Kinds of State

I have been asked to speak on "Will Emu lead to a super-state". I take it that a super-state does not mean some monolith which would try to dominate our lives as Big Brother did in Orwell's 1984. I take it that it is meant to be a state to which the existing UK - or perhaps it will then be England - will be subordinate in the sense that the state of New York is subordinate to the federal government in Washington.

It seems a simple question, but it is not. I do not think that either-or questions will get us all that far. To start with, we need a more suitable system of differentiation. A contrast is usually drawn between independent states - which can either be unitary, as the UK has been until now, or federal like Germany - and subordinate units such as the states of the USA or the Länder of Germany.

But there are many more entities to be found in the real world. There is a hybrid between a fully independent state and a fully fledged federation. This is known as a confederation. The key distinction is that in a confederation separate governments continue to exist, but meet together to decide common courses of policy in at least some areas. Thus there need be no chief executive like the US president. The leaders of the individual governments meet and decide what to do, whether by unanimity or majority voting, weighted or otherwise.

One of the more interesting Italian politicians, Signor Giuliano Amato, has said that recent developments are rapidly moving the EU in the confederal direction. He has not used this exact word; but he has said that the Brussels Commission, which is such a bete noir of the British media, is likely to become less important and more like a civil service. The key decisions will be taken by the European Council which consists of heads of government and which can also meet at the level, say, of foreign or finance ministers. The accountability will be to the European parliament, which has gained a new legitimacy from its role in the demise of the Santer Commission for failing to take a strong line on corrupt or questionable practices.

But my main concern is with the question: Does a confederation mean the end of the UK as an independent unit and the development of some kind of European state, super or not? At this stage we have to refine our classification still further. For there are several different kinds of animal which have been known as confederations. At the weakest end we find organisations such as the German Confederation of the 19th century. This was the successor to the Holy Roman Empire. The old joke about that was that it was neither Holy nor Roman nor an empire. The 19th Century German Confederation consisted of a loose assembly of governments from dozens of independent German states.

It was a Prussian representative at this Confederation that Bismarck first made his name. It was mainly a talking shop. It could not bind its members, who could even be at war with each other - for instance in the Austro-Prussian War of 1866. I shall come in a moment to whether it had a common currency or not.

A little further along the road we find the American Confederation as it existed after the American colonies won the war with Britain, but before they established the present United States (1782-88) State representatives met together. They may even have used majority votes, but the Confederation was regarded as largely ineffective. Hence the US constitution.

Further still along the route is the Swiss Confederation. Some people might say that it does not merit the prefix "con". For it has a directly elected executive which can take binding decisions in defined spheres. It is unclear whether individual cantons retain the right to leave Switzerland.

It is even more unclear whether member countries "can" leave the European Union. The 1957 Rome Treaty speaks of the members having come together "for an unlimited period" (Article 240). The Treaty does not explicitly forbid exit, but provides no machinery. Realistically speaking, if a country like Spain decided that it wished to leave I cannot imagine that anyone would be foolish enough to try and prevent it.

You will see that in questions of sovereignty, as in many things, I see a continuum with many indeterminate shades rather than a rigid polarity. But if I try to put myself of the minds of those who worry about British sovereignty, I would put the dividing line at whether the UK can opt out of decisions of which it disapproves or can at least exert a veto in the Council of Ministers.

From the very beginning, the 1957 Treaty of Rome provided for some majority voting. But non-Federalist pro-Europeans, such as Harold Macmillan, cold reassure themselves that these were modest matters not affecting national interests. The biggest subsequent extension of majority voting came with the Single Market Act of 1987 of which Lady Thatcher was an enthusiastic supporter. She now says that she regrets having agreed to the voting provisions. But it is difficult to see how a single market which goes well beyond free trade treaty or customs union could work without some machinery to ensure that trade distortions could be removed even against the opposition of some members.

The Single Currency

The Euro-sceptics will argue that the single currency takes us much further along this route by seven league boots. There is, it is true, a Central European Bank which takes decisions by majority vote. More fundamentally, no member country can conduct any more an independent monetary policy, which is usually taken to mean setting its own short term interest rates.

Historians sometimes go further and say there never has been a single currency without political union. The German Confederation did not have one; and 19th Century attempts in this direction were a failure.

An alternative view, which I share, is that Europe and the United States did have a single currency at the end of the 19th Century and the beginning of the 20th. It was known as the International Gold Standard. So long as national monetary authorities had an obligation to convert their notes into gold at a fixed exchange rate, there was effectively one international money. The pound, the dollar and the Reichmark were simply local names for gold. The goldsovereignn was simply one way of dividing a bar of gold into units convenient to carry. Bank deposits were convertible either directly into sovereigns or into Bank of England notes which could themselves be redeemed for bullion.

To a very large extent the euro is an attempt to gain the benefits of the gold standard on an improved basis and without precious metals. Hence the emphasis on stable prices. Hence too the determination of the European Central Bank to regulate the quality of this new international currency to prevent inflation - and one hopes deflation as well.

The Exchange Rate

These moves, oddly enough, derive their intellectual underpinnings from the writings of American economists such as Milton Friedman, even though Friedman and most of his followers detest the euro and all that goes with it. Nevertheless it was Friedman who demonstrated in modern terms that there was no long term trade-off between employment and growth on the one hand and stable prices on the other. This means that it is not possible to improve a country's economic performance by tolerating inflationary policies.

If the exercise of monetary sovereigntyy simply means the right to have a faster rate of inflation than our European neighbours - as seemed the case until a few years ago - then is that sovereignty really worth having?

There is a little more to it than that. The big advantage of Emu for Britain is that it would abolish the overshooting and undershooting of sterling against continental currencies which have lead to swings of 30 per cent or more in the exchange rate in recent years and thus to destabilise the British overseas trade, specially manufacturing. It would do so by merging sterling onto the euro, leaving only some 10 per cent of GDP affected by swings of the euro against other world currencies such as the dollar and the yen.

The disadvantage is that the Bank of England will no longer be able to determine British monetary policy. The ECB has to find one interest rate for an area extending from the Algarve of southern Portugal to the tundra of northern Finland and from Connemara to the Czech borders. It is most unlikely that a rate chosen to meet average EU conditions would be similar to that selected by an operationally independent British Monetary Policy Committee with British needs in mind.

The Government's Tests

How important is it to maintain the limited national control over interest rates still possible today? This is a good point at which to recall the tests the Labour Government said, soon after it came into office, would have to be met before it would agree to recommend membership of the euro.

The majority of the five tests were so vague that the government could declare they met them at any time it made a political decision to join. The one which has been taken seriously is that of economic convergence.

The real meaning was that there had to be a greater conformity of business cycle conditions. There have been occasions - such as the last couple of years - when British interest rates have had to be higher than those in the European core to hold inflation in check. There have been other periods, such as the 1992 recession, during which Britain left the Exchange Rate Mechanism, when British interest rates have had to be lower. Moreover there has been a tendency for the British business cycle to be closer to that of the United States than to that of continental Europe.

The Government has no magic formula for reducing these divergences. The truth is that those who support membership of the euro expect that lasting convergence will appear only once euro membership has become a near certainty, as has been the case among the original eleven. The economic opponents of membership will continue to believe that Europe is too large and diverse for a single monetary policy.

Fiscal Policy

A single currency need not involve a common budgetary policy. It is not often said that a single currency is possible in the US because there is a large federal budget which automatically cushions the affect of shocks specific to individual states or regions. Thus, if there is a slump in the price of oil, Texas pays less to Washington in tax and receives a bit more in social security. The European Union budget of around 1 per cent of the total GDP of member countries is far too small to play such a role.

In fact there are some insurance ideas which could alleviate these shocks without establishing a large European budget. The problem was examined by a group of independent experts set up by the Brussels Commission, which reported in European Economy No5, 1993. Some of them argues that a degree of stabilisation similar to that existing in the US could be established without a big increase in the EU budget. One reason for this is that the US stabilisation is a by-product of spending and taxes designed for totally different purposes. A tailor-made scheme could be much cheaper.

The EU experts proposed, not an extension of the EU budget as such, but an insurance agreement. Countries that experienced an above average increase in unemployment would receive automatic budgetary contributions, which would be paid for my members experiencing a fall in unemployment or a below average increase. As the authors emphasise, they are strictly concerned with demand shocks which are more severe in some countries than others. But that is surely better than nothing.

Unfortunately the weariness on EU negotiators has allowed these ideas to be wantonly cast aside. Instead pressures have arisen of a centralising kind. There is no pressure for a large Community-wide budget; but there is pressure for a concerted fiscal policy, covering such matters as budget deficits and national debt limits.

On the left there are pressures for concerted fiscal stimulation - in plain English higher budget deficits - to make up for what is regarded as the hard money policies of the ECB.<

On the right the pressure is coming from the ECB. Like all policymakers it feels it is having to bear too heavy a burden and is pressing European governments to reduce their budget deficits further to fulfil the Growth and Stability pact. Both sides conveniently brush aside all the evidence that fiscal fine-tuning is at worst ineffective and at best highly unpredictable in its results.

Size of Government

Gervas Huxley, who persuaded me to come here, would like me to discuss whether political federation or some other kind of union must mean a large government sector and heavy-handed regulation. Logically it need not at all. There is much to said in favour of a strong but limited European executive in charge of foreign and military affairs and a single currency; but which left far more to be decided at a local - or best of all individual - level than the existing governments of Europe do at present.

Nevertheless the move to political union has come late in the day at a time when existing national governments spend large proportions of the national income and engage in many kinds of regulation. The European dimension has in practice come in the form of pressures for increased spending and extra regulation. The Social Affairs Directorate, in particular, has not waited for all countries to ratify the so-called Social protocol. It has instead misused health and safety regulations to promote measures such as the compulsory limits on working adults for adults.

Its guiding belief is that the Single Market has helped business and that there is now need for compensationary measures to help workers. There is nothing wrong with the aim. But the hostility to market forces intensifying the already high level of continental unemployment and of driving international businesses to other parts of the world.

The Creeping Euro

Let me come back to the euro. Many businesses, specially smaller ones, are out off not only by the cost of changing money but by having to work out their accounts in so many currencies.

But what is not often realised is that many of these costs are disappearing irrespective of whether the UK joins the euro. Suppose it does not join. British exporters will still have the benefit of only having to bother with one exchange conversion rather than dozens of cross rates about which they had to worry before the euro. In that case the UK will be to some extent a free-rider on the efforts of its neighbours.

In any case use of the euro is likely to spread even without formal membership of Emu by the British government. Already several large UK-based international companies are planning to prepare accounts in euros. Sceptics will say that this is no different from invoicing in dollars or other third currencies at present. The turning point will come of the euro is used for internal British transactions not crossing national frontiers. The key to the matter is likely to be whether or not British workers are prepared to be paid in euros.

This is not pie in the sky. Already a few employers have made euro-linked wage offers. The next stage will be when payments are actually made in the new currency.

So whatever happens at the political level do not let us forget the likelihood of what I have called the creeping euro. There could come a stage, even if Britain is formerly outside, when the euro becomes such an important currency that the decisions of the ECB become more important for British monetary policy than those of the Bank of England.

Political Suggestions

Reflection on this Euro creep does lead to suggestions for reserve policies for the two main political parties. Suppose that after the next election a Labour government sill does not feel that it can win a referendum on membership? Or suppose it loses such a referendum? That need not be the end of the game. The government could note the fact that the euro was being used in the UK and promote that use actively. The chancellor has already provided for the discretionary settlement of tax bills in euros although it is not exactly clear how or to what extent this option will be used. There are many other ways in which he could encourage the use of it.

There is also something in this train of thought for the Conservatives. Let us suppose that they come to see the need for something more constructive than just say "No, no, no." They might remember that when in government they proposed a system of competitive currencies which would give British citizens the choice of using sterling, the euro, or any other unit they pleased.

Why should not the Conservatives, instead of emphasising their opposition to the euro, instead put the emphasis on free choice and say that it is up to the citizens of this country to decide how much use they make of the new currency? This leaves open until a god deal later any government decision to adopt it officially.

Why Care?

Finally I would like to come back to the sovereignty issue about which I have been asked to speak. The loss of national sovereignty inside the EU has been a gradual one on which it is impossible to put a specific date. I doubt myself if the formation of the single currency has been the crucial step. What worries me most is not the loss of national sovereignty but its uncertain replacement. Individual governments have lost the power to decide, but no supranational institution has taken over. This is the rub of Henry Kissenger's complaint that when American officials pick up the phone to ascertain European opinion "there is no one at the other end."

There are many areas - trade policy being a well-established example and currency policy a new one - where the EU governments have given up their rights to unilateral action, but there is no single authority to take their place - just a cacophony of voices which take a long time to come to a decision; and if they do it is a feeble compromise. This can bee seen for instance in the pathetic European attempts to formulate a common policy on former Yugoslavia before the US stepped in to fill the vacuum.

At this point I sometimes alarm audiences by saying that I do not much care about the unit of political decision so long as it is effective. I do worry about the kind of political entity in which we are and the quality of political decisions. Like most people, I care about prosperity; I care even more about personal freedom and the humane treatment of individuals. But I do not mind in the least whether the British prime minister or foreign secretary sits at some top table, except to the extend to which it contributes to these objectives. I have no desire either to build up a European union for its own sake nor to reserve British decision making for its own sake.

To those who ask me whether I do not care about freedoms for which the ancestors of today's citizens have fought, my answer is that I care intensely; but for me freedom and humanity refer to individuals, not to entities such as states or ethnic groups.

Back to Fundamentals

But I want to end on an obvious point. Those of us who have no a priori position for or against a European political union need to ask what purpose such a union is meant to achieve. Euro enthusiasts favour any policy which will either lead to common policies or to strengthen European institutions irrespective of its ideological flavour. They favour a European Central Bank. But they also favour a great deal of interference with the labour market and also European initiatives to liberalise international trade; but they insist that there must be some residual tariffs or preferences for former colonies to preserve what they call a European identity.

But the more fundamental question is: what is the rationale for this drive to political unity? If it is a stepping stone to world government, three cheers. But is it?Thee founders of the European Union were concerned above all to heal the rift between France and Germany and bring them so close together so that a future war between these countries is inconceivable. But few suppose that such a conflict is the danger today. To what extent would a European political union help in relations with the former Soviet block or in stabilising the Balkans? I wish I knew.

But there is one thing of which I am confident. This is that the Maastricht treaty, which created thesinglee currency, was already out of date when it was negotiated in 1991. For it was a continuation of an old agenda for unifying the section of western Europe and took no real heed of the much more important task of bringing in the former communist countries of central Europe. This is a much more important cause, which I am afraid has been put on the back burner.

Thus I do not feel at all optimistic on the European front. But nor would I have done at any time in its 1,000-year-old history. Europe is a continent in which progress has been made by individuals including artists, writers, scientists and yes, - business entrepreneurs - in the teeth of much political stupidity. But as I cannot recreate the Roman Empire or better still the Roman republic, I think I should now stop for discussions which I hope will continue informally later on.