Euro is 'doomed to failure'Former British foreign secretary Lord David Owen said: "The basic concept is flawed. I think that it is a straitjacket which if we joined we would find an intolerable constraint."
He was speaking ahead of the launch of his "New Europe" think-tank which will campaign against Britain joining Europe's single currency.
The all-party group includes Lord Prior, former cabinet minister under premier Margaret Thatcher, former Labour Chancellor of the Exchequer, Dennis Healey, former Barclays Bank chief executive Martin Taylor and City economist Roger Bootle.
Lord Owen said: "It's not a party, it's not a membership organisation. We hope people will come and support us.
"It is mainly to try and produce serious factual information about Europe as it is, Europe as it will be when it becomes over 26 countries and what euroland really does mean, what it means to not have control over your own currency, the exchange rate, your own interest rates.
"I think people just need to be very aware that this is a massive change for Britain.
"It isn't a minor political question, it's not even just an economic question, it has a lot of political baggage in its trail," he told BBC 1's Breakfast with Frost.
Lord Owen who split from the Labour party and helped found the Social Democratic party in the early 1980s, stressed he was a lifelong supporter of the European Union but that signing up to the euro was a step too far.
Lord Healey said the European single currency was likely to crash before Prime Minister Tony Blair even has a chance to decide whether Britain should join.
"An economic recession will require the existing members of European Monetary Union (EMU) to have different interest rates and exchange rates and I myself believe that EMU will probably break down before Blair is called on to take a decision whether or not Britain should join," he added.
Last week Prime Minister Tony Blair made his strongest statement of support to date for Britain signing up to the euro early next century, subject to a number of economic tests and a referendum.
Source: BBC 99-02-28
The Economist 98-01-24
BRITAIN AND EUROPE
Yes to Europe, No to federalism
David Owen explains how he reconciles his pro-Europeanism with opposition to British membership of a single European currency.
Lord Owen was Britains foreign secretary from 1977-79 and EU co-chairman of the international conference on the former Yugoslavia from 1992-95.
(A longer version of this article is available.)
MY POLITICAL career has been dominated by the question of British membership of the European Community. I have resigned three times, with the EU as the most important issue each time. On the first two occasions, I was protesting against the Labour Partys negative attitude to Europe. In 1972 I resigned with Roy Jenkins from my position as a junior defence spokesman for the Labour Party; and in 1980 I stood down from the Labour shadow cabinet when the implacably anti-European Michael Foot was elected leader.
In 1987, when the Social Democrats voted to merge with the Liberals, I resigned as the SDPs leaderbecause I knew the centre of gravity of the Liberal Democrats would be decisively federalist. I did not consider it would be possible, or even legitimate, to attempt to change the Liberals long-standing commitment to European federalism.
Despite my commitment to the European Community I have never been at any stage a federalist, or a believer in a United States of Europe.
When I campaigned for Britain to join the EC in general elections from 1964 to 1970, I believed that it was not inevitable that the European Union would become a single state. I believe that even more today, with at least 11 nations due to join. But even if, regrettably, it does become such a state I hope it would be without the participation of the United Kingdom.
For Britain to join a single European currency would represent a quantum leap in the pooling of sovereignty. It is not just economic sovereignty which can be forgone by adopting the euro, but political sovereignty as well.
Much is written about the changing nature of the nation-state. Most people accept that change here is inevitable, but while they may not be able to define the nature of the state in which they want to live, they know they will recognise when that state no longer exists.
Some of Britains ambivalence about the euro is rooted in a sense of unease about where we are heading if we just acquiesce in another move towards integration, and appear to be becoming a mere province of Europa.
I want to believe that the British people will not allow their government to give up the pound and join a single European currency if they sense that to do so is to forgo some of the essential sinews of nationhood, which are still worth preserving in the 21st century.
But I cannot be sure that Britain will be sufficiently successful economically or self-confident politically to stand aside from a single currency. What now needs to be clearly established in the public mind is that one can be unconvinced about the euro, while being a convinced supporter of the EU.
Even though no British government is likely to say never to the euro, there is no obligation to say when. The single currency is an issue best left open with no timetable for a referendum and no assumptions that there will need to be a referendum.
The serious economic arguments against Britain joining the single currency do not weaken my support for the EU, nor do they make me against the option of a single currency for those who want to develop the characteristics of a single state.
Most people in Britain recognise that it would be foolish if we were to cast ourselves as the adversary of monetary union, and seek to destroy the euro. The hallmark of the City of London is that it provides a global service handling all currencies for all comers.
At the threshold of the 21st century we can if we wish end the hesitant approach to Europe shown by Britain over the last 25 years. We are now part of a new Europe-wide EU. Labour is at last a genuinely pro-European Union party. Wait and see is not a weak position for Britain to adopt on the euro, provided that it is not a cover for a decision to wait and join.
We must produce our own forward thinking in other areas. We need to play a full part by the force of our ideas, and to set them in the context of practical European unity. Britain did this over the creation of the single market. We must make a reality of the variable geometry in the new EU not just with rhetoric, but resources.
Enlargement has to be financially backed by the EU, which means that Britain and others must be generous. This applies not just to Poland and others in the first six; Romania and even the Ukraine need to feel that we are financially supporting their moves toward a new, less integrationist, EU.
Britain also needs to champion and further develop the common foreign and security policy (CFSP)something very different from a single foreign policy. We should demonstrate that in this area we are ready to become a key player within the EU, and talk intensively with the French. Britains defence partnership on the ground with France in Bosnia, as I witnessed, has left both armed forces with considerable mutual respect.
The far closer working relationship between the Foreign Office and the Quai dOrsay established in 1991 with the break-up of Yugoslavia has meant that the old scars from the failed collaboration over Suez in 1956 have largely healed. The French are readier than ever before to act together on security matters.
It is essential for Britain that we build on this relationship with France, which should not in any way be based on excluding Germany or antagonism to NATO, to ensure that the inter-governmental pillar supporting CFSP is bedded into the practice and future development of the EU.
A wise British government would quietly let France know that this needs to be done before Britain will ever seriously contemplate participating in a single currency.
We do not need to be apologetic about wanting some European activities to remain subject to inter-governmental co-operation and consensus. We have rightly claimed our Maastricht opt-out from the euro and our opt-out from EU border controls at Amsterdam.
The independence of economic policy we know is bound to change for any country that adopts the euro, but it cannot change for all EU members unless they all agree.
Experience shows that the price of retaining the inter-governmental aspects of the treaties, particularly the second pillar, a common foreign and security policy, is constant vigilance to protect against small erosions from a commission and European Parliament that have a long-term game plan of whittling away at the importance and strengths of the nation-states within the EU.
In praise of self-confidence
Any EU nation needs to have an inner self-confidence if it is to step out of what is otherwise an EU consensus position on foreign and defence policy. There can be no doubt either that for a country whose currency is the euro there will be additional pressures to avoid the tough choices of following an independent foreign-policy line, particularly if the foreign policy carries risks of trade embargoes or economic discrimination. That is because retaliation against a participating member in the single currency will no longer affect only that country, but all participants.
It can be argued, and sometimes is, that countries operating within a monetary union have more economic protection to take a particular foreign-policy line. Yet EU experience shows that what is more likely to develop is a soft CFSP designed to keep policy within the middle of the Euro pack.
Such policies will be very different from British foreign policy over the last 1,000 years. More relevantly, it will be very different from that practised over the last 25 years.
One only has to recall, with the exception of France, the continental European equivocation over nuclear weapons while we were still confronting the Soviet Union in the 1970s and 1980s to know why we should refuse to lose our independence in foreign and defence policy. While the French are sympathetic to British fears, in the last analysis they believe that Germany will always support France out of solidarity, if French vital interests are at stake. Britain has no such bilateral buttress and nor can we expect to develop a trilateral relationship with France and Germany to match their bilateral relationship. Too much water has flowed under that particular bridge for its design to be altered.
We need, therefore, in Britain to be honest with ourselves. Would a Britain operating within a single currency feel as free to support the United States when the rest of Europe did not? Would we have been able to have given the consistent support that we have to American policy from the moment Iraq invaded Kuwait in 1990 to the present day? We need to remember that the stance of various members of the EU during much of this period has been neither coherent, consistent nor courageous. Their attitudes were shaped by their assessment of national interest based on political, economic and trading factors. They are entitled to make that judgment independently or collectively, but so must we in Britain be free to make our own vital choices.
Remember the Gulf
The EU was not ready to act in concert in November 1997 when there was clear evidence that Saddam Hussein was circumventing the UN inspectors charged with stopping him developing all three weapons of mass destructionbiological, chemical and nuclear.
The French and Germans had their own interests to protect and they too as member states must be free to take independent action. The British government made its own decision and Britain on this occasion would have acted militarily with America. Had we been locked into qualified majority voting as part of an EU Middle East policy, we would not have been able to block an EU policy that would not have supported military action. It is worth reflecting on this incident, for it encapsulates most of the deeper questions about continuing on the path of integration and eroding national independence within the EU.
French and German policy towards Iraq, their relationship with Russia, all have a rationale and there is no need to denigrate their views just because we have formed a different judgment. The United States should reflect a little more deeply on a future where Britain could be tightly circumscribed in what it could do. These are vital issues to be weighed not in a chauvinistic mood that Britain knows best, but with a realism about the need for a structure where the sinews of British nationhood are not severed or hobbled.
We who are pro-Europe but critical of the euro are for the moment in a clear majority in the country. As democrats we accept that this may not last. Given that a week is a long time in politics, five years or more is an eternity. Our task as a country is to keep genuinely all our options open on the euro for the years ahead.
To recognise and analyse meanwhile potential economic benefits (but also potential economic losses); and also to reflect not just on the actual loss of economic sovereignty, but the potential loss of political sovereignty.
It will be the generation of people untouched by the cold war who will swing the choice on Britains future role within the European Union. We who lived through that testing period of deterrence and detente confronting the Soviet Union have a duty as far as possible to ensure that the younger generation are able to choose in full possession of the facts, from a Britain that has built a strong economic base and has developed a broad, confident, global outlook.
Här början den långa versionen
Yes to Europe, No to federalism
BY THE RT HON LORD DAVID OWEN*
PROGRESSIVE enlargement of the EU to twenty six or more nations opens the prospect of such a different EU that it it is not an exaggeration to call it a new EU.
Hitherto, the evolution of the Common Market to European Community has been an inclusive development across the territory of all its member states. The new European Union will represent not part but the whole of Europe. It will extend from Estonia to Rumania, quite possibly, and I believe correctly. It will eventually include both Russia and Turkey.
Within that all embracing Europe there will be a Single Market but an important grouping of countries perhaps more than half will operate a single currency. As part of sustaining that currency these countries will be driven to develop most of the characteristics of a single state.
Those nations who do not want to participate in the single currency or are economically unable to participate will nevertheless remain full members of the EU and will not as members of EMU lose their option to join the single currency. The variable geometry model of a multifaceted Europe has now replaced the fully integrated multispeed Europe.
The Exchange Rate Mechanism within the European Monetary System first established this variegated pattern. European Monetary Union with the option of not participating in a single currency has confirmed the trend.
For continental european politicians a single currency is above all a political not an economic issue. It is a return in history to the Empire of Charlemagne Charles the Great from 768 to 814 which stretched from the Atlantic to the Danube, from the South of France to Holland. That had a central silver coinage and some historians have termed it the first Europe with its own international executive class.
By the 16th Century there had emerged another trans-Elbean second Europe which lasted until 1918 when it was broken up after the first World War but then revived again by Hitler. Flitting in and out often in the wings has been a Muscovy candidate Europe.
In the 19th Century there were three failed attempts in parts of Europe to create monetary unions. The German monetary union was fully fledged by the1870s but it began some 40 years before initially with a customs union. The Prussian Thaler as the currency was called held sway while Bismarck dominated.
The French attempt at a Latin Monetary Union started in 1865 and included Belgium, Italy, Greece and Switzerland and at the time Walter Bagehot warned that if Britain did nothing we would be left out in the cold. We wisely declined to join and never regretted it.
In 1873 Sweden, Denmark and Norway started a monetary union which was dissolved in 1924. This albeit limited history shows that monetary unions fail but only after a period of time unless they are underpinned by political union.
Since the Second WorId War there has been a less dramatic but determined drive to build on the back of the European Coal and Steel Community a democratic or third Europe. This deliberately concentrated on a continental Common Market core of six nations. Winston Churchill advocated it for Europe but not for Britain. General de Gaulle openly opposed widening it to include the UK but did talk of a Europe from the Atlantic to the Urals.
In 1973 the Channel was crossed and the UK included in an enlargement to nine. This third Europe has always had amongst its leaders people who aspire, often only in private, to a United States of Europe. They see the USA as the most successful continental size federation and they want to achieve over time the same degree of integration.
This is, even though I believe profoundly misguided, a legitimate objective. But it is only honourable if it is openly and democratically espoused.
Unfortunately in some countries and for the most part in the UK those who want such an outcome operate by stealth, denying this is their ambition while edging constantly towards it.
The third Europe has had its successes economically best illustrated by the Single Market politically by continued enlargement. It still has its extravagances demonstrated by the Common Agricultural Policy which pays farmers not to grow crops and costs £29 billion a year absorbing half of the European Unions budget.
There have also been failures particularly when attempting to realise the ambitions of its federalists. The most ambitious federalist project was the Pleven Plan for creating a European Defence Community, but this was eventually rejected by the French Assembly in August 1954.
In the late 1960s and early 1970s the federalists made their first attempt at monetary union with the Werner plan. This was for the total and irreversible convertability of currencies, the elimination of margins of fluctuations in exchange rates, the irrevocable fixing of parity rates and the complete liberation of movements of capital. The Werner plan for the Common Market was to include all members and was supported by Edward Heaths government but never put to the test in the British Parliament being quickly consigned to the wastepaper basket after the oil price shock of 1973.
It is salutary to reflect that had it been established it would have been blown to smithereens by the after effects of the Arab Israeli war.
The old arguments about deepening or widening as the best way of developing the European Union have produced a creative tension that has never been resolved, In reality with every EU enlargement the integrationists have had to accept some changes to their original integrated model. Their last hope is that at the start of the 21st Century they can precede political union with monetary union by establishing what they call an inner core of countries operating a single currency within a wider Europe. Commonsense tells us that it will not work unless those countries who join it forge a political union in all but name.
We know from the Marjohn Report of 1975 that the underlying aim is for a monetary union where national governments put at the disposal of common institutions the use of all the instruments of monetary policy and of economic policy whose action should be exercised for the Community as a whole.
The challenge for us all now in the EU is during the 21st Century to build a new European Union or Fourth Europe. Such a Union will not be as prescriptive as the Third Union, it will be designed so that individual states can group on some issues and not on others thereby reflecting the natural diversity between states of a larger Europe.
Such variable geometry for the European Union appears to be what most British people want. The design should not be too rigid and it must be adaptable enough to allow different countries within the EU on certain issues to choose greater or lesser integration. This design was followed when some countries signed the 1985 Schengen agreement to open their frontiers. This was initially outside the EU Treaties and then came within EU rules with Britain, Ireland and Denmark, who were not prepared to do away with their border controls choosing to opt out. Many UK euro enthusiasts criticised the British position that free movement in the 1987 Treaty only applied to EU nationals but given the panic in the Schengen countries when in 1998 there was movement of Kurds from Turkey and Iraq the British position that freedom of movement only applies to EU nationals seems fully justified.
In the Amsterdam negotiations the third intergovernmental pillar, Justice and Home Affairs, was partially Commissionised and policy on visas, asylum, immigration and other policies related to the free movement of persons will come under Community Law unless five years after ratification of this Treaty the member states vote against the trigger clause. In any circumstances Britain has the right if it wishes to stay outside. Most of these changes are justified by practical arguments that intergovernmentalism is thought not to be working effectively.
The differential approach to the design of the new EU is inherent in the Mastricht opt out provision for the euro and the Amsterdam opt out from open frontiers.
The Maastricht Treaty and the Amsterdam negotiations far from being the most massive step towards the integrative Third model of Europe that the anti-Europeans and sceptics in Britain believe, may yet prove to be its high water mark. The variable geometry design now in place offers the possibility of a Europe that can accommodate the process of enlargement institutionally.
Chancellor Kohls refusal to champion further integration during the 1997 negotiations prior to and during the Amsterdam negotiations may be a pointer. As is the fact that he has stopped referring in speeches to the goal of a United States of Europe. What is now emerging is a multifaceted Europe.
How should the UK handle this new EU? Where lies the true destiny of Britain? I believe it is to say Yes to Europe but No to Federalism.
We are now inextricably involved in the EU and must not act as a distant offshore island. But we do have a choice as to whether we join particular activities such as the single currency.
We can choose to define our own destiny case by case, joining in some other new activities while declining others. Is it our destiny to lead the EU?
Or is our destiny instead to fully involve ourselves in the EU? The two are not quite the same. Leadership rhetoric sounds good in the UK but it challenges the ethos of a Community founded on the Franco-German alliance. It also belies the UKs true role. We can and have been instigators in the EU, problem solvers and good Europeans but we are also the grit in a soggy concensus. It is important that we carry clout within the EU counsels but our destiny is also to be the hinge country between the EU and the United States. Not as the apologist or the defender of US policy but as its constant European friend through good times and bad. Standing up to the US when they are wrong as we did in Bosnia in 1993, supporting them over Iraq from 1990-1998 when they were right. This is our unique role which by the very nature of their joint relationship neither France nor Germany can always fill.
A Political Currency
The political origins of the euro are that after the fall of the Berlin Wall in November 1989 a pact was formed initially between the Chancellor of Germany and the President of France early in 1990 well before the formal reunification of Germany on 3 October 1990.
The motivation of Helmut Kohl was to demonstrate to his friend Francois Mitterrand that France had nothing to fear from a much larger Germany for they would put their Deutschmark with the French franc into a single currency to forge out of the third Europe the historic first Europe.
The Maastricht Treaty of 1992 was the manifestation of that Franco-German political deal but its detail had within it compromises of a deeper significance. For while the Ministry of Finance in France conceded to the Bundesbank on the design of an independent European Central Bank so Germany conceded to the Elysee and Quai dOrsay the crucial three intergovernmental pillars:
I. Economic; II. Common Foreign and Security Policy; and III. Justice and Home Affairs Policy, which are written into the Treaty. Thereby, Maastricht, for the first time, put Treaty parameters to the extent of European integration. It also left Britain and Denmark free to decide, as they have both done, not to give up in 1999 their own currencies.
Since Maastricht Sweden has taken the position that they are not obliged to put their Kroner into the Euro in 1999 and this flexible interpretation of the Treaty will in practice be on offer to all new entrants even ifnot offered formally by the EU. Because the motivation for a single currency is political the criteria for entry spelt out in the Maastricht Treaty will continue to be stretched for these political leaders have vested too much of their own personal credibility, for the 1999 start date to be postponed. In fairness the criticism is not that they lack vision but that they are taking an immense risk with the political, as well as the economic, stability of Europe.
First the Benelux countries developed a coordinated currency link called the snake built around the Deutschmark and then France wanted to join but needed a new structure. This became, when I was Foreign Secretary the European monetary System which we joined in 1979 despite deciding that we would not participate in the substantive part, the actual Exchange Rate Mechanism. Entry at that time into the ERM certainly did not suit our economy. Nevertheless the Euro enthusiasts in Britain advocated immediate entry regardless because for them it was a political project.
By the mid 1980s I had begun to argue that ERM entry would be advantageous. Margaret Thatcher did not allow the then Conservative Government to join but acquiesced as Nigel Lawson shadowed the Deutschmark for far too long when the government should have introduced higher interest rates to cool the economic boom. Margaret Thatchers government then compounded this error by entering the ERM at a too high a rate.
It was John Majors government which then defended the pound at an absurd cost rather than seeking the very currency readjustment which was allowed under the rules. The ERM was by design a flexible system for stabilising rates but the politicians saw maintaining the rate as a national virility symbol.
That same vice was followed by British governments, Labour and Conservative, after the Second World War under the Bretton Woods fixed rate system most damagingly by Labour before the devaluation of 1949 and again in 1967.
Although this rigidity about exchange rate policy was deeply unfortunate at least we were able to adjust the value of the pound or as we did in 1992 leave the ERM. To give up the pound and to join the euro means that there is no way out short of breaking the Treaty and recreating ones own currency.
I was a believer in the parallel currency of a hard ecu in the late 1980s but when that failed to carry our EU partners it was inevitable that some countries within the ERM would seek at one stage to align their currencies in a monetary union.
Once the EMU was proposed it was correct for Britain while staying out of the euro itself to ensure that any monetary union affecting a significant number of member states was developed within the broad framework of the rules of the European Union. For that reason successive governments have ensured we will in effect remain part of the EMU structure even while not participating in the single currency.
My political career since 1962 has been dominated by the question of British membership of the European Community but only since 1992 has a single currency been seen as the test of ones Europeanism. In the early 1960s the leader of the Labour Party, Hugh Gaitskell, was someone I greatly admired. He had a passionate pride in the British nations capacity to lead but also the intellectual rigour of mind to warn against the political risks of joining a common market which had federalist ambitions, He dismayed friends like Roy Jenkins but he demonstrated a statesmanship that led millions to mourn his premature death a few months later. On 21 September 1962, I watched Hugh Gaitskell on television reply to Prime Minister Harold Macmillans broadcast of the night before. He asked if Macmillan wanted to enter a European federation. If so it means the end of Britain as an independent nation; we become no more than Texas or California in the United States of Europe. It means the end of a thousand years of history it means the end of the Commonwealth to become just a province of Europe.
I liked Gaitskells warning and broadly accepted in my own speeches his line of questioning that outcome. I have never been at any stage a federalist, or a believer in a United States of Europe. When I campaigned for Britain to join the EC in the general elections from 1964 to 1970 I believed that it was not inevitable that the European Union would become a single state. I believe that even more today, with at least 11 nations due to join. But even if it regrettably does, driven by a single currency, become such a state, hopefully without the partlcipation of the UK, it would never have the strength nor the stability of the USA.
I have resigned three times, with the EU as the most important issue. On the first two occasions I was protesting against the Labour Partys negative attitude to Europe. In 1972 I resigned with Roy Jenklns from being a junior defence spokesman for the Labour Party; in 1980 I stood down from the Labour Shadow Cabinet when the implacable anti-European Michael Foot was elected leader. In 1987 when the Social Democrats voted to merge with the Libeals I resigned as the SDPs leader because I knew the centre of gravity of the Liberal Democrats would be decisively federalist and while I could have changed Liberal defence policy I did not believe it would be possible or even legitimate to attempt to change the Llberal longstanding commitment to Euro Federalism.
Before I stepped down from the House of Commons in 1992 and during the Maastrtcht Treaty negotiations, all too aware that a single currency represented a quantum leap in the pooling of sovereignty I tried to draw attention to an essential political safeguard. Arguing that the euros political acceptability, even if there were quantifiable economic advantages for me would totally depend on the extent to which the intergovernmental pillars particularly on foreign and defence policy had held flrm over the intervening years and had not been absorbed into Community structures. I added this would demand vigilance and self-confidence from our politicians. That remains my position.
It is not just economic sovereignty which can be foregone by adopting the euro but political sovereignty as well.
I want to believe that the British people will not allow their government to give up the pound and join a single European currency if they sense that to do so is to forego some of the essential sinews of nationhood still worth preserving in the 21st Century. But I cannot be sure that Britain will be sufficiently successful economically or self confident politlcally to stand aside from a single currency.
Even though no Britlsh government is likely to say never there is no obligation to say when. The single currency is an issue best left open with no timetable for a referendum and no assumptions that there will ever need to be a referendum on a single currency. The serious economic arguments against the UK joining the single currency do not weaken my support for the EU, nor do they make me against the option of a single currency for those who want to develop the characteristics of a single state.
The need for convergence
A country in the single currency facing a political crisis because of high unemployment and falling living standards has no currency of its own to adjust, no interest rates of its own to change there is no safety valve. Many independent economists do not believe the necessary economic convergence in Italy, Spain or Portugal exists for a stable euro. The EU collectively will be hard pressed to help for it is barely able to face the redistribution costs inevitable in the process of enlargement over the next seven years.
Germany has found it hard enough to cope with the fiscal transfers needed for absorbing the East of their own country and France has problems of its own. The Dutch have for the most part wanted to start with a small group of nations whose economies are on a definite convergent course.
In 1977 the MacDougal Group of economists reported to the UK government that a budget for the then Community of Nine of 5-7% of their total GDP would be needed for territorial redistribution to bring about the convergence of those countries economies sufficient to have a successful monetary union. There was no chance of assembling the necessary political commitment then to earmark such resources across the Community and there is little sign of such a commitment now. An interesting initiative would be to reconvene a similar MacDougal Group to try and quantify the financial needs of enlargement to 21 countries by 2006 as well as to cover the needs during this period of some of the weaker countries within the single currency. At present Brussels envisages a total of over £35 billion being allocated to new member states before 2006.
Some member states intending to join EMU are becoming increasingly worried about this enlargement bill given the transition costs to their own economies of accepting a single currency.
The countries operating a single currency will have to accept the discipline imposed by the European Central Bank which will settle interest rates. Yet a major unresolved issue is between those countries who want a political forum to inject social and other considerations into the decision making like France and those like Germany who want as with the Bundesbank for the European Central Bank to be totally independent. Obviously those countries who have adopted a single currency must have the right to consult and cooperate together on detailed aspects of their currency. But they wanted the framework of a single currency to be within the EU and that is why EMU operates as part of the EU Treaties.
Therefore all the EU Finance Ministers meeting in ECOFIN must determine the rules of the EMU and its participants are bound by those EU rules. This is the vital issue in the arguments about what can legitimately be done within the informal grouping called Euro X to discuss management of the single currency.
Economic policy within the EU after the establishment of EMU will allow the Council to make recommendations to a member state on its economic policies by a qualified majority vote but the tougher provisions of the stability pact allow by qualified majority voting for fines but this only applies to those who have joined the single currency. In effect those outside the euro cannot have a central plank of their economic policy overturned by a qualified majority vote but they have to accept that their economic policies are a matter of common concern and subject to coordination. Those who are part of the euro will have to adopt self discipline on some major economic harmonisation issues to ensure the success of the currency.
For the single currency to survive not just interest rates will have to be the same. Much of the anxiety about the sustainability of the single currency relates to the fear that some participating countries will in an economic downturn balk at the discipline required. Also their electorates will not understand why other member states still outside the euro, have a far greater measure of national economic decision making, for example in letting their currency float downwards or upwards or to decide to run larger or smaller deficit.
A key question and very hard to predict is when if ever might the euro take over the dollars status as the worlds reserve currency. The dollar in the 1930s quickly replaced sterling because its transaction costs became lower as it was used more. In 1996 the dollar was used in 40% of foreign exchange transactions. The fact that the US has only 27% of global production and 14% of world trade and the EU 31% and 16% respectively shows that the euro could theoretically replace the dollar. I doubt, however, if it will for the US will act to maintain the dollars pre-eminence. It is clear that many bankers will want the European Central Bank to establish the euro as a hard currency and the ECB will want as many central banks around the world as possible to transfer much of their reserves into euros as well as public and private institutions.
Britain staying outside the euro will have a considerable impact on the ability of the euro to challenge the dollar and one of the factors in judging the British interest will be the extent to which the euro builds itself up to challenge the dollar despite our retaining the pound. Also how the euro impacts on the City of London will need the most careful, detailed and continuing assessment.
The British Opt Out
Tony Blairs decision as Prime Ministerand I believe it was very personal onethat Britain should plan on the basis that the euro will not replace the pound in the lifetime of this Parliament, was well judged. He could very easily have succumbed to the blandishments of those, in all three parties, who wanted him to use Labours massive Parliamentary majority and public popularity to push through a referendum perhaps endorsing entry at some unspecified date after six months of pro Europe publicity orchestrated as part of the British Presidency.
With opinion polls showing anti euro feeling of 2:1 in the autumn of 1997 Tony Blair may have been warned off such a course by the difficulty he experienced in shifting entrenched public opinion during the September 1997 Welsh referendum. But I doubt that that argument was crucial. If, on taking office, he was a committed enthusiast for the euro his inner self confidence was such that he would have taken up the challenge and planned for a 1998 referendum. The citizens of the UK have much to be thankful for the fact that he has chosen to wait and in doing so given us all time to ponder these issues outside the framework of party politics.
It is in the interests of a sensible UK debate about the euro that the public recognise that the euro from 1999 will start to impact in our country even though we will not ourselves be giving up the pound. The euro will become as much a part of the City of Londons financial and trading life by 2000 and beyond as the dollar or the yen. There is no aspect of the euro as a global currency to which Britain need be hostile. Indeed it is in the UKs interests to be euro friendly. Nor should the appearance of the euro in Britain pre-empt our own debate over whether we in Britain should give up the pound and adopt the euro as our currency. Any UK business operating in foreign exchange will find that for any subsidiary operating in an EU country whose currency is the euro they will not have to make complicated risk adjustments and this will bring bigger benefits than the elimination of transaction costs. Currency flows may speed up, bank lending margins may come down and the corporate bond market may be used more for external debt financing. Many multinationa1 companies operating in the UK will, therefore, adopt the euro as the companys official currency and they will be free to do so.
The euro will, however, accentuate wage differentials between countries which, if adjusted, could add over a time considerably to costs. Product prices which can vary considerably at present between EU countries will become more transparent and come under pressure to be unified with implications for the profit/loss account.
Apart from Germany no other EU country has a global currency of anything like the same significance as Britain. The City of London is a global, not a European, financial centre where the pound has for many years been of less importance than the dollar. The euro will become the central currency for the wholesale markets in London, Those big multinational firms which are advocating the euro for Britain are perfectly free to introduce the euro into every nook and cranny of their own business in the UK if their customers are content for this to be done. In a global world of electronic exchange, however, currency transaction costs can and should come down far more than they have. In this context the transaction costs argument for a single currency is a rather old fashioned one.
The global movements of money are now massive, investors trade $1.5 trillion worth of foreign currencies each day. There are genuine arguments about whether it is better to use electronics to reflect market conditions and the underlying economy more accurately and adjust through floating exchange rates than think political decisions can even temper let alone resist such powerful market forces.
Business interests though important are not the only factor to be weighed. We never should see our country as Great Britain plc and there are important factors about the way we live which have to be assessed which are neither commercial nor economic, but social and poIitical. Scare campaigns by businesses on both sides of the argument, without providing real evidence about adverse or beneficial consequences for Britain deserve to backfire and probably will. Those who voice their scepticism or enthusiasm about Britain adopting the euro but who have a record of passionate opposition or unqualified support for British membership of the EC and now the EU will very probably be seen to be riding their hobby horses once again. The challenge for those of us who have never been anti or sceptical about British membership of the EC and the EU and yet who want to keep the pound is to ensure that we are not seen to be part of any anti EU campaign.
There is a need for cool, clear minds to focus on the issues of substance and disentangle the propaganda.
In what Tony Blair has said to newspapers, particularly the Sun on the euro to date there is an ambivalence shared, I believe, by millions of people. In part before the election this could be explained by tactical positioning so that his party was not placed on the wrong side of public opinion on this issue. In government he has the opportunity to shape public opinion. He has given himself time to assess the real worth of the euro and also I hope to think through and experience the complex inter-relationships that surround the question. The British people will need convincing before they will endorse such a massive economic and politica1 commitment. Particularly when they register that a single currency by its very nature cannot be put up for periodic review. No country can step out of the euro without appalling and largely unforeseen consequences for itself and for Europe in general. It is effectively an irrevocable decision.
That is why it is a British, Danish, Greek and Swedish interest, who will not join, that only those countries do join the EMU in May 1998 who can stay within the disciplines of a strong currency. Maintaining as a minimum the Maastricht criteria is something which the German constitutional court has taken an interest in. But it is not just a question for prudent participating countries it is also an overall EU priority.
The UK Labour government, plotting a course through these uncharted waters on taking office in 1997, and anticipating the British Presidency in the first part of 1998, felt they had to go further than just announce they had taken up the Maastricht opt out for British entry into the euro ln 1999. Fearing that otherwise this would have been seen as a purely negative decision their statement on 27 October 1997 admitted that though to share a common monetary policy with other states does represent a major pooling of economic sovereignty this should not be a constitutional bar to British participation in a single currency, regardless of the economic benefits it could bring. There was no mention of political sovereignty and the potential pressure stemming from joining the euro for a further pooling of foreign and defence policy sovereignty.
Parliament was told that we should prepare ourselves to join the euro if there are clear and unambiguous benefits soon after the next election, Perhaps the reason why the word soon was used was that it was hoped that it would make other EU nations feel that the UK government did not have a closed mind on the issue of the euro and it was hoped it would make our own business community focus their minds on the possibility of early entry. Yet soon will prove to be an immense hostage to fortune. Assessing any benefit after the 1999 threshold and after the actual money circulates fully in 2002, necessarily the sum of pluses and minuses, will be impossible to do quickly. Some factors like the effect on inward investment and the relationships to economic cycles will not be immediately calcuable in 2003.
In particular the strains and stresses within an initial monetary union of as many as eleven EU nations could take time to emerge.
The Prime Minister constitutionally had the right to call the next General Election so as to seek a mandate to join the euro and thus avoid a referendum However he authorised the Chancellor of the Exchequer, Gordon Brown, in the House of Commons to close that option and to say under this government there will be a referendum. Government, Parliament and the people must all agree. Some have argued that this wording still leaves open the possibility of combining a referendum with a General Electlon but this is casuistry. The purpose of a referendum is to enable the public to focus their minds on one major issue and not subsume it in numerous other issues in an election linked to party political positions. Juxtaposing the General Election with a euro referendum would be a cynical device and deeply resented as such.
Tony Blairs stance over the next few years will be fascinating to watch. He will want to be seen to be leading opinion on the single currency and yet this will sit uneasily with his previous stance of adopting a calculated degree of ambivalence in public and in private to the euro.
Studied ambivalence from Prime Ministers on European issues is not new. Edward Heath, while Prime Minister from 1970-74, denied at all times supporting the Eurofederalism that he now openly espouses, Harold Wilson never made clear which way he would come out on the promised referendum for three years from 1972 until just before the 1975 referendum was called. The appearance at least that he and Jim Callaghan only made up their minds prior to the referendum campaign ensured that their opinion carried far more weight than the already well known views of the pro and anti campaigners. It is also worth recalling that Margaret Thatcher took office ln 1979 on a platform of being more positive about Europe than the then Labour Government, only adopting her No, No, No stance in 1990 after ten years during which she played a positive role in creating the Single market and accepted a significant extension of majority voting John Majors achievement was to negotiate the British opt out in the Maastricht Treaty for which he receives all too little credit and one reason for this is the split in the Conservative Party.
Neither the europhiles nor the eurosceptlcs, as old warriors are prepared to recognise that the EU itself was changed by Maastricht. They debate the issue as if we are still in the old integrative model where all states have to accept the same obligations.
Wait and See
Wait and see is not a weak position for Britain to adopt on the euro, provided that it is not a cover for a decision to wait and join. Also that we use that period constructively and produce our own forward thinking in other areas. We need to play a full part by the force of our ideas and to set them in the context of practical european unity. Britain did this over the creation of the Single Market. We must make a reality of the variable geometry in the new EU not just with rhetoric but resources.
The UK will not be out in the cold by not participating in the single currency but able to exercise a far greater degree of democratic accountability of our Chancellor of the Exchequer and the Governor of the Bank of England than will ever be exercised over the euro by the grouping of Finance Ministers and the European Central Bank. For that democracy and independence there is a price. Euro X will informally be a more important Ministerial voice than that of the Chancellor of the exchequer in monetary matters and indeed that of ECOFIN.
But the Minister of Finance in Germany is already a more powerful voice than our Chancellor. We need to be realistic therefore; our influence within Euro X would be limited too. How effective we are depends not on the grouping but an the strength of our economy.
At the threshold of the 21st Century Britain can champion a new Europe and end our hesitant approach to Europe which has characterised the last 25 years. We are now part of an expanding new Europe-wide EU. We do not have to make any further big European decisions. We have rightly claimed our Maastricht opt out from the euro and our opt out from EU border controls at Amsterdam. Labour is at last a genuinely pro-European Union party. John Majors Conservative and Tony Blairs Labour governments through the Treasury have constructively helped other states in the EU, who wish to, to create a successful monetary union. Most people in Britain recognise that it would be foolish if we were to cast ourselves as the adversary of monetary union, and seek to destroy the euro. The hallmark of the City of London is that it provides a global service handling all currencies for all comers.
What now needs to be clearly established in the public mind is that one can be unconvinced about the euro while being a convinced supporter of the EU.
We do not need to be apologetic about wanting some European activities to remain subject to intergovernmental cooperation and concensus. Experience shows that the price of retaining the intergovernmental aspects of the Treaties, particularly pillar II, a Common Foreign and Security Policy, is constant vigilance to protect against small erosions from a Commission and European Parliament that has a long term game plan of whittling away at the importance and strengths of the nation states within the EU. Many on the commission and in the European Parliament already point to their success in breaking down some aspects of all three intergovernmental pillars. The economic pillar, however, was never purely intergovernmeneal, the Treaties saying that member states should conduct their economic policies with a view to contributing to the achievement of the objectives of the Community. This gives limited scope for harmonisation of economic policy. Accordingly those in Brussels who argue for harmonising many taxes amongst member states cleverly will not just use the single currency to make their case, instead they will cite any economic provision that can remotely bear on the working of the Single Market. There are those too who want to harmonise welfare and social benefits, their aim is gradually to leave very few areas on which a Finance Minister can act independently.
The effect of the UK signing up for the Social Chapter in the short to medium term was exaggerated in the party political debate within the UK. Nevertheless the potential for longer term damage to the UK economy is ever present. Much will depend on the current debate about how fast continental Europe is prepared to adapt its attitudes and practices to achieve the flexible labour market so identifled with US economic success.
It is true that the Single Market cannot operate fairly if big interstate differences in financial, social and environmental costs persist over time. The question is, therefore, one of achieving a broad balance across member states of what contributes to unit costs rather than prescribing from the Commission uniform policies for all the elernents which contribute to unit costs. This particularly applies to wage levels. For countries operating a single currency differential wages will be one of the main ways of adjusting their relative economic performance when interest rates can no longer be varied except across all the participating states.
Enlargement has to be financially backed by the EU and to carry conviction Britain and the others must be generous. This applies not just to Poland and others in the first six, but Rumania and even the Ukraine need to feel that we are financially supporting their moves toward a new less integrationist EU.
Britain also needs to champion and develop further the common, not single, foreign and security intergovernmental pillar and demonstrate that in this area we are ready to become a key player within the EU. We should talk intensively with the French and I suspect we can both learn from the dialogue over what was called the Fouchet Plan even though it was in 1962. It failed because of a dispute over limiting the supranationality of a Union of States.
Now such a debate will in some matters be easier for the parameters of the EU are much better defined. France also wants Britain to be more forthcoming over European defence and de Gaulles passing has left France undoubtedly more pragmatic.
Britains defence partnership on the ground with France from 1992 onwards in Bosnia, as I witnessed, has left both armed forces with considerable mutual respect. The far closer working relationship between the FCO and the Quai dOrsay established in 1991 with the break up of Yugoslavia has meant that the old scars from the failed collaboration over Suez in 1956 have largely healed.
Paris has noted with both surprise and appreciation the readiness of London to openly differ with the Washington line over Yugoslavia and is readier than ever before to act together on security questions. It is essential for Britain that we build on this relationship with France, which should not be in any way based on excluding Germany, or being antagonistic to NATO, to ensure that the intergovernmental pillar supporting CFSP is bedded into the practice and future development of the EU. A wise British government would quietly let thern know that this needs to be done before the UK will ever seriously contemplate participating in the single currency.
The French will first need to be convinced that we in Britain are serious in wanting to develop the intergovernmental structures for an independent European defence capability to support an effective Common Foreign and Security Policy (CFSP). An effective CFSP does need to be buttressed by a European military capacity which can either act alone or in support of the UN Charter when the US is not prepared for NATO to be used; this was in effect the situation in the winter of 1993 in Bosnia-Herzagovina. The EU Action Plan of November 1993 could not be enforced other than by NATO on the ground and the US did not at that stage support the Plan. The US intermittently advocated NATO should operate from the air while the UN stayed on the ground but was deliberately vague about what any political settlement should be.
All that really separates the 1995 Dayton Accords from the EU Action Plan was two years of continued war, massive further ethnic cleansing and loss of life, Both plans gave the Bosnian Serbs 49% of contiguous territory. By contrast the so-called Vance Owen Plan gave the Serbs only 43% of territory in three unconnected provinces.
The logic for holding an organisation like the WEU in reserve for action in support of EU diplomacy, as in 1993, for those EU Heads of Government who are ready to become part of such a European defence grouping is compelling.
The EU-WEU would not replace NATO or the UN. In 1996-97 carefully crafted steps were taken whereby WEU would in future be enabled to use NATO assets and infrastructure for various peacekeeping and peacemaking tasks without the US participating. This bottom up approach is working and it is important that it does for given the quality of NATOs assets in the all important respects, American, it is hard to see any serious European defence operation being successful without them.
The next political step is for Britain to work with those EU partners, like France, who attach importance to the subordination of the WEU to the inergovernmental foreign, defence and security pillar of the EU.
The French want to see the WEU role going beyond peacekeeping and Britain should accept this. The 1948 Treaty of Brussels which established WEU has a firmer defence commitment binding its members to go to the defence of any of their number who is attacked than is even contained in the 1949 Treaty that established NATO. Also the French will want a mechanism whereby their nuclear deterrent and that of the British are put at the servrice of the EU. This is long overdue and an important guarantee now that Russian nuclear forces are less powerful and the US nuclear guarantee for Europe arguably less credible.
Some countries like Sweden, Finland and Ireland may well want to opt out and this should be accepted without demur. The WEU has its own democratic Assembly made up of Parliamentarians from national parliaments. It is this Assembly which Britain must insist be taken into the EU structure to provide the main forum for democratic parliamentary accountability for EU defence matters buttressing thereby a more effective intergovernmental CFSP. Many members of the European Parliament and the Commission will oppose such a step. But they will in doing so be downplaying the advantage of having national parliaments tied in to an important aspect of European activity. Also it will make national parliamentarians more receptive to the European Parliament having primacy on Single Market issues and some involvement with the II intergovernmental CPSP pillar. Within the EU few things worth having ever come without being the result of horse trading and in essence that is the basis of the art of most politics. The UK government must engage constructively with our partners on this and other issues while retaining the essentials of governmental decision making.
A Common not a Single Foreign and Security Policy
In European parlance common means a concensus policy, single means a majority policy. The majority coming from either delegated power stemming from an institution like the Commission, the Central Bank or from a qualified majority vote of the Council.
When the Amsterdam Treaty is enacted in 1999 and a Secretary Genera1 for CFSP is appointed in order to help promote concensus the deputy Political Directors for all EU countries should live in Brussels and be available to coordinate the CFSP on a day to day, and if need be hour to hour, basis. Thls is done through concensus by our permanent representatives in NATO. This would also provide the mechanism, for building up an early warning system within CFSP.
Any EU nation needs to have an inner self confidence to step out of an otherwise EU concensus position on foreign and defence policy. There can be no doubt either that for a country whose currency is the euro there will be additional pressures to avoid the tough choices of following an independent foreign policy line. This is particularly the case if the foreign policy carries risks of trade embargoes or economic discrimination, for retaliation on a participating member in the single currency will no longer affect only that country but all participants. It can be argued and sometimes is that countries operating within a monetary union have more economic protection to take a particular foreign policy line. Yet EU experience shows that what is more likely to develop is a soft CFSP designed to keep policy within the middle of the Euro pack. Such policies will be very different from British foreign policy over the last one thousand years and more relevantly, very different from that practiced over the last 25 years.
One only has to recall, with the exception of France, the continental european equivocation over nuclear weapons while we were still confronting the Soviet Union in the 1970s and 1980s to know why we should refuse to lose our independence in foreign and defence policy. While the French also know this to be true and are sympathetic to British fears. ln the last analysis they believe that Germany will always support France out of solidarity if French vital interests are at stake. Britain has no such bilateral buttress and nor can we expect to develop a trilateral relationship with France and Germany to match their bilateral relationship. Too much water has flowed under that particular bridge for its design to be altered
Some people argue that there is no danger of the foreign and securiy intergovernmental pillar eroding. But it is not hard to see how this could happen.
In the Treaty there is a provision for declaring an area of foreign policy to be the subject of joint action. This decision has to be taken unanimously but thereafter the implementing decisions are to be taken by qualified majority voting. Quite apart from the virtual impossibility of distinguishing between the original measure taken by unanimity and what constitutes implementation the mechanism was wished on us at Maastricht because it was seen as the thin end of a potentially very long wedge. The temptation will come at a time when the UK has a very strong foreign policy objective and wants the EU to support it. Then it is not hard to imagine it being suggested that this policy should only be adopted if it is to be subject to joint action. It only requires a weak Foreign Secretary accepting the advice of the Department that implementation will present no difficulties and we will have crossed a very important threshold. I have no doubt that the UK should never under any circumstances, however tempting, cross that threshold. But I cannot be sure given the past history of us being edged over similar thresholds that we will not do so.
There is a strong argument for the UK Parliament to restrict the right of any government in this area insistlng that joint action can never be declared without the prior approval of both Houses of Parliament.
We need, therefore, in Britain to be honest with ourselves. Would a Britain operating within a single currency feel as free to support the US when the rest of Europe did not support America. Would we have been able to have given the consistent support that we have to US policy from the moment Iraq invaded Kuwait in 1990 to the present day? We need to remember that the stance of various members of the EU during much of this period has been neither coherent, consistent nor courageous. Their attitudes were shaped by their assessment of national interest based on political, economic and trading factors.
They are entitled to make that judgement independently or collectively but so must we in the UK be free to make our own vital choices.
The EU was not ready to act in concert in November 1997 when there was clear evidence that Saddam Hussein was cimumventing the UN inspectors charged with stopping him developing all three weapons of mass destruction biological, chemical and nuclear. The French and Germans had their own interests to protect and they too as member states must be free to take independent action. The British Government made its own decision and Britain on this occasion would have acted militarily with the US. Had we been locked into qualified majority voting as part of an EU Middle East policy we would not have been able to assemble even a blocking vote for EU policy which would not have supported military action. lt is worth reflecting on this incident for it encapsulates most of the deeper questions about continuing on the path of integration and eroding national independence within the EU French and German policy towards Iraq, their relationship with Russia, all have a rationale and there is no need to denigrate their views because we have formed a different judgement. Washington should reflect a little more deeply on a future where Britain could be tightly circumscrlbed in foreign and defence policy over what it could do. These are vital issues to be weighed not in a chauvenistic mood that Britain knows best but with a realism about the need for a structure where the sinews of British nationhood are not severed or hobbled.
In the former Yugoslavia from 1990 onwards we saw the dangers of the soft concensus when real differences of approach are stifled. Yet nothing in the nearly three years from August l992 to July 1995 that I was the EU negotiator in the Balkans reduced my support for the EUs patient attempt to forge a real concensus on difficult issues of foreign and security policy. Mistakes were inevitable but everyone genuinely tried to learn from each other.
The worst peace or war decision taken in British foreign policy since Suez was the decision not to veto in December 1991 EU recognition of Croatia and Slovenia because it triggered the war in Bosnia-Herzegovina. Under the Maastricht Treaty, which had not even been ratified at that time, there was no obligation on Britain to agree, only to try to find common ground; this France and Britain had already done. On 8 November 1991 the EC issued a Declaration in Rome which stated that the prospect of recognition of the independence of those Republics wishing it, can only be envisaged in the framework of an overall settlement. Given the German governments strong views it would have been legitimate for Germany within the EC to invoke an overriding national interest and to recognise unilaterally. It was perhaps not surprising, in view of the Franco-German alliance, that it was the French Foreign Minister Roland Dumas who first gave in to the Germans but it was surprising when he was followed by Douglas Hurd who had eloquently argues for months against recognition. It was a deeply damaging face-saving EC consensus taken despite the opposition of Lord Carrington, Chairman of the EC Peace Conference on Yugoslavia, Perez de Cueller, the UN Secretary General and Cyrus Vance, peace negotiator for the UN. There is no ground for believing, as some claim, that the French would have acted differently if qualified majority voting had existed on the Foreign Affairs Council. France would not only have been unable to isolate Germany on the Council, It had become by then a French national interest to accommodate the German viewpoint. The UK also felt grateful to Chancellor Kohl for his understanding over the Maastricht negotiation and his readiness to support our euro opt out. There was probably no explicit bargain struck just an understanding reached that we would be more flexible over matters of real concern to Germany. Given the negotiated ceasefire between the Croats and the Serbs at the end of the year the problems created by recognition could have been overcome if it had not been compounded by going forward with the recognition of Bosnia-Herzegovina The US, who had opposed recognition of Croatla in December 1991, became very active in pushing for recognition of Bosnia-Herzegovina in the spring of 1992 but the situation was very different. This was the one internal republic of Yugoslavia that contained three large constituent peoples -Muslim, Serbs and Croats -with very different views on independence. Recognition wIthout the prior presence of a substantial UN Prevention Force was a recipe for war.
The Yugoslavian 1991 recognition debates within the EC are a sombre warning of how dangerous decisions, with the predicted consequence of an even bloodier war, can be made in an atmosphere where maintaining unity among the member states becomes an end in itself.
Much is written about the changing nature of the nation state. Most people accept that change here is inevitable, but while they may not be able to define the nature of the state in which they want to live they know they will recognise when that state no longer exists. Some of Britains ambivalence about the euro is rooted in a sense of unease about where we are heading if we just acquiesce in another move towards integration and appear to be becoming a mere province of Europa.
Before recommending a referendum for joining the euro the British government has established a condition evidence of clear and unambiguous economic beneflts. To that should be added another condition in the securing of the ultimate safeguard where in the last analysis the British nation remains free to conduct its own foreign and defence policies and where the democratic accountability for our defence remains through national parliaments. Then the British people can feel that at least their ultimate political sovereignty is guaranteed should we join the single currency and that the continuation of our nation state is inviolable.
Since unless and until there is evidence of clear and unambiguous benefits to Britain there will be no referendum to place the pound within the euro, we are entitled to question the whole tempo of our continuing party political debate. The politicians may fix timetables for party political reasons but the referendum pledge surely makes this a fairly pointless exercise. Tlmetables add to the impression that the UK is not waiting and seeing but waiting to join. A timetable implies a decision when it expires and tends to fuel the argument that it is inevitable that we join the single currency. What the public needs at present is information. The issue may or may not go to a referendum. Making the debate emotive, particularly if it descends to propagating chauvinistic, little England sentiments will not help. It was very important that William Hague in his speech to the CBI in November 1997 did not take a position which was anti the European Union.
What the majority of us who are outside party politics are entitled to ask is that our politicians cool their party debate on the single currency and make it clear beyond peradventure that we will be able to judge the euro separately from the party political atmosphere of a General Election. We can also make it clear to them that if they manage our own economy and our own currency successfully that is bound to influence our judgement on the arguments they put for or against the euro. Maintaining the undoubted economic progress that we have made since we were rumbled in 1992 for treating the ERM as a fixed, rather than a flexible, system for managing currencies is the big economic question. At present we are saying no to joining the euro confidently with Denmark while both countries easily qualify to join on the Masstricht economic criteria and both are doing well economically. We should be very wary of ever joining on the back of a weak economy.
There are many other reasons why the UK should not be rushed into joining the single currency by arbitrary timetables, not least some of the interesting constitutional innovations that are now underway in the UK. The new system of Bank of England independence will have been only partially tested by 2003. It may be impossible for some time to demonstrate whether the pound, independently managed within the UK, holds its own better within a global economy than in the past. There are also the important constitutional reforms within the UK, which I support, but which need time to bed down before we consider fundamental changes in the powers of our own state. The Scottish Parliament will only sit for the first time in 2000. Scottish Ministers will be attending EU meetings as part of the UK delegation. We will have a Welsh Parliament and hopefully by then one in Northern Ireland as well. We need to live under the European Convention of Human Rights being made justicable in the UK and experience the Freedom of Information legislation let alone perhaps reform of the electoral system for the House of Commons and reform of the House of Lords.
Already the City of London copes well despite intense competition in attracting global business from Frankfurt or Paris but they are likely to make changes to improve their competitive position in relation to the euro and this will take time to take effect. The Treasury believes that the benefits of new opportunities from a single currency could be easier to tap from within the Euro zone. There is, however, a respected element within the City of London that takes the view that the City will lose more than it can gain by being part of a single currency.
Prudence would dictate first seeing how countries whose economies are not converging with the majority within the euro weather an economic downturn without the capacity to devalue their currency, or to alter their interest rates.
Also how such countries ease rising unemployment without the migration possibilities to other EU countries that for example a worker in the US East Coast rust belt has to enable them to move down South or out West. Also to judge the effect on unemployment of not having the fiscal transfers between the countries of Europe that exists between the prosperous and rich states in the US. Hopefully the British people will insist on this period of waiting and seeing.
Judging that it is not sufficient for those politicians who want to join to mouth bland generalities about political will and the need not to be left behind in Europe. Advocates of the euro need to demonstate concrete benefits instead of telling us we must not miss the train, or fail to catch the bus or the other metaphors aimed at pretending we have no choice.
Not joining the euro is in no way comparable to staying away from the Messina Conference which set up the Common Market in 1956. We are today in the EU, we have helped shape the European Monetary Union. We are entitled to join the single currency after fulfilling the criteria within the Maastricht Treaty.
There cannot be any veto from another EU country on our joining. That is another reason why it is in British interests to uphold a strict interpretation of the Maastricht criteria in May 1998 when the decision on which countries fufil the criteria is made by the EU. There is a suspicion that because our politiclans do not want to fulfil the criteria for a two year transitional period as part of the ERM they do not mind the criteria being fiddled.
Our economy over many decades has had more similarities with the US than with either Germany or France so it is not just a question of coinciding the UK economic cycle with that of the continent. The key is how well we perform economically ourselves. Almost by definition an economically successful Britain will be a more self confident Britain. In that mind frame we can analyse objectively the myriad of changes that we will need to make to our tax, pensions, insurance, mortgage, financial services, trade, employment and inflation policies if we were ever to join the single currency. Each of these sectors needs detailed study and time to adapt were we to join.
The Treasury seems to believe that we can prepare to join and then decide; in reality we will have to decide before we prepare since the costs and disadvantages are far too high to incur before the British people have given their verdict.
We need to watch how other countries behave on other aspects of the EUs political development. In that sense we will be better able to assess the political impact of monetary union and the certainty of our being able to continue to pursue an independent foreign policy. We must have the confidence to wait and see and not be carried away by an illusion that leadership is always about action. Some of the best leaders are those who understand the power of patience
We who are pro Europe but critical of the euro are for the moment in a clear majority in the country. As democrats we accept that this may not last. Given a week is a long time in politics, five years or more is an eternity. Our task as a country is to keep genuinely all our options open on the euro for the years ahead. To recognise and analyse meanwhile potential economic benefits but also potential economic losses, not just the actua1 loss of economic sovereignty but the potential loss of political sovereignty.
The Prime Minister is rightly focused on his personal project to make Britain quite simply the best. As he pursues this objective with an attractive respect for views outside the confines of party politics, he will hopefully understand that while further moves towards EU unity are good for Britain rapid movement towards a single European currency risks demotivating the British people and inhibitng the belief in ourselves and in our country that is so vital to bring out our best. There is a particular role for a Prime Minister in orchestrating the national mood. While being determined to play a full and creative part within the EU he will undoubtedly find himself wanting to display a distinctive British approach which will also be in the best interests of Europe. A particular warning sign was the way President Yeltsin announced a trilateral summit relationship with Germany and France without consultation just after Tony Blairs visit to Moscow.
The lesson is not that Britain as part of the euro would have been given an automatic place the fourth member. The lesson is that we have to establish our own relationship with Russia, to trade more with this vast and potentially rich country and bring our financial services and insurance expertise to Russia and thereby establish a relationship at least as strong as France. We need to focus too on Central Asia and Turkey.
Hopefully the new Labour government in its Defence Review will question defence forces that are designed to be based in Germany. There will be plenty of tank regiments in NATO with Poland and the Czech Republic and Hungary contributing. The UKs role as a permanent member of the Security Council must focus on Rapid Reaction forces, airborne and amphibious with the next generation of maritime VSTOL aircraft from America. We in Britain may have to persuade our electorate to pay a higher price for defence than the average paid by the other EU countries. Tony Blair will hopefully see as clearly as he has done over Iraq that there will be occasions when he will have to define for us a British role and then confidently espouse and practice it even if it means from time to time being in a minority of one in the EU.
We must also not feel too threatened by loose talk that our place in the G7 will be put in jeopardy if we are not part of the single currency. Canada will not easily give up G7 participation. Nor would I be that confident that Germany, France and Italy, when the single currency is operating, will agree to be represented by only one delegation. Russia has only just secured their G8 position. If there is an informal G3 of dollar, yen and euro so be it. We have lived with the reality for some years where the Deutchsmark has given the German Bundesbank a stronger role on international monetary matters than the UK. Nevertheless an independent Governor of the Bank of England operatirng a successful economy with a strong pound will find a welcome in most monetary forums.
The first big decision taken by Tony Blair was to decide that the pound could be better managed by a newly independent Bank of England which will hopefully match the US Federal Reserve Banks record of handling the dollar. This depoliticising of monetary policy in the UK makes it less necessary to be part of a Euro system which will not be as geared to the complexities and sensitivties of the UK economy.
The second big decision was to decide to exercise our Maastricht opt out from the euro. There is a widespread UK consensus on this. We should stay opted out and learn from our experience with the ERM. Instead of a deeply divisive debate in anticipation of a referendum in 2002 we should concentrate on building up our economic strengeh and our political influence.
It will be the generation of people untouched by the Cold War who will swing the choice on Britains future role within the European Union. We who lived through that testing period of deterrence and detente confronting the Soviet Unlon have a duty as far as possible to ensure that the younger generation are able to choose in full possession of all the facts, from a UK that has built a strong economic base and has developed a broad, confident, global outlook.
©January 1998 Lord Owen