Not a Euro-Sceptic

My theme might give the impression that I have joined the eurosceptics. I have not.

As anything that can be misunderstood will be misunderstood, may I add that, although I do not either expect or favour an early referendum, nevertheless if there were one I should vote in favour of the UK joining the euro. This would be mainly out of political instinct. Which is quite reasonable when most of the economic and other rational arguments cancel each other out.

I have no hang-ups over national sovereignty. To me a government exists to provide those services which are best provided collectively rather than through markets or voluntary cooperation.

The unit of government is to be judged by the effects on individual people. If their happiness is best promoted by pushing upwards some functions of national government towards a European or wider international group, so be it. It may also be the case that other functions now performed by national government could be better performed at a regional or local other lower level. So be it as well.

In examining the effects on individual well being it is quite legitimate to take into account feelings that people have for tradition or patches of territory, whether these be Scotland, Great Britain, Cornwall or some kind of European idealism.

There is one area in which the British government is obstinately and unnecessarily creating divisions and hostilities in the inter-governmental conference taking place this year, whose results are supposed to be endorsed in the December summit.

In my view it is quite wrong to reject out of hand the proposal of the European Commission to make it easier for a group of member countries to go ahead with a project even though others prefer to remain outside. (Flexibility). Britain benefited from a similar provision in the case of the Single Currency. Moreover it is the only basis of such variable geometry that a larger European Union of up to 25 or 30 countries can ever be constructed.

The British government is being too heavily influenced by the Foreign Office fantasy that if the EU goes ahead in some spheres without Britain then the British prime minister will not be sitting at some imaginary top table.

The Euro Lobby Spin-Doctoring

My main theme however, is that unit of government represented by the European Union -- which should more accurately be called the European Confederation - and its supporters are not performing impressively. Let me give a few examples out of very many.

First there is the reluctance and procrastination with which the former Communist countries of central and eastern Europe are being treated in their application to join the EU. It is eleven years since the Iron Curtain fell; and still membership is many years away, even for the most favoured candidates.

Then there is the hypocritical and self-satisfied way in which the governments of the EU have reacted -- for once in concert -- to the entry of the Haider party into the Austrian government. It is nauseating on several levels. It is an unwarranted interference in the internal affairs of a member country. It is surely elementary fairness to hold back on intervention until if and when there is specific evidence that the new Austrian coalition is violating human rights.

I very happy to make the comparison with 1933. The time to have taken international action was not when Von Papen advised President Hindenburg to invite Hitler into the government in 1933, but when Hitler began tearing apart international treaties and embarked on his anti-Jewish measures. Many commentators have pointed out why Austria is unlikely to follow a similar line; and that the main effect of condemning the country in advance is to increase Haider's influence.

Recent actions have also been hypocritical because several European governments, in particular the French and Italian ones, have at times contained unrepentant Stalinist communists, who do not even make the show of disowning their spiritual forebears in the way that Haider feels impelled to do from time to time.

Moreover one cannot help noticing that, in this as in so much else, people regarded as linked with Nazism are treated much more harshly than those linked with Stalinist or Maoist Communism -- even though the latest evidence suggests that Communist varieties of totalitarianism are responsible for the deaths of even more people.

Indeed the whole spectacle looks very much like a group of left and centre politicians scratching each others backs for comfort and titivation. They cannot agree on anything constructive. So let them denounce once more the so-called extreme right. But having said this I cannot help remembering that Mr Fini, who formerly led a neo-Fascist party, was in a recent Italian government. Maybe too more indulgence is shown towards Latin countries than those with a Germanic background.

But what I personally find most offensive is that while Austria is being ostracised for fear of what its government might do, Turkey which has a long and recent record of violating human rights has been promoted to being an official candidate for EU membership..

Next there is the shabby way in which the European Union countries have formed a common front to back a joint candidate for the directorship of the International Monetary Fund (Koch-Weser). Almost no-one believes that he is the best, or even a particularly good, candidate. He just happens to have the support of the German chancellor; and the EU countries have decided that it is Germanys turn now. If this is what acting together means, it would be better if we went back to the old so-called anarchy in which each EU member felt free to lobby for its own preferred candidate.

Disaster has only been prevented because the United States Treasury, despite all urging, has put its foot down and said that it will not have Koch-Weser at any price. The US does not quite have a blocking vote; but there is now a chance of someone better being considered. Once again, as in the far more important case of former Yugoslavia, the US has had to step in to save the European Union from its own laziness and cowardice.

Then again, moving to a much lower level of discourse, I cannot help regarding with amused contempt the way in which some British supporters of the European single currency are seizing every disreputable argument to influence opinion. Instead of making the case for the euro openly, the Prime Minister and those who follow him in all parties, have chosen to pretend that the issue is whether the UK should stay in the European Union.

Of course there are some Conservatives who would like to leave; and others who would not mind if we did. The recent tactics of Britain in Europe can only increase their influence. There is nearly always a modicum of truth or half-truth behind most smears. Which is no reason for ignoring the more rational arguments that many of the euros opponents put forward.

A pathetic example of some europhil tactics occurred recently when the National Institute of Economic and Social Research undertook a report for Britain in Europe. This stated that British trade with the rest of the European Union accounts directly for 2.7m jobs and a further 0.5m indirectly via firms that export intensively to the EU. To the fury of the National Institute a distorted version was leaked to the Daily Express on February 18 which stated that up to 8m people could lose their jobs if Britain pulls out of the European Union.

Not merely did the NIESR report not say that 3.2m jobs - let alone 8m. - jobs would be lost. No long run effect at all was expected on employment levels; and even for the first two or three years the temporary job loss was put at 50,000, with an appropriate response from monetary policy ,and 175,000 without such a response.

Whether the misrepresentation was due to stupidity or unscrupulousness I do not know. Indeed, it is more worrying if it was due to stupidity. For this suggests that the campaigners for Britain in Europe do not understand the difference between jobs being related to a market within a particular institutional arrangement, and all the jobs being lost if a country leaves that arrangement.

Yet another example of careless or unscrupulous propaganda by the pro-Euro lobby is the attempt to plant stories about Japanese firms reconsidering their plans to invest in the UK if they cannot foresee a date for Euro membership. One of these stories, at least, seems to be based on a second or third hand account of a meeting that the Prime Minister had at the World Economic Forum in Davos. According to other accounts, it seems that the main concern of the Japanese industrialists involved was not British membership of the Euro zone, but the high level of sterling, which was making Britain a less attractive location or base from which to export.

Effects of Joining the Euro

At this stage I am going to change gear and come closer to what is supposed to be my professional last and speak more technically about the difficulties of Britain joining the euro at all quickly. So those of you who are mainly interested in the politics might want to go to your lunch now, as a little bit of economics is required to explain the case for delaying the euro issue.

The general effects British membership of the euro include the following:-

• There will be greater transparency in price comparisons with other members of the European Union. This will make it easier for consumers to choose and for producers to compete. There is a great deal of uncertainty about how much this effect is worth. Even the Brussels Commission cannot attribute to it more than a fraction of a percent on the level - not the rate of growth - of GDP.

  Indeed Britain has already gained much of the transparency benefit. Some 11 EU countries have already abolished exchange rate changes; and, irrespective of what Britain does, another three might well join them. Thus, in making price comparisons, British businessmen and consumers no longer have to look at 11 bilateral exchange rates -- and goodness knows how many cross rates. Buying and selling in Europe is now much more like buying and selling in the United States where there is a single dollar. In that respect the UK is already a free rider on the efforts of others.

  Moreover -- although I am not a fan of IT, which adds to the complications of life -- I must admit that the internet, in conjunction with the Single Market, will probably do more for transparency than the single currency will.
  
  

• A more important effect of joining the single currency is that it would eliminate unpredictability and volatility between sterling and the euro. The exchange rate will in fact have been abolished. There is no agreement among economic model makers whether this will be at the expense of greater volatility towards the dollar and other parts of the world; nor how much this would matter. Those economists who look at visible trade regard British exchanges with Europe as being the most important. Those who pay a lot of attention to invisibles and capital flows pay more attention to the US, Japan and the rest of the world.

  The great gain will be the end of the switchback fluctuations of sterling, originally against the DM, and now against the euro -- which infuriate exporters so much and make their lives so difficult. The other side of the coin is that the UK will have to accept a one size fits all monetary policy. A rate chosen to fit average conditions in the whole euro zone is unlikely to fit any single member country, especially one that is on the periphery rather than in the Franco-German core.

  This has two different aspects. The average level of nominal interest rates could be too high or too low for several years at a time. Even if it is not, the year-to-year movement of rates may be very different from what an independent Bank of England might have chosen.

  To take an example: once it had left the Exchange Rate Mechanism, Britain was able to lower interest rates to well below the core European average, as it was emerging from the nasty recession of the early 1990s. More recently British interest rates have been higher than Continental ones because the MPC of the Bank of England believed that inflationary pressures were greater here.

  The Bank of England governor, Eddie George, and many of his colleagues, have already had a hard time in their visits to manufacturing centres in Scotland and the north, where they have been accused of holding back growth in the rest of the country because of inflationary pressures in the South East. Imagine how much this criticism will be magnified when the decisions are those of the European Central Bank. The ECB would have to say, not merely that it cannot tailor monetary policy to the needs of a particular region, but even to a particular country. And it will not help that most of the people saying it will not have names like George and King but more like Duisenberg and Trichet.

  While there is some tendency on the Continent -- perhaps a hangover from the gold standard period -- to treat monetary events as bolts from heaven about which domestic politicians can do rather little, there is no such toleration among the British public.

Effects on Jobs

A think tank has kindly asked for my view among the sample of opinions which it is canvassing. In particular, how much difference will all these effects make to jobs? Perhaps not as much as people think. I am happy to agree with the prevailing view among central banks that there is no long-term tradeoff (ie choice) between inflation and unemployment.

The conventional wisdom is that the underlying rate of unemployment is determined mainly by Supply Side policies. What on earth does this mean? Third Way governments like to talk rather vaguely about flexibility and removing rigidities. That is to avoid offending their hard core left wing supporters. One must add though that many Christian Democrat politicians also talk a similar language.

In fact there are many kinds of flexibility that are desirable in themselves but are more likely to have an unfavourable immediate impact on jobs. Suppose that Europe were really to liberalise telecommunications, air, rail and road transport. The impact would surely be a jobs shake-out. Indeed that would be the idea.

The big question is whether workers losing their jobs as a result of this restructuring would be able easily to find fresh jobs. This depends in the short run on monetary policies not being too restrictive, but in the longer run on the functioning of labour markets. In other words labour costs should be more closely related to market conditions. In some cases -- e.g. science teachers or scarce technologists -- they should be higher; but in many other cases they would need to be lower.

The political cliché is to talk about non-wage labour costs; but why non-wage? It is quite true that high unemployment in the core countries such as Germany, France and Italy is not associated with excessive pay levels, if allowance is made for productivity. The adverse differential compared with the UK, Ireland -- and the Netherlands, which has reformed its corporatist model -- comes from high social security levies paid by both employers and employees to finance welfare state activities.

But supposing that these add-ons to the wage bill could be slashed? Then either welfare state payments would have to be cut appropriately or other taxes bearing directly on income, or on indirect taxes on goods in the shops,, would have to be raised. In practice it would be a mixture of both.

These reforms would only help to get labour costs down if workers and their representatives accepted a cut in what used to be called the social wage and did not succeed in offsetting it by higher take-home pay. This is a big question, especially in continental countries where collective bargaining is still quite central.

Wage fixing in France and Germany is almost certainly becoming more market-driven and this is helping to reduce the underlying rate of unemployment. The improvement is not the result of deliberate government policies, still less of anything that is likely to be agreed at the Lisbon talking shop of heads of government on which Tony Blair sets so much store.

It is because of the spread of devices such as temporary, part time and fixed-term job contracts. These are ways in which employers are trying to find a way round official labour market institutions, which are pricing workers out of jobs. Moreover these devices are very much a second best. For instance we do not know how many of the workers who have been priced into part-time jobs have preferred full time employment at below union rates if given the choice.

How do these considerations relate, or not relate, to the euro? I would put the emphasis on not relate. Labour market policies are the province of individual countries. The EU tries to interfere by stupid rules which raise costs, such as the Working Time Directive. They have nothing to do with the single currency. The headline for these activities is the Social Charter; but in the case I have mentioned they have been smuggled in by Health and Safety directives.

It may be said that the Labour government has accepted Social Charter type policies because it wants to show that it is more friendly to the EU than the Conservatives. I doubt that this is the reason at all. Parties can no more shed all their traditions than snakes can shed their skins. A Labour government of any kind, whether or not it wanted to join the euro, would find it extremely difficult to stay outside the Social Charter, even assuming that its key members wanted to do so.

Avoiding Churchill’s Mistake

So far the implication has been that the effects on employment is about half a dozen of one and six of the other; and that membership or non-membership of the euro is far from decisive.

But there is one exception. There would be an adverse effect on jobs if the UK joined the euro at an excessively high exchange rate. If a businessman were to say to me that he does not know what an excessively high rate is -- any more than he can define an elephant -- but he knows it when he sees it, I would agree; and I would accept that the recent level of sterling at well above the equivalent of DM3 to the pound is excessive.

Is there any reason why sterling should join at the market rate? If sterling is being abolished rather than being put into an exchange rate arrangement, surely the entry rate can be decided politically? It would be more like the fixing of the fixing of the conversion rate of East Marks into Deutschmarks in 1990 rather than entering the ERM.

Nevertheless my friends in the official world are very reluctant to contemplate an entry rate too far removed from the one prevailing in the market. This is mainly a gut instinct, but gut instincts are not always wrong.

Moreover it cannot be sufficiently emphasised that a British entry rate would have to be negotiated. It cannot just be decided unilaterally, as it was when Britain entered the ERM in 1990. Our continental partners have been bounced once before and will not be bounced again for something more permanent and more important.

There is here an important asymmetry. A country that enters the euro at an excessively low exchange rate might have to undergo above-average inflation rates for a few years. But eventually the effect of higher prices and wages will be to move from super-competitive to a merely competitive exchange rate.

But an excessively high entry rate is much worse. A great deal of experience shows that it is often extremely difficult to exert downward pressure and nominal pay rates by means of monetary or fiscal policy. The effect of going back to gold in 1925 at the pre-1914 parity has been driven into the mindset of British economists, irrespective of their views on other issues; and here is just one topic where an economists demonstration outside Number 10 could have some influence.

A more recent example, although in rather different circumstances, would be the effect on unemployment in East Germany of the monetary unification at a one-for-one exchange rate. Some economists might still like to describe these effects as short-term, but it is precisely in this context that Keynes made his famous remark: In the long run we are all dead.

Difficulties of Entry

There is one argument that could be put forward in favour of tolerating British entry at an excessively high rate. This is that the sterling exchange rate is already high. Yet British business has been doing much better than anyone expected while competing at an exchange rate well above DM3.

I have thought about this quite a lot; one answer may well be that the present sterling rate is regarded by business as a temporary aberration. It would be quite different if the present exchange rate were locked in permanently. Unfortunately the financial markets have not marked in an early drop in the pound. Towards the end of February forward markets showed sterling above 3DM for almost another three years and still be above 2.9 DM after five years.

Of course, if there were an overwhelming desire on the part of the British government and the governments of Germany and France for the UK to join, the technicians at the ECB could be overruled. I would hope that once an entry rate were negotiated sterling would jump straight away towards it and there could thus be a two year of stability as required by the Maastricht Treaty.

But no such enthusiasm seems at all likely. The British Chancellor Gordon Brown, seems happy to carry on with the present internal framework of monetary policy; and it would be extremely difficult for Tony Blair to overrule the solemn Treasury warnings that are so easy to envisage and even write for oneself.

The German Chancellor Gerhard Schroder, has far too much on his plate to want to lead a crusade for British membership; and he will in any case be careful of going on another Third Way journey with Tony Blair after the unfavourable political kick-back he received from their joint Neue Mitte pamphlet. Frankly I am not optimistic of the chances of success against the background of a suspicious British public opinion and well justified European suspicion of British motives and intentions.

Putting the Euro on Hold

The ECB president, Wim Duisenberg recently said that it would take several years - if at all - for the UK to become sufficiently similar to the present 11 euro members to meet either the Maastricht requirements or the British Governments own convergence conditions. We are probably at least five years away - probably more - from any feasible entry date.

When I suggest that the euro issue be put on hold, the advice is given to the eurosceptics as well as to the euro enthusiasts. Of course neither side is likely to take this advice; but if, hypothetically, one side were to quieten down it would be more difficult for the other to keep the battle going.

If the issue were put on hold for five years, the British government and British companies could concentrate on other issues. No president of the CBI has ever said a truer word than the current director general Mr Digby-Jones when he warned that the sterile debate over whether Britain should adopt the euro has distracted British companies from the more immediate issue of making the Single Market work. And not only British companies, but British politicians, officials and - last but not least - the media.