BRITAIN AND THE SINGLE CURRENCY
Confederation of British Industry
10 th November 1997
Introduction
The Conservative Party and the CBI have often seen eye to eye, but not always.
In 1980 your Director General said he was ready for a bare knuckled fight against Margaret
Thatcher s policies, while other businesses stood by her through thick and thin.
Yet, whatever our differences, we have always been candid friends. We have been
friends because there is so much on which we easily agree: The forthcoming Competition
Bill, the Social Chapter and the new tax on pension funds. Our friendship has been
candid because there is more to being a pro-business party than telling everybody what
they want to hear.
Your companies do business in every corner of the planet. British firms are almost as
likely to be operating in Jakarta, Soeul and Seattle as they are in Birmingham, Newcastle
and Dundee. Like you and your shareholders, I am excited about what the global market
has to offer this country in the new century: Tougher competition, of course, but
enormous opportunities too. India and China alone represent a largely untapped market
of over two billion consumers.
It is not just businesses that are thinking globally. People of my generation regard it as
normal to work or study overseas. Like the young officials who went out to administer
an Empire in the last century, the young men and women of today are going out across
the globe to win contracts and secure investment for British companies.
A Free Enterprise Europe
For your companies, Europe is a vital market — just as Britain is a vital market for
European companies. Conservative Governments have played a crucial role in promoting
a European Union (EU) built on the principle of free trade. It was we who pushed ahead
with the creation of the Single Market, thanks to which British companies now have
direct access to over 370 million consumers.
Lets not have debates about who is pro-or anti-European. We should all be pro-
European: Pro-about a Europe that is flexible, not rigid; that is about diversity not
uniformity; that is outward looking and does not turn itself in to a fortress.
There are today twenty million unemployed people on the continent. European countries
need to tackle head on the unpalatable truth that, unless they cut their social costs and
free up their labour markets, they will be out priced and out performed by the rest of the
world — and, consequently, unacceptable levels of unemployment will persist. Red tape
and regulation are luxuries Europe can no longer afford. The danger for Britain is not that we
will somehow be left behind in Europe; the real danger for us is that Europe could be left behind
by the rest of the world.
So I want to see Britain championing a modern free enterprise Europe. In a world of free
capital flows and newly emerging markets, the mature economies of Europe need to be
flexible in their labour markets, with low taxation and regulation that does not hinder
enterprise.
A Single Currency
A single currency should be low on Europe's list of priorities. Instead, it is fast becoming
its only priority.
A single currency is not a new idea. As far back as 1963, Karl Blessing, the eminent
President of the Bundesbank, had this to say: The final goal of the Commission is a
European Monetary Union A common currency is feasible only if, a part from a
common trade policy, there is also a common finance and budgetary policy, a common
social and wage policy — a common policy all round. In brief, this would only happen if
there was a federal state.
Gordon Brown says that this Labour Government to welcome the principle of a single
currency. He is wrong: Ted Heath's Government accepted the principle of a single
currency when it endorsed what was then called the Werner Plan. The oil crisis blew
apart that plan for a single currency; had it already been implemented, the oil crisis would
have blown apart the single currency itself.
So economic and monetary union is primarily a political idea.
The economic risks for British businesses are not new either. None of us should be starry
eyed about a single currency or simply rest on the argument that, since monetary union
now seems inevitable, Britain has to be part of it. It was that kind of thinking in 1990
that took us into the ERM. Almost everyone was in favour of it: The Conservative
Government, the Labour Party, the press, the City and — I dare say it — the CBI.
We know what happened next: British companies paid the price for our membership of
the ERM with high interest rates, job losses and falling investment. My party paid the
political price for our humiliating exit on Black Wednesday. More importantly, millions
of jobs, repossessed homes and bankrupt small businesses. Getting something like this
wrong is not just and academic error or putting the wrong argument at a conference. It
affects the livelihoods of millions.
I have apologized on behalf of my party for the error we made with the ERM. I never
want to apologise again for following the dictates of fashion..Unlike the ERM,the single currency is for all time.
British business could find itself trapped in a burning building with no exits.
Judging by today s letter in The Times from thirteen of the biggest names in British industry,
I am not alone in thinking this.
British business needs a hard headed assessment of the risks involved in a single currency before
we consider joining it — and that assessment is only just beginning.
Flaws in the argument
Now, I am quite willing to accept that there are arguments for Britain joining a single
currency. After all, there were strong arguments for Britain joining the ERM. A single
currency would put an end to inconvenient currency transaction costs and it would allow
business to compete on more transparent terms.
Other arguments are less convincing. For example, the idea that the City of London
would somehow lose its pre-eminence in Europe's financial markets. The Governor of
the Bank of England has rightly pointed out that there is no reason why the City should
not be the leading dealer in euros and euro dominated securities, even if Britain is not a
member.
Then there is the argument that the single currency will produce lower interest rates
automatically. I would have thought that it is more important to get the right interest rate.
In any case, there is no reason whatsoever why interest rates should not be lower outside
the single currency than init. After all, Switzerland is not even a member of the EU and it
has lower short term interest rates and bond yields than Germany. In or out of EMU,
provided we keep inflation down, we can have low interest rates.
There is no evidence that ending exchange rate fluctuations in Europe would boost
investment and trade. IMF studies have found no correlation at all between exchange
rate volatility and trade and investment levels. One of the most successful free trade
areas in the world is NAFTA. No one is suggesting that the Canadian dollar has to merge
with the US dollar to encourage trade.
The truth is that the supporters of British membership of a single currency tend to fall
back on one central argument that overshadows all others. They say: Its going to
happen and we can't possibly be left out of it. It is the argument used by every lemming
throughout the centuries and it does not bear close scrutiny.
For if Britain is not part of the single currency, it does not mean that we shall no longer
sell socks to Belgium or ball bearings to Spain. We are integral members of the Single
Market and shall remain so in or out of a single currency.
Four years ago, German interest rates were higher than Britain s. Today, short term
interest rates in Britain are higher than in Germany. Our economy is booming and theirs
is not. If we set a single interest rate for Europe now, what would it be? Would it be half
way between the UK and Germany and therefore wrong for both countries?
For a single interest rate to work across the whole of Europe, then all European
economies — including ours — need to be on the same cycle. At the moment, they simply
are not. This leads me on to one of the greatest economic risks of all: That we join a
single currency without convergence between the British and continental economies.
The Lack of Convergence
Such convergence is not happening. The British and German business cycles, if
anything, are diverging. If convergence has not happened after twenty five years in the
EU, it is unlikely to happen in the next four years. Sustained convergence is not some
theoretical concept that only economic professors need worry about. It goes to the heart
of whether a single currency can work. If we get it wrong, businesses will pay a harsh
price.
It is possible, of course, that at some point in the future interest rates and growth rates in
Britain will be similar to those in continental economies. For that moment the British
and German economies will appear to have converged. The danger is that the Chancellor
will then release the shutter, take his snapshot and declare that sustained convergence has
taken place — but will it ? Our economies could be heading in totally different directions
and simply will have met at a crossroads.
We cannot ignore the fundamental differences in the structure of the British economy
compared to the other European economies. It is a fact that we do a much higher
proportion of our trade with non-EU countries. It is a fact that we have a much larger
equity market than France or Germany and that our financial services industry accounts
for a huge sector of our economy. It is a fact that we have more homeowners in Britain
who are more sharply affected by changes in interest rates.
It is a fact that pension provision in Britain is largely funded and on the continent it is
not. It is a fact that we are unique in Europe in being a net exporter of oil and gas. It is a
fact that our labour market is far less rigid than other European labour markets. We all
know that our tax rates are much lower than the rest of Europe s — or at least they are
now.
Given these facts, what are the chances that we shall converge in the near future? What
are the chances we shall converge forever, without ever diverging again? Would it be
wise to run our economy so as to make it converge rather than prosper in its own right?
What happens to a single currency when it suffers what economists call external
shocks? This could be anything from a natural disaster to a war or some unseen political
event like the reunification of Germany. Some external shocks will affect all
economies in Europe in the same way; others will affect them in different ways.
A dramatic rise in the price of oil would affect Britain (as an oil exporter)in a totally
different way from France,Italy or Germany (all of whom are major oil importers).
No one can tell you what the next external shock to hit this country might be. All they
can tell you is that there is going to be one.
Monetary Policy and Floating Exchange Rates
Changes in interest rates and exchange rates are powerful economic instruments.The
value of the floating exchange rate should not be underestimated. Changes in the value
of currencies upwards as well as downwards are important safety valves for economies.
When a country is in recession, a downward movement of its exchange rate may help
recovery. Equally, when an economy is booming, as in Britain, an appreciation of the
exchange rate — painful though it is to exporters — can help prevent overheating and
inflation.
As one very recent study put it: The loss of domestic monetary policy and lack of
exchange rate freedom could make the UK cycle more volatile. That study was by the
Treasury itself.
Targeting the exchange rate means prices and labour costs must be able to go down as
well as up. To begin with, it looks easy: The stockmarket booms; property companies
make a fortune; the high street is packed. However, the government cannot raise interest
rates to stop the boom overheating. So the boom has to be followed by a salvage
deflation to get prices back to line.
It is tough being on a fixed exchange rate: Booms are bigger; busts are deeper. It is
exactly what is happening in Hong Kong today. It is even tougher when you cannot
control your own interest rates. It means not just refraining from having a pay increase
every year. It might mean your members asking their employees to take a cut in wages.
Wages have not fallen since the Great Depression. Before the CBI shakes hands with the
TUC on a single currency, you should fix them in the eye and ask them if they are
prepared to tell their members that they might have to accept a pay cut.
Supporters of the single currency dismiss all these economic risks by pointing out the
success of the United States. Wyoming, Missouri and California all have very different
economies yet all do well under a single currency and a single monetary policy.
However, this is made to work well in the United States only because two crucial
conditions are satisfied — neither of which apply to European economies.
First, there is a very high degree of labour mobility in America. An unemployed worker
in New Jersey can look ready for jobs in Texas, where he may have friends or relatives
and where his pension and social security entitlements can travel with him. Europe does
not have such a high degree of labour flexibility, despite the absence of legal restrictions.
People are understandably very reluctant to move to a new country, with a different
culture, a different language and a different pension system. We have a long way to go
before we can say to people: Get on your hovercraft and look for work.
So long as Europe is without a true single labour market, a single currency will create
vicious unemployment blackspots across the continent. The Untied States is a country
and Europe is not.
Second, the Federal Government in the United States automatically transfers billions of
dollars from the more prosperous parts of the country through federal taxation and federal
expenditure. This kind of redistribution of resources to help weaker regions is essential
for a single currency to work effectively. Many European politicians openly talk of a
much larger budget and the need for fiscal union as well as monetary union. In other
words, your companies would have to pay higher taxes so that poorer countries can be
protected from the effects of a single currency.
Gordon Brown says this will not happen; others disagree. As the current president of the
Bundesbank said recently: A European currency will lead to member nations transferring
their sovereignty over financial and wage policy as well as in monetary affairs. It is an
illusion to think that states can hold on to their autonomy over taxation policies.
Is Britain ready to join something which could easily lead to us handing over our powers
to raise our own taxes and spend our own money? What implications would it have for
British businesses? Corporation tax in this country stands at just 31 per cent (compared to
45 per cent in Germany). The Commission already calls this harmful tax competition .
Would you be able to compete as effectively in the world markets if saddled with
European business tax levels?
What about European employment laws and social costs? That is one area we do not
want to converge. The idea that the imposition of political institutions and bureaucratic
rules is necessary to make Europe a place where businesses can work is an idea whose
time has passed.
Conclusion
Nevertheless, a single currency is going to happen for some countries and everyone must
prepare for that. The political decision has been taken. Just because something does not
work does not mean it is not going to happen. Yet I cannot accept the idea that by not
joining now we are somehow missing out or being left behind .
A strength of a country comes primarily from within itself. It cannot be imposed from
outside. If a country has sound education, low taxes, a spirit of enterprise and a work
ethic then its economy will succeed and its currency will be a strong one. If it does not
have these things, then no amount of fudging or merging with other currencies will save
it from the consequences.
I know that some businesses favour Britain's early entry in to a single currency, but I also
know that many others share my deep concerns about the whole project. If the nightmare
of our experience in the ERM teaches us anything, it is not to steer by the siren voices of
a supposed consensus but to exercise the independent judgement of a cool head.
I believe that a single currency carries with it fundamental economic and political risks.
For this reason the Conservative Party believes it is a mistake to commit this country in
principle to joining a single currency. We oppose Britain joining a single currency
during the lifetime of this Parliament and we intend to campaign against British
membership of the single currency at the next election — subject, like all our major
policies, to the approval of rank and file Conservative members nearer the time.
It is a clear and unambiguous position. It is also a pragmatic position based on what we
believe to be in the vital interests of British companies and the British people.
In so many ways in recent years, the British Governments and British businesses have
shown Europe the way. We do not have to be afraid of the future. Let us have the
confidence to make the most of Europe without having to accept uncritically every idea
labeled European .
A single currency is too important an issue to be decided by political fashions. Nor
should we join just because other countries are going to. We should look at the merits of
a single currency in the same sober way in which you would take a decsion that could
jeopardize the future of your company.
Together, in the years that lie ahead, let us do just that.
AURECON
VERMÖGENSBERATUNGSGESELLSCHAFT MBH
Firmensitz Gauting - Handelsregister München HRB 40415 - Geschäftsführer: Peter Odendahl
Gründungsjahr: 1968
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