How to decide - part 1It's as important a decision as it is difficult. Tony Blair promised that if he won the 2001 election he would decide within two years whether to have a referendum. The president of the European Commission, Romano Prodi, raised the stakes, coming to Britain to tell us we will lose out if we don't join in. We are, quite simply, being asked to decide whether to get rid of the pound and join Europe's new single currency, the euro. It will probably be the most important economic and political decision Britain will have to make in the first half of the twenty-first century. It won't just affect the economy and businesses, but everyone old enough to have pocket money. Yet survey after survey has shown that most British people feel too ill-informed to make an educated decision. This is in sharp contrast to Denmark, where citizens generally felt very well informed about it before rejecting it narrowly in a referendum. A Referendum Street programme on BBC1 showed just how big an effect hearing the different arguments about the euro has on people's attitudes to it. The danger is that in Britain we make the wrong decision for the wrong reasons and regret it later at great cost. It could lead to greater prosperity, lower inflation, more jobs and greater national influence. Or it could lead to higher unemployment, failing businesses and a loss of national sovereignty. It is a debate of daunting complexity, with powerful arguments both for and against joining. To help readers make up their own minds, The Observer published extracts from a new book, The Euro - Should Britain Join: Yes or No? Written by Anthony Browne, who covered the launch of the euro for The Observer, it sets out for the first time answers to all the most common questions, giving both the pro-euro and anti-euro arguments. The book covers the effects not just on business, the economy and our sovereignty, but on personal finances, mortgages, pensions, house prices and the cost of holidays. Here are edited answers to some of the questions that are dominating the current political debate. THE ECONOMY The single currency - the merging of national currencies - is most obviously an economic project. It directly affects our exchange rate and interest rates and, indirectly, jobs, trade, investment and economic growth. It is in this realm that the intellectual battle for and against the euro is fought out most intensely in the UK. Since Britain's economic cycle has historically been out of phase with those in mainland Europe, the economic issues are particularly thorny for us. In contrast, the economies of Belgium, the Netherlands and Austria were already so closely tied to that of Germany that the economic issues arising from uniting the currency as well were less significant.
Do we really want the same interest rates as the rest of Europe? No The main danger of the euro is the 'one-size-fits-all' interest rate, imposed across the continent from Ireland to Austria, Portugal to Finland, by the European Central Bank in Frankfurt. If our economy is ever out of step with Euroland, that interest rate will be wrong for us and we will return to a boom and bust scenario. For example, if Germany and France are booming while we are in recession, the high interest rates needed to stop them overheating will deepen our economic plight. Because the British economy is so out of step with those of mainland Europe, we will suffer particularly badly. This has already happened to Ireland. It overheated and had an explosive property market because it had low German-level interest rates in the middle of an economic boom. Joining the euro may mean greater stability for our currency, but it will replace it with interest rates that are inappropriate for the state of the economy. Yes The world's most successful economy - with about the same population as Euroland - has just one interest rate, set in Washington. In the US, they positively thrive with the same interest rate set stretching from Hawaii to Florida, Alaska to Texas. When California is booming and Tennessee's in recession, for example, they manage to cope with one currency and one interest rate. Britain can have an independent interest rate only if we also have a currency that is free to fluctuate - and the volatility of the pound causes great economic problems. No but The US thrives with one interest rate only because in the US people move far more easily to look for work, and because they have huge financial transfers from rich to poor areas. When Tennessee is in recession, it doesn't suffer permanent high unemployment because huge numbers of workers will move to booming California in search of work. The different cultures and languages mean it is simply unrealistic to think unemployed Portuguese will move to Finland for work, or that people from Newcastle will move to Milan. At the same time, the increased taxes paid in booming California would be used to prop up ailing Tennessee through huge federal transfers, which we don't have between countries in Europe. If we suffer recession while Germany is booming, we will be lumbered with high interest rates, no financial lifeboat, and our workers wouldn't be able to move to Germany to find work, because they don't speak German. Yes, but More labour mobility would definitely be an advantage, but people in Europe don't even move around within countries in search of work - for example southern Italians are reluctant go to work in the north of the country - and we have learnt to cope with the consequences through such things as regional development funds. The government can always fine-tune the economy by altering tax and spending.
Isn't our economy out of step with Europe? Yes There have been several occasions in the past 30 years where Britain has been in recession when Europe is booming, and vice versa. Our economy is out of step with that of mainland Europe partly because we have much closer ties with North America than they do. More than half our trade goes outside Euroland, and most of our trade is done in dollars. Over the past three economic cycles, the British economy has moved more closely in line with that of the US than with Europe's. Evidence of this is that since the pound fell out of the exchange-rate mechanism in 1992, it has remained relatively stable against the dollar, but very volatile against European currencies. In contrast, countries on the European mainland do a higher proportion of trade with each other, and their economies are far more integrated. No Britain's economy has been converging with that of mainland Europe since the late Nineties. The proportion of our trade with Europe has been growing since the creation of the single market in 1992. The UK and other European countries with high government budget deficits have managed to get them under control, so that all EU governments are now living within their means. The independence of the Bank of England has helped defeat our inflationary habit, and brought interest rates down towards European levels. Most analysts now say that our economy is the closest it has been to Europe's for more than 30 years. What is more, once we join the euro, we are very unlikely then to get out of step, because enhanced trade and investment will tie us even closer.
Will joining solve the problem of the volatile pound? Yes Obviously, if we joined the euro, we would have the same currency as our main trading partners - in the Eurozone - and the problem of a pound that bounces up and down would be ended at a stroke. It would help create certainty for exporters and importers, who have been ravaged by the unpredictability of our currency. Britain is very vulnerable to these currency movements because we are a medium-sized economy heavily dependent on imports and exports. If we stay outside the euro, the pound will remain torn between the euro and the dollar, strongly connected to both but not protected by either. The pound would be torn apart like a child trying to hold on to both its parents while they walk in different directions. No Half of our trade and two-thirds of our investment are with the rest of the world outside Euroland. Most of our exports are traded in dollars. This is why the pound has been relatively stable against the dollar. However, the euro has been very volatile against the dollar, so locking the pound to the euro would actually mean more currency instability for the majority of our exporters, not less. In any case, a floating exchange rate is one of the economic safety valves - along with public spending and interest rates - that can help it to adjust in the global economy. Having an independent exchange rate allows us to compensate for differences in inflation and productivity, and can help boost our economy if we end up in recession.
Will joining the euro boost trade? Yes By joining the euro we will be joining the largest single market in the world outside the US. This will enable businesses to sell more widely, achieving greater economies of scale. It will also enable families and businesses to buy from a wider, and so cheaper, range of suppliers. Both of these will boost trade and increase our prosperity. Having a stable exchange rate with our biggest trading partner - Euroland - will eliminate uncertainties and so boost trade further. No Most trade barriers were abolished with the creation of the European single market in 1992, and having the same currency will make little extra difference. Businesses can already buy from suppliers in different countries, and exchange costs are marginal. We have access to the market, but we avoid the disadvantages of inappropriate interest rates that come with being part of it. In any case, the trade that we pay for in dollars will suffer if we join the euro, because the euro is so volatile against the dollar.
Will the euro push up inflation? Yes In recent years, the Bank of England has proved very successful at controlling inflation. Britain is no longer the high-inflation capital of Europe, but has inflation at a similarly low level to Germany and France. However, if we join the euro we will be forced to use European interest rates, which have generally been much lower than British ones, inevitably leading to an inflationary boom. No There will be long-term downward forces on prices that are far more powerful than the effect of low interest rates. More trade and stronger competition will keep prices in check. One of the most important influences will be 'price transparency'. With goods in the same currency here as the rest of Euroland, it will be far easier to directly compare prices. When shoppers in 'rip-off Britain' can so easily see they are being charged more, they will become far more demanding about getting the same low prices as mainland Europe. The creation of an enormous single market the size of the US will lead to economies of scale in production that will bring prices down still further. High levels of competition, price transparency and increased trade will force expensive companies to bring prices down to the lowest level.
Isn't the British economy thriving outside the euro? Yes It is the world's fourth-largest economy, in the best condition it has been in for generations. Britain's flexible labour market and low taxation helped push unemployment and inflation to the lowest level for a generation. After the boom and bust of the Seventies, Eighties and early Nineties, we at last have long-term economic stability. Joining the euro will be a profound shock to the economy, which will threaten all we have achieved. As a low-tax, flexible economy off the coast of mainland Europe, we are proving increasingly attractive to foreign investors. Staying out will give us the best of both worlds. We are in the single market, but outside the euro. No Britain has done very well before the creation of the euro, but the world has moved on. The single currency - and the world's second-largest single market - is now a fact of life, it's on our doorstep, and we're not part of it. We may be the world's fourth-largest economy, but we are now dwarfed by a neighbour that is rapidly reorganising itself and becoming more competitive. The ground rules have changed. The impact of our exclusion was muted in the first couple of years by the Labour government's hints that we would join soon, encouraging foreign investors to hold firm.
BUSINESS Joining the euro will affect everyone, but businesses will be in the front line. Importers and exporters will be greatly affected by the merging of our currency with Europe's. All businesses will have to make changes, from the accounts department to the tills, and will be indirectly affected by the changes in interest rates. It is for this reason that groups such as the Confederation of British Industry, the Institute of Directors, and the Trades Union Congress have such a vested interest in the debate.
Will foreign investors be put off and jobs be lost if we stay out? Yes Staying out will lead to the loss of thousands of jobs as foreign investors stay away and British businesses become relatively uncompetitive compared with their Euroland rivals. Without access to the single currency zone, foreign investors who are here will move out, closing factories and businesses; new ones will set up in Euroland in preference to the UK. Many multinationals have warned Tony Blair they will invest elsewhere unless he gives a commitment to join the euro. The huge economies of scale of the vast single market of Euroland will enable them to produce more goods at lower prices, undercutting British companies at home and abroad. As British companies lose out, so will their workers. No Joining the euro would damage the British economy - with one-size-fits-all interest rates - and destroy jobs. It is being part of the European Union single market rather than the euro that ensures trade and employment. The evidence speaks for itself. Britain's unemployment carried on falling, and foreign investment rose to record levels, after the launch of the euro. In the Nineties, Britain has created more jobs than all the other Euroland countries put together. Two years after the launch of the euro, Euroland has unemployment about twice as high as the UK, which is enjoying its lowest unemployment for a quarter of a century.
Won't converting to the euro be very expensive for shops and other businesses? Yes Cashpoints, tills and vending machines will all have to be changed or simply bought anew. Accounting systems will have to be switched, and staff will have to be trained. The British Retail Consortium estimates that it would cost shops £3.5 billion, and amount to almost 3 per cent of turnover for small shops. The Federation of Small Businesses reckons that for most of its members, conversion will cost up to £5,000 - a substantial sum for a small company. No It is a one-off cost that will not be repeated. Much of the cost will just be a case of bringing forward an investment (changing to the next-generation cashpoint earlier) rather than a whole new cost. In any case, much of British business is having to convert its operations to the euro even if Britain stays out. Many exporters are now having to price their goods in euros rather than pounds when they pitch for sales in Euroland.
Will the City of London lose its position as Europe's financial centre if we stay out? Yes The European Central Bank - the second most powerful in the world - had a natural home in London, but ended up in Frankfurt because of our indecision over the euro. This success reinvigorated Germany's bid to ensure that Frankfurt becomes Europe's financial centre, with a massive office-building programme to rival that going on in London's Docklands. Both Frankfurt and Paris are open about trying to stimulate the virtuous circle of success that has taken London to pre-eminence, and their determination would undoubtedly increase if it became clear that Britain's absence from the euro was to be permanent. No This scare-mongering - prevalent at the time of the euro's launch - has simply not been borne out by events, which show that the launch of the euro has actually consolidated London's number-one position. Lord Levene, the Lord Mayor of London at the launch of the euro, used to warn about the threat to London, but the evidence was so overwhelming that he quickly changed tune. Indeed, London's rivals have suffered a bloody nose because the centralising effect of the single currency means that what were effectively regional financial centres - such as Paris - lost any reason for their existence, and saw all the European business drain away to Europe's real financial centre, London.
|