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Martin Wolf in Financial Times 99-06-09 "Britain should join a successful single currency, provided
the economic conditions are met. . . . This is the right course for
the country, to resolve this issue for the British national interest,
the future of our people and their well-being. And it is the national
interest that will always come first."
If someone asked the governor of New York whether it was in the interests of his state to be a member of the US currency union, he would find the question absurd. New York does not have permanent interests distinct from those of the US. Being part of the currency union is a consequence of being American. The prime minister rejects this view of the European monetary union. He does not say that UK membership of the single currency follows from the British people's will to merge within the European Union. He could not say so, because there is no such will. He says, instead, that the question is one of national interest. In his statement to the House of Commons of February 23, Mr Blair elaborated this view by insisting that "if joining a single currency is good for British jobs and British industry, if it enhances British power and British influence, I believe it is right for Britain to overcome [the] constitutional and political arguments and the fears behind them." This raises two fundamental questions. First, what is the balance of advantage in joining Emu, viewed from the standpoint of national interests? Second, is it sensible to limit the consideration of entry in this way? Start with national interest. Over the past two weeks (May 26 and June 2), I have concluded that membership of Emu offers a poor relationship of economic reward to downside risk. It is impossible therefore to make a compelling economic case in favour of entry into a permanent currency union. Much must depend on the impact of membership on "British power" and "British influence". The question is how much additional influence and power membership of Emu would bring. In general, influence can come from competitive pressure or from having a direct say. The UK can, for instance, change labour market policies in Europe by its votes or by its example. In practice, the pressure of success is likely to be more effective than its opinions, however lucidly expressed. Membership of Emu would, in any case, not give the UK much of a say. On the European Central Bank, the UK members would have one (or at most two) votes out of, say, 20 and would, in any case, be enjoined not to act as national representatives. The governor of the Bank of England might enjoy himself on the ECB, but why should any British resident care? The weight of the UK economy in euro-zone aggregate figures for inflation and growth would be less than a sixth. British influence on the monetary policy that affects it would, in short, be obviously far smaller inside than outside. Membership of the committee of euro-zone finance ministers would give the UK a voice in its members' fiscal and exchange-rate policies. But this would merely mitigate the lost domestic autonomy. As for its say on European Union labour market policy, this would be virtually unchanged. Within the group of seven leading industrial countries, an individual member of Emu would have less influence (because it would enjoy less freedom) than if it kept its own currency. In a world of floating exchange rates, the gains to any one country from being able to influence global monetary policy via its say on the euro must be tiny. The conclusion then is that the additional influence and power that would accrue from membership of the euro is very small (and may well be negative). Who, after all, has greater influence upon the world, the prime minister of Canada or the governor of New York? "The former" is the right answer. The calculation of national interest fails to come out in favour of
entry. But is national interest even a sensible way of thinking about
entry? The answer is no. Emu will work only if members accept their
disappearance as sovereign entities, within the EU.
The evidence from history is compelling. Currency unions are neither created nor endure for economic reasons. The theory of "optimal currency areas", over which economists have spilled much ink, is irrelevant. Enduring unions have been national unions: they are born out of an impulse towards political integration and they last so long as that impulse endures. Admittedly, this conclusion can be disputed. David Currie, a professor at the London Business School and a Labour spokesman in the House of Lords, argues that "the euro can and will work without a European government".* *Will Emu lead to a European economic government? David Currie and others, Centre for European Reform, London, 1999; Experience suggests he is wrong. An intriguing recent paper on the history of monetary unions - by Michael Bordo of Rutgers University and Lars Jonung of the University of Stockholm - concludes that "the major driving forces behind the establishment of national monetary unions as well as behind their dissolution are political ones."** **The future of Emu: what does the history of monetary unions tell us? Michael Bordo and Lars Jonung, presented at City University Business School conference on monetary unions, May 1999. Evidently, this judgment can be applied to Emu only if it is more like the 19th century national unifications of the US, Germany and Italy than like the multinational Latin or Scandinavian monetary unions. This can be questioned, since Emu is unique. Yet it looks extremely plausible. Emu has a common central bank; it is irrevocable; and it involves substantial constraints on the exercise of sovereign responsibilities, notably on fiscal policy. Furthermore, political integration is what proponents want. Wim Duisenberg, the president of the ECB, has stated, for example, that "the process of monetary union goes hand in hand ... with political integration and ultimately political union." Similarly, Hans Tietmeyer, the Bundesbank president, has declared that "a European monetary currency will lead to member states transferring sovereignty over financial and wage policies as well as in monetary affairs. It is an illusion to think that states can hold on to their autonomy over taxation policies." The conclusion - that Emu will work only if it is accompanied by deepening political integration and a growing sense of shared identity - seems self-evident. The constituent peoples must see themselves as being as much European as they are German, Italian or French. Only then will it be possible for the union to cope with the stresses that are bound to come. Mr Blair's view of Emu is doubly misleading. He is wrong to believe that a calculation of national interest can decide the question. And he is wrong to believe the notion of a definable national interest is sensible in this case. To join Emu a country must already have decided to abandon a distinct poltical identity. Membership will work only if people embrace a future in which they are as much European as British. The choice over the euro is not so much about their interests, as about who they think they are. |