once a single currency is established, will be almost impossible to escape from. It is therefore essential that, before proceeding, it is established beyond all doubt that the benefits would exceed the costs. This paper has shown that this is far from being the case at present.”
Before I get down to the nitty gritty of the argument, I would like to make some general observations.
Step by step, and insidiously, our sovereignty has been eroded. Brussels has been the matador, tempting the British bull to make ever more daring lunges. Despite being one of the most business oriented and trading–wise nations on earth, we have been naively seduced into pouring money into the Common Agricultural Policy and other dubious European initiatives. We have even given away control of great institutions like Yorkshire Pudding and the ingredients of fish and chips!!
Being serious again, what remains of our fishing industry is reduced to selling fishing rights to the Spanish—the latest aberration to afflict us. And the less said about beef the better.
James Callaghan in his memoirs says:–
“As Foreign Secretary I found myself corresponding with the Chancellor, Denis Healey, about import levels of apricot halves and canned fruit salad, and with Peter Shore about mutton and lamb. I recall one low point when nine Foreign Ministers from the major countries of Europe solemnly assembled in Brussels to spend several hours discussing how to resolve our differences on standardising a fixed position of rear–view mirrors on agricultural tractors.”
The Brussels matador only needs us to succumb to the single currency and the coup de grace will be delivered.
No country can hand over its currency policy and all that goes with it and retain a sliver of sovereignty. We may cavil and carp at Parliament, but at least its members are neither unelected nor faceless.
Even Michael Heseltine (no less), said of the single market in March 1994:
“The single market is over–regulated, over–protected, over–centralised. We now have Eurosclerosis; we burden our businesses with extra costs, preventing labour markets from working properly, stifling the regenerative process of the capitalist system.”
And I add:–
In short the bureaucracy is frightful.
Despite this, I come down firmly on the side of our remaining in the single market, the common market we all agreed to join. It does not inhibit us from being the great international trader we are. We can still be the largest investor in the USA; we can still export 75% of our goods outside the core countries—that is outside the European countries most likely to enter single currency first.
So I say Yes to the Common Market, the single market. But I say a very big No to Britain entering single currency, for the following fifteen reasons:–
1. We don’t need to do it. We trade with the whole world in countless currencies and we are good at this—better at it than our continental competitors. We know how to hedge and make conversions into foreign currencies at no great cost. (A famous airline in Europe did an in–depth study on this and they found that net transactional costs would be about the same whether we go in or stay out. And even if we went into monetary union with the first group (including France and Germany) about 70% of the value of our trade would still be subject to currency exchange.
2. Britain has a high degree of fully funded pension schemes. We have more pension assets invested in paid up private sector schemes than the rest of Europe put together. Europe’s unfunded schemes are a major factor in Europe’s national debt which stands at the horrendous figure of £30,000 per person across the European Union as a whole. In Britain where we have by far the most prudent funding of pensions, the national debt is only £9,000 per person. (Source: House of Commons Committee report of October 1996).
We now hear that the Europeans propose to ignore their unfunded pensions when arriving at calculations on the single currency. Surprise, Surprise!
The Commons Committee is on record as saying that this would be crazy. I agree with them. Unfunded pensions must be taken into account as they now total £10,000 billion across Europe!
3. And there are serious tax implications for us. Whereas our funded schemes amount to nearly 80% of our GNP, in France, Germany and Italy, the unfunded pay– as– you–go liabilities are 69%, 122% and 107% respectively. No wonder they want us to join the single currency. Our contribution to capital transfers (under Maastricht) and the revenue contribution Britain would be expected to make towards funding Europe’s ageing population, would greatly ease the burden they face in redressing this lack of funding. The implications for Britain’s current and future tax payers on the other hand, is obvious.
4. Joining the single currency means handing over the levers of economic policy and power to unelected third parties. We don’t even know who they will be.
5. The power we would cede includes the ability to set interest rates, to control inflation, to keep our currency at levels appropriate to our trade in US Dollars, Yen and all currencies other than the Euro. All this goes to the European Central Bank and so we will have virtually no control over our economic growth rate when (depending on the economic cycle) we may need to dampen the growth rate or step it up.
6. In recession we will be unable to manage our levels of unemployment by means of reflation or by currency adjustment. For example, France is following the path towards convergence and this has lifted her level of unemployment to some 12%. (I have talked to friends in France who only half jokingly refer to 1789.)
7. Once national exchange rates are abolished, differences in the productivity of individual states cannot be ironed out by exchange rates and other instruments of economic policy, for these will be rigid right across Europe. No—they must be ironed out by employment. This means that the unemployed in Liverpool or London will be expected to look for their employment to whichever part of Europe has higher productivity. They will be looking for jobs in common with Europe’s current 18 million unemployed. In the United States. job mobility works because there is one business language and a common American culture. Without a common European language, job mobility in Europe just won’t happen, especially for Britain where job mobility is not our strongest attribute. The Commission itself in August 1990 described regional mobility of labour as, and I quote:– “neither feasible, at least not across language barriers, nor perhaps desirable.” So it is not Britain alone that would suffer. Better therefore for us to contemplate the single currency in the second half of the next century if by then we have a the single language in Europe…and possibly fewer cultural differences.
(It is no coincidence that in past recessions our job mobility has been in the direction of anglophile and anglophone areas like the Common-wealth and North America.)
8. What about global economic shocks? — Not an uncommon phenomenon. It is not good enough to say that economic shocks will affect all members of the single currency area in the same way, so that they may be dealt with say by changing the common exchange rate vis a vis the rest of the trading world. The fact is many economic shocks will affect the nation States differently e.g. an increase in the world oil price, or a shift in world demand for manufactured goods, or agricultural products, or financial services, would impact on those countries specialising in them.1
9. So because we will have forfeited our ability to adjust interest rates and exchange rates, either the adjustment must be made by job mobility, which I have shown will not be easy, or by adjusting local wages and prices country by country. This mechanism raises unattractive possibilities for standards of living in individual states, but it will probably be the only flexible instrument available.
10. Another negative is that we, being more dependent on invisible earnings (services and investment income), rely for the greater part of our invisible surplus not on the European Union but outside it. It is our global trading that underpins this important contribution to our prosperity. Having our currency in the hands of others is not the best way to interface with our largest (but non–European) market.
11. At the end of the day, Europe is diverse, with neither one language nor one culture nor the same economic cycle. Our differences in culture include every aspect of life—to quote David Heathcoat–Amory again:
“Constituent countries show great variety in their financial and capital structures, labour markets, productivity rates, industrial specialisations and social security systems. Forcing them into the same mould of a single currency is hardly rational.”
12. Nevertheless, politicians have been known to do things that are not rational! What would we be left with if we handed over our pound and our sovereignty for others to dictate? We would in theory be left with the power to change taxation and Government expenditure levels. We know that these are dangerous instruments in fine tuning the economy, but in the absence of control of interest rates, the temptation would be to make greater use of these, undesirable as this may be.
But even in this area Nation States will have limited flexibility. An active policy to cut taxes or increase public expenditure, if considered out of harmony, could break EU policy and lead to fines. In reality we would be severely restricted in our actions.
13. Finally, there are three cost issues I would like to touch on. The first cost area is the cost to retailers in preparing for single currency. The estimate is that it would cost British retailers £3.5 billion. The overall cost to Europe is estimated at £22 billion. Now £3.5 billion is a piddling figure if the single currency was seen to bring a substantial benefit to Britain. But as Paul Droop, the economist, has said “The UK is one of the best performing economies in the world and will continue to do well outside the EMU. The major indicators are very positive and they will stay that way if it stays out.”2 Why then would we spend £3.5 billion to be worse off economically?
14. The second is what happens to our national assets? The fact is that we have £25 billion of foreign exchange reserves—under the single currency these funds would be transferred to the European Central Bank. A bit tough when less than half of Britain’s trade is with EU countries.3
15. The third is the little talked about and little understood question of the Cohesion Fund.The European Research Group in their paper “A Europe of Nations” comment:
“The experience of recent years should lead us to reject the Maastricht plan for monetary union. Economic convergence as spelt out in the Treaties would cause unemployment and dislocation.
For this reason, we must also question the associated use of the Cohesion Fund. The Cohesion Fund was created as a consequence of the Maastricht plan for monetary union. The original justification for it was that it was only reasonable for the wealthier Member States to help defray the costs which economic convergence would impose upon the less developed countries, robbed of the advantages of lower costs and the opportunity for competitive devaluation. The EU should explore more successful ways to level up its less wealthy regions.”
They go on to say:
“In a properly functioning single market, it is not the geographical transfer of wealth but a floating exchange rate which will prevent the poorer regions from falling too far behind. Competitive exports will ensure that these regions automatically price themselves into the market.”
But of course any country entering single currency gives up its floating exchange rate, requiring capital payments across Europe running into billions, over and above the EU budget which for 1997 exceeds £63 billion.
In summary, I quote Denis Healey
“Economic conditions for monetary union would provoke widespread discontent as the new European Central Bank imposed economic restraint on national governments. To set up an organisation of this importance against the will of so many people would be a disaster.”4
He and I are not often in complete agreement…
I doubt that he would concur with my final point—the single currency is good in theory, but like socialism, it simply won’t work.
The Business Implications of Single Currency
The Bruges Group Thursday 21 May 1998
I have no problem about the euro across the 11 countries. As a businessman I welcome their having a single currency. It will make life simpler for us. The fact that some of our EEC friends will be out of 'synch' from time to time or even all the time, is essentially their problem. In Britain it will impinge more directly on politics than on business. The tensions which will be caused by resulting unemployment in parts of the euro area may well be resolved by the '11' by cohesion payments and other artificial adjustments. As a businessman, no problem. We will deal with a single euro from outside just as we do with the dollar and the yen now.
On the other hand, if I were a British politician, I would be very concerned indeed, for two serious issues arise. First, if the tensions between policy for a hard euro and a soft euro spill over into the sort of stresses that caused two world wars, I would be apprehensive about being dragged in as their close neighbour. And second, if they subsidise the unemployment hotspots by cohesion payments, our politicians will need to assure us that British taxpayers will not be called upon to fund the cop-out directly or indirectly.
Being financially and economically independent of the Euro eleven gives me great comfort. I will demonstrate that there is no business downside from being outside of the single currency whilst being part of the single market. If this is right, why should I as a citizen want sovereignty to be handed over to an unelected Central Bank whose agenda may coincide with our economic needs for only 20 per cent of the time, if we are very lucky. Why should we join in the fun at such enormous risk to our economy and our security. It would make no sense.
The Distortion of Business Opinion
Perhaps I should begin by looking at the main claims put forward by businessmen who favour EMU. I say put forward by businessmen, but in fact, if you look at the names of the people doing it, you will rarely find entrepreneurs. The people who spend their time writing pro-Euro letters to newspapers tend rather to be corporatists. That is, they are not the sort of people who have built up successful enterprises. That breed of businessman - Stanley Kalms at Dixons, for example, or Anthony Bamford of JCB or Emmanuel Kaye - tend to be anti-EMU.
The people who are most often trotted out as pro-Euro spokesmen for British business are seldom British industrialists, but are presented on the Today programme, on Newsnight and on countless other BBC broadcasts as though they represented the entire British business community.
As for the CBI, its members employ around 8% of the workforce. The Sun newspaper has greater influence. So, bearing this in mind, let us look at some of the claims made in favour of EMU by these businessmen. They claim that the single currency would be counter-inflationary; that it would reduce transaction costs; and that it could bring down interest rates. More recently they have taken to claiming that it would boost exports, which of course contradicts their counter-inflationary argument, since it relies on the assumption that the euro will not be as strong as sterling. Let me briefly consider these claims in turn.
EMU and Inflation
First, the claim that the single currency will bear down on inflation. Supporters of the euro like to tell us that it will have all the anti-inflationary properties of the Deutschmark. This, of course, is not a view widely shared in Germany. After all, the proposed European Central Bank will contain representatives of countries with relatively inflationary traditions, whose natural inclination will be to try to loosen Germany's monetary policy - something that they would perceive as being in their own national interest.
But I don't actually need to argue in the abstract about why monetary union would be inflationary. I can demonstrate it by pointing to recent history. Perhaps you will bear with me if, in order to prove this point, I recall briefly the story of the Exchange Rate Mechanism.
The ERM was set up on the continent in 1979. Britain, however, pursued its own monetary policy for eight years until 1987, when it began to shadow the Deutschmark as a prelude to full ERM membership in 1990. So, by comparing Britain's record during this eight year period to that of the ERM countries, we ought to be able to test the question of whether an independent British monetary policy is more or less inflationary than that on the continent. In fact, during this period, UK inflation fell faster and remained consistently lower than the ERM average. And the ERM, let us remember, did not even include states like Portugal, Spain and Greece in those days.
After 1987, however, inflation rose from 4 per cent to 11 per cent, and remained high until we left the ERM on White Wednesday in September 1992, when it immediately fell to its lowest level in 30 years. The lesson from this is about as clear as anything can be in economics; it is that modern Britain can run a better anti-inflationary policy on its own than by contracting out its monetary targets to Europe.
EMU and Transaction Costs
Then there is the claim that EMU will reduce transaction costs. I have to say that this is not the kind of argument you hear among real businessmen. I have yet to find a company board that agonises more over transaction costs than over, say, keeping key personnel. The truth is that we have evolved sophisticated financial mechanisms for getting around the cost of fluctuations in the exchange rate by hedging the futures market; mechanisms cheaply and readily available even to fairly small companies. In any case, the total amount of transaction costs within the EU is only around 0.4 per cent of GDP - or 0.1 per cent for a country like Britain, with its advanced banking sector.
Yet this relatively trivial issue is blown up out of all proportion; presumably because it is the only unequivocal advantage that EMU supporters have been able to latch onto.
EMU and Interest Rates
The most ridiculous claim made for the euro is that it will mean lower interest rates. Now I could talk to you at length about why Britain's monetary needs to diverge from those on the continent. But it is much easier simply to say - "Remember ERM."
To join the euro today, we would need to cut interest rates by three or four points at the beginning of what could easily turn into an inflationary boom. During ERM, at the other end of the cycle, we had to keep interest rates at 10 and even 15 per cent during a deep recession. Those two statistics prove that there can never be a right rate for sterling to join the euro. They speak more eloquently of why the project is cockeyed than anything I can say tonight. What price convergence?
There is never a right rate for all time between the pound and the other currencies. If convergence ever happens it will be momentary.
Gordon Brown's Five Criteria
But that is not just my conclusion. It is also the implicit conclusion of the Chancellor of the Exchequer. Now, I realise that this may sound strange. Gordon Brown, after all, is probably the greatest euro-enthusiast in the Cabinet. But the European Research Group recently tried a little experiment: they tested the five criteria that he himself has laid down for Britain to join the euro, against economic reality. And they concluded that, according to Mr Brown's own definition, we shall not be in a position to join for at least thirty years, if ever. Let me run through those five criteria very briefly. I shall quote them in his own words.
"Are business cycles and economic structures compatible so that we, and others, could live comfortably with euro interest rates on a permanent basis?"
The Treasury acknowledges that our cycle is likely to remain decoupled from the rest of Europe "for some time." But, as the Chancellor must be aware, this lack of synchronisation is not a recent phenomenon. It can be identified at least as far back as the first oil shock in 1974 and arguably much earlier than that. It is based on several permanent, structural differences between the British and European economies. Just three examples:
1. Britain is uniquely dependent on non-EU trade. Around 44per cent of our exports go to other EU members as compared with, say, Belgium which sells 81 per cent of its products to other members. 79 per cent of our overseas investment is in non-EU markets. Britain, consequently, moves in what economists call the 'AngloSaxon' (as opposed to the 'European' or 'German') cycle.
2. The United Kingdom has much more flexible labour laws than the other members; we shed workers more quickly in recession and hire them more easily at other times.
3. We are the EU's only net oil exporter: a change in the world oil price would have precisely the opposite effect on us from that which it would have on every other member.
These differences will not go away in five or ten years. If anything, the British and European cycles are diverging even further.
And the Government will not be able to bring about an artificial convergence, since it has given responsibility for monetary policy to the Bank of England with instructions to meet domestic monetary targets. Any undue reduction in interest rates, and inflation looms.
"If problems emerge is there sufficient flexibility to deal with them?"
Gordon Brown rightly acknowledges that, if external shocks cannot be absorbed by a flexible exchange rate, they will be felt in output and jobs. Employment and wage flexibility would obviously be crucial in these circumstances.
So why is the Government determined to reduce our labour flexibility by implementing the EU Social and Employment Chapters, and our wage flexibility by introducing a minimum wage?
Meanwhile, the continental countries show no sign of deregulating their own sclerotic employment regimes.
"Would joining EMU create better conditions for firms making longterm decisions to invest in Britain?"
The fact that the United Kingdom has attracted nearly 40 per cent of all foreign investment into the EU despite our scepticism does not suggest that investors are put off by our attitude.
Foreign businessmen cite four main reasons for preferring the United Kingdom to other European economies.
* The lowest rate of corporation tax in Europe
* The most flexible labour market in Europe
* Relatively incorruptible public servants
* The English language
Haruko Fukuda of Nikko Europe, one of Japan's largest investment banks, said recently "Japanese investors would actually prefer Britain to stay outside the single currency so that their production bases here continue to enjoy the benefits of a flexible exchange rate."
"What impact would entry into EMU have on the competitive position of the UK's financial services industry, particularly the City's wholesale markets?"
The Treasury believes that remaining outside EMU would not jeopardise London's pre-eminence as a financial centre. (International banks are not troubled by what currency their employees use to buy their tube tickets.)
London is the world's largest centre for currency, insurance and bond trading and for international bank lending and international equity trading. The bulk of its trading is carried out in US dollars. Although Britain is the world's second largest exporter of financial services, the Single Market has had almost no effect on our invisibles sector. Europe accounts for just four per cent of Britain's turnover in banking and two per cent in life assurance and eight per cent of its foreign exchange dealing.
The City can only lose if we join the euro.
"In summary, will joining EMU promote higher growth, stability and a lasting increase in jobs?"
Is the Government seriously suggesting that we should converge with European employment levels? Unemployment in the United Kingdom is 6.9 per cent and falling. In the rest of the EU it is 11.1 per cent and static.
My last comment on the Chancellor's logic is as follows:
Last Thursday on the Today programme he spoke for 10 minutes about Britain's low productivity, that 16 countries do better than we do, including Germany. He said that Government will initiate reforms to solve the problem. Not once did he mention the possibility of our joining the single currency and the certain employment disaster that would befall us if we cannot control our own interest rates, growth rates, exchange rates and therefore levels of unemployment. Not once did he say that our inability to achieve productivity levels within the straightjacket of single currency would mean British people being forced to look for work in Europe and elsewhere. He made the case for staying out of the single currency without once mentioning the dreaded words.
It is impossible to believe that Mr Brown is genuinely persuaded by the economics of EMU, since his case fails even in the terms which he himself has set: an opponent of the single currency might have chosen very different criteria, such as the cost in higher taxation, which the Treasury estimates at £20 billion per year. The only explanation for the Chancellor's statement is that he is drawn to EMU for political reasons but has decided, for the sake of public opinion, to argue for membership in terms of spurious economic advantages. These advantages do not exist.
Twenty-one years ago I became chairman of a British company that had just lost 32 million man hours in one year due to strike action. That was a national crisis. Now we have another potential crisis; the possibility that Britain might enter the EMU. Let us keep the pound so that Britain may be both free and rich.
(Source: Rt Hon David Heathcoat-Amory (October 1996)
The Financial Times, 31st October 1996
John Redwood, The Single European Currency, Conservative 2000 Foundation, 1995
Denis Healey, House of Lords October, 1996