The de-stabilising effects of the euro
The Rt Hon. Lord Lamont of Lerwick
The alternative to jumping out of a window from the top of a building is not jumping out of the window. To ask what are the consequences of staying out of the euro is like asking what are the consequences of not jumping out of the window. The consequences are life goes on, we are in quite good shape, and we have avoided a step that would inevitably end in disaster.
Having failed to convince the British public of the so-called positive advantages of the euro, supporters of entry now claim that the argument is about the "costs" of not joining the euro. The trouble is these "costs" are precisely the same arguments that have failed to move public opinion.
The facts are clear. The British economy has performed better than the eurozone
The facts are clear. The British economy has performed better than the eurozone, both since its launch in 1999 and by even more in the past 2 years. Economic growth and job creation are currently rolled into one of the "five test" that will determine whether the government will recommend we join the euro, and on which British Chancellor of the Exchequer Gordon Brown will rule on shortly. But they must e the key test. And that is that Britain "fails," though that is a curious word to describe Britain's superior economic performance.
The members of non-governmental commission economists whose report is summarised above, want to change the British government's decision from "no for the foreseeable future" to "maybe in a little time." This is a mistake. If the five tests are not satisfied today they will not be satisfied in two years time. To fudge the conclusions will only create uncertainty when business needs a clear decision.
The Begg Report is nonetheless an impressive document. It argues that the euro will increase trade within the eurozone so much that it will increase growth and employment. Indeed, they claim that the euro has created an extra 29% in trade among eurozone countries. That is not wholly impossible since trade tends to grow faster than GDP. Increased trade, of course, between European countries is not just about the single currency. Getting the single market to work is arguably more important.
But if the claims in the report are anywhere near correct, increased trade in the eurozone has completely failed to translate into extra growth or jobs. The exchange of goods in itself is not the final objective of policy. The OECD for 2003 expects the eurozone's unemployment rate to be 8.8% compared with Britain's 5.4% and economic growth of 1% compared with Britain's 2.1%.
If Tony Blair manages to keep the decision on the euro open for another two years it is possible that Britain's economic performance by then may have degraded somewhat. That will not be because we remain outside the eurozone but because of his government's tax-and-spend and regulation policies. Joining the euro will not be the answer.
But the argument is not just about trade, it is also about stability and having the right monetary policy. The report is full of examples of how the single euro interest rate would destabilise the British economy. They call for a move to fixed-rate mortgages in order that the euro will not exacerbate Britain's already volatile housing market. Such a change in consumer habits could take years.
The report is full of examples of how the single euro interest rate would destabilise the British economy
The report concedes that if Britain joined the euro it would have to cut interest rates sharply at a time when inflation is already above target. It is far from clear that interest rates have converged, and the next move by the Bank of England and the ECB may be widening the existing differential of 1.25%.
The authors make the claim that Britain's share of direct inward investment has fallen because we are not in the euro. Proponents of the euro have been arguing this for years. Perhaps one day, like a stopped clock, they will be monetarily correct. But so far it hasn't happened. As Vauxhall showed this week with its investment announcement, companies invest in Britain for many reasons, including lower taxes, the English language, lighter regulation, perhaps even our golf courses. The currency is only one consideration. The major advantage of our staying out of the euro is that we will be able to stick with the monetary regime established by Kenneth Clarke and myself 10 years ago. This consists of inflation targeting and an inflation report to which Mr Brown added the vital ingredient of Bank of England independence. These arrangements have stood the test of time and delivered low inflation and rising employment.
Far from bringing stability, the euro has widened inflation differentials, pushed up inflation is some countries and caused stagnation in others
Looked at the other way round, we will not be involving ourselves in monetary arrangements that carry increasing risks when the economic climate may even be changing dramatically. Far from bringing stability, the euro has widened inflation differentials, pushed up inflation is some countries and caused stagnation in others. The risk of deflation is now being openly discussed and the risk of it in Germany is increasing every day, as reflected in the ECB's decision to change its inflation target.
Defaltion may not happen. The odds ought to be against it. But if deflation does come to Europe the ECB will have helped to create it in Germany with its over tight policy. As Sir Samuel Brittan has argued, the ECB as presently constituted is probably not ideally placed to co-operate with 12 different governments to combat any deflationary risk.
If deflation does come to Europe the ECB will have helped to create it
The truth, which few wish to acknowledge, least of all in Germany, is that the euro is a significant part of Germany's problems. British entry would exacerbate them and widen further the gap between the monetary needs of Germany and other parts of Europe. Britain outside the euro is not just good for Britain but also for Germany.
This article in taken from The Wall Street Journal Europe