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August 16, 2000

Great Britain and the Euro v. Sterling Debate

By

The former French President François Mitterand once said, "France does not know it, but we are at war with America. Yes, a permanent war, a vital war, an economic war, a war without death. The Americans want undivided power over the world." Those aren't really the sentiments of a committed ally but they do reveal a Franco-German perspective that, frankly, led to the creation of the Euro, the single European currency.

The key premise is that at the moment Britain is a natural brake on the process of Europe emerging as a superstate. But if we are absorbed within that superstate, then America will lose a key ally in the battle for free trade, open markets, and transatlantic cooperation.

The danger is real. You may have seen that 70 percent of the British public, in the most recent poll, are opposed to joining the Euro. But the British government has decided in principle to join a very high-priced and dishonest campaign to swing public opinion that has already begun. It involves dire warnings of economic Armageddon if Britain fails to sign up, and we expect the possibility of a referendum on this issue in Britain in less than two years' time.

Business for Sterling is a non-partisan political organization set up by some of Britain's leading businessmen two years ago to argue the business and economic case for remaining outside of the Euro Zone but within the European Union (EU) and the single market. This is the geopolitical solution that most business people and, frankly, most of the public want the UK to arrive at over the question of Europe.

Supporters of the Euro claim the debate is only about the money. There is an extraordinarily deceitful argument in Britain that says that this project has no constitutional implications at all. The government argues that they are simply settled and the real debate is only about economics.

But the project is clearly political, and that has to be understood right from the start. As Dr. Otmar Issing, the Chief Economist of the European Central Bank, has said, there is no example in history of a lasting monetary union that was not linked to a state entity.

Our contention is that Europe's leaders are already using the single currency as a pretext, as the engine, for still deeper integration and, indeed, there are now proposals for an EU constitution with the ultimate goal of building a United States of Europe.

SHALLOW ECONOMIC CASE
But let us for the moment play the British government's game and consider only the economic issues. What is startling about this is how shallow the economic case for Britain's entry into the Euro really is. The principal benefit that is being extolled for our joining now is that we would buy exchange rate stability with the Euro Zone. Well, that is a benefit for the 15 percent of our GDP that is exported to the Euro Zone. The cost, though, is Britain's acceptance of a uniform monetary policy, a single interest rate set by the European Central Bank. If that monetary regime is inappropriate for the British economy, that exchange rate stability is bought at the price of instability for the economy as a whole. Our own Chancellor of the Exchequer, Gordon Brown, has recently made the point that exchange rate stability is not the same as stability of the economy as a whole.

We have had some currency experiments before in Britain, some recent and some very painful indeed. A decade ago, the same evangelists who told us that the only thing that matters in economic management is exchange rate stability drove us into the Exchange Rate Mechanism in Europe. Two years later we crashed out. Interest rates had been held too high for Britain's needs. One hundred thousand businesses--that is a lot in British terms--were bankrupted, unemployment doubled, and one and three-quarter million homes were thrown into negative equity.

However, since we have left the ERM we have actually enjoyed nearly a decade of economic growth and stability. Indeed, a former ambassador to Washington recently suggested that a statue of George Soros should be erected in Parliament Square to honor his role in getting us out of a system that was causing us so much harm.1

The Euro does not have the advantage of an exit route. It is an irrevocable union and it is too soon to tell whether the Euro Zone's one-size-fits-all monetary policy really can suit all. Already there are inflationary pressures in five out of eleven Euro economies, but they are enjoying a long overdue period of economic growth partly fueled by the Euro's devaluation. Times are better in the EU at the moment. The real test of the system will come in the future when times are bad and the danger is that Europe has created a currency before they have created a country.

When problems of unemployment start to rise in the future, there is no system, as there is in the United States, of fiscal transfers set in place to be able to help out those poor regions. But, more importantly, the core Euro Zone economies suffer from high taxation, over-regulation, inflexible labor markets, and high endemic unemployment. Worse, they have bankrupt pension systems. Unlike Britain, they are storing up for themselves serious trouble. In the future, unprecedented tax rises will be necessary in order to pay for pension systems that have not been funded. Dr. Issing himself recently warned that this combination of problems poses an almost lethal threat to monetary union.

Britain, on the other hand, enjoys economic advantages that were chiefly the prize of Margaret Thatcher's liberalizing economic reforms of the 1980s. We have lower taxes than the Euro Zone--a fifth lower in fact. If the pensions problem starts to unfold in the Euro Zone over the next two decades, then that gap will rise to a third. So Britain's taxes will be significantly lower overall than the Euro Zone's.

The burdens we place on our employers are far lower. We have lower unemployment--in fact half the rate in the Euro Zone, where unemployment has frankly risen dismally since 1970.

Over the last decade we have created more jobs than the Euro Zone economies put together. The OECD (Organization for Economic Cooperation and Development) reports that the UK is the least regulated of OECD economies. So the danger to Britain comes not just from the potentially risky adoption of a one-size-fits-all monetary policy, but fundamentally from the integration of our economy with those whose model is entirely different from our own and, frankly, one that is not succeeding in the modern world. EMU means Economic and Monetary Union. This is not just about a currency union. This is about integrating our economy with others.

The Euro Zone's response to the challenge of creating the Euro is to coordinate. It is not to strive for flexibility, it is to harmonize taxes. The agenda for the next European treaty to be signed in Nice, France, at the end of this year includes proposals to eliminate Britain's veto on EU tax measures and the adoption of a Charter of Fundamental Rights that would reinstate at a stroke many of the job-destroying employment protections that Britain swept away so successfully two decades ago.

DIFFERENCE IN PHILOSOPHY
There is a fundamental difference in philosophy between the Anglo-Saxon economic model and the dirigiste continental model. We call a low-tax regime a competitive business environment. They call it unfair tax competition. We point to America's unmatched record of job creation compared with Europe's dismal record of unemployment. They dismiss these jobs as low-paid jobs in what they call the "hamburger economy" and they talk about the importance of social protection.

Despite the rhetoric of liberalization, Euro Zone countries are inclined to eliminate competition from outside as a policy response rather than to reform internally. While they mouth platitudes about the new economy, too many of Europe's leaders long for Wall Street and the Nasdaq to crash to show that Anglo-Saxon "casino economics" really is a failure.

And the danger is that as the Euro Zone countries find it impossible to compete in the global economy they will resort to protectionism. Already trade struggles with the U.S. over bananas and hormone-treated beef illustrate that U.S.-EU tensions are rising. Britain has the most to lose from an isolated, from a fortress Europe. The U.S. invests twice as much in Britain as the Euro Zone does and Britain is the single biggest foreign investor in the U.S.

If we join the Euro, our ability to influence European trade and foreign policy must wane. That influence depends on the leverage that comes from Britain's role as a transatlantic bridge, our relatively superior armed forces, our unique global alliances. It does not come--will not come--from the defeatist attitude of some in Britain who cannot distinguish between consensus and concession.

IMPLICATIONS FOR AMERICA AND BRITAIN
The old Cold War-era policy position that American interests have been furthered by ever deeper Anglo-European integration no longer holds. America now faces the emergence of a European government which does not share the Anglo-American desire for a liberal global trading order, and which is developing a military capability that it hopes will position it to rival America.

America relies on British support whenever it argues in favor of liberalizing global markets. The U.S. and Britain ought to be promoting a global free trade area, not consolidating rival blocs. It is in America's interests surely for Britain to be arguing for radical reform from within the EU but outside of the Euro Zone.

The single currency was conceived in the last century in an age of high tariff barriers that predate the personal computer. Today the Internet revolution has left the Euro behind, superseding many of its claimed benefits such as delivering price transparency and lower transactions costs. It has opened up a world to a new generation of businesses and consumers who buy, sell, and communicate globally. In the new economy we have to decide whether it is more important for Britain to be investing in e-commerce or tills for new coins and bank notes. We have to decide whether we want a modern global perspective or a narrow European one.

U.S. investors in Britain are being told that they should back Euro membership because it will bring exchange rate stability with the Euro Zone. They are not being told that the Euro could destabilize what has been a stable relationship with the dollar. The Euro, as you know, has plunged some 20 percent against the dollar since its debut.

We were told when the Euro was launched that we should join it because it would be a strong currency to rival the dollar. Now Britons are being told that we have to join the Euro because it is weak.

Nor are they being warned about the price of economic union in terms of high taxes, rising employment costs, and more regulation. It is time, we argue, that investors were shown the other side of the coin. It is time they were reminded about Britain's economic advantages, advantages we feel will be lost if we lose our currency and lose our economic control.

Britain has now the lowest inflation in the EU. In fact, we have the lowest inflation and unemployment for two decades. We have enjoyed an economic renaissance. We have taken measures that were hard-fought and which were painful in the 1980s, and our fear is that they are now going to be rolled back.

We actually receive more inward investment in Britain than Germany and France received combined--the lion's share of the EU's inward investment. In spite of these concrete facts, predictions of gloom if we remain excluded from the Euro Zone have been rising.

CONCLUSION
Over the past two decades Britain's real income per head has actually grown faster than Germany's and France's, and even faster than the United States'. As I mentioned, we have secure and funded pensions. We actually have more invested in private pensions than in Germany and France put together.

We therefore have a bright future. But that is a future that we feel is at risk and the Euro is the Rubicon issue. Cross it and we have sold out. We have lost many advantages after fighting so hard to regain our economic success for this new century.

We can't have a special relationship with America if we are willing to cede control of our economy, our defenses, and our foreign policy. We can't be a bridge between North America and Europe if we are subsumed within Europe itself. Britons have so far only heard the Continent's siren voices warning against isolation from Europe. They need to be reminded that their relationship with America matters, too, and America needs to realize that the transatlantic bridge is now in danger of being broken.

Nick Herbert is Chief Executive of Business for Sterling, Britain's leading campaign against joining the Euro Zone. It is supported by some 300 business leaders across Britain.

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