Inevitability of EMU entry has begun
to disintegrate
How Britain has regained its place in the world economic
league
The battle over British membership of the single currency
has reached a decisive point. The European election on
Thursday could, with luck, deal a serious blow against the
doctrine of "inevitability" which is so influential with
"practical" businessmen and politicians who pride
themselves on their indifference to abstract ideas.
Membership of EMU, they maintain, is inevitable,
irrespective of any arguments for or against. People who
argue that a country such as Britain can keep its monetary
independence are just idealistic dreamers with no
understanding of economic realities. All opposition to
EMU is futile because British involvement is
pre-determined, driven by history's inexorable tides.
Dr Johnson said that patriotism is the last refuge of the
scoundrel. But today a naively deterministic doctrine of
historical inevitability has become the last refuge of the
business lobbyists who are unable to offer any better
arguments for Britain to give up control of its economic
affairs. In the past few weeks the British lobbyists for
EMU have been shocked by the growing disparity
between European and American economic performance.
They have been embarrassed by the sight of the Italian
finance mininster pleading with the new economic
government of euroland, the shadowy Euro-X committee,
for "permission" to implement his Government's new
budgetary plans.
So much for the myth that the single currency is a purely
monetary arrangement that would leave national
parliaments in charge of public spending and tax.
The business arguments for EMU have been further
weakened by the weakness of the euro against the dollar,
and by Germany's emergence as the "sick man of Europe"
- two problems that were perfectly predictable
consequences of the EMU process, but which very few
businessmen believed or understood.
Worst of all, from the point of view of the EMU lobby,
has been the "unexpected" strength of the pound. This has
terrified into silence most of the business community's
EMU-boosters since it raises the awful possibility that
joining the single currency, far from offering a respectable
excuse for a profit-boosting devaluation, would actually
lock British companies into a tough competitive regime
that would force them to manage their businesses more
efficiently, to improve services and products and to boost
productivity to levels that prevail in America, Germany
and France.
This column has often discussed the likelihood that the
pound and the dollar would rise, that the euro would fall
and that Germany would be transformed by EMU into the
rustbelt of Europe. This week, however, I want to focus
on some of the political developments that are changing
the outlook for British membership of the eurozone.
First, there is Thursday's European election. A big swing
to the Tories could well persuade Tony Blair to retreat
from holding a referendum on EMU at the start of the next
parliament, thereby shelving the whole issue until 2005 or
beyond.
How could this happen? Since Thursday's election is not
about the composition of the next British Government, it
may not be much influenced by the utter ineffectiveness of
the Tories as an opposition party, nor by the staggering
contrast between the leadership qualities of William Hague
and Mr Blair. If people behave rationally their votes on
Thursday will be motivated primarily by their views on the
one EMU issue. Thus, while Thursday's result will have no
relevance at all for the outcome of the next general
election, it may be an accurate indicator of voting
behaviour if a referendum on the single currency were
called. Thus, while a bad result for Labour on Thursday
would scarcely alter the massive odds in favour of Mr
Blair remaining Prime Minister after the next election, it
could very substantially affect his own calculations about
the risk of gambling his second term on a referendum the
outcome of which he could neither predict nor control.
Another political event that could have a surprising impact
on the EMU debate is the apparent victory in Kosovo.
Mr Blair's starring role in the Kosovo drama should rebut
one of the strongest political arguments for joining EMU,
at least from Mr Blair's point of view. This is that Britain
would "lose influence" in Europe if it insisted on continuing
to manage its own economic affairs.
Mr Blair's key role in the Kosovo crisis should have
demonstrated once and for all that a country's international
influence has less to do with its membership of economic
committees than with its leader's decisiveness, clarity of its
purpose and strong democratic support. Of course, a
nation's influence depends not only on its leadership, but
also on its economic and military power. But on these
grounds, there seems to be no reason to worry about
Britain's world position, if it remains outside euoroland.
Militarily, of course, Britain has long punched above its
weight as the second most important member of Nato.
What is less widely recognised is how far the country has
recently advanced in its relative economic position.
Enough time has now elapsed since the change in Britain's
economic fortunes in the mid-1980s to conclude that a
century of relative decline probably ended about a decade
ago.
Consider the statistics on national output compiled by the
OECD. These show how Britain was overtaken from
1960 onwards, first by Japan, then by France and then
Italy. But in the late-1980s, this trend turned. By 1994
Britain had again passed Italy to become the world's
fifth-largest economy, and in the past few years, the lead
over Italy has widened to 15 per cent. If recent trends
continued, even the 4 per cent gap between British and
French national output could be closed within a year or
two. This would restore Britain to its postwar position as
the world's fourth-largest military and economic power.
To suggest that Britain has now almost certainly stabilised
its position as a major world power is not to indulge in
jingoism or yearning for imperial glory. It is simply a
matter of recognising objective facts. Britain is almost
certain to remain the world's fourth, fifth or sixth-largest
economy for the rest of our lifetimes. The idea that such a
country is too small to operate as an independent entity is,
therefore, manifestly absurd. If a Britain outside EMU
were really condemned to become a banana republic,
then how should we describe the contemptible prospects
for much smaller economies such as Canada, Australia,
Switzerland and China?
The fact is that the world economy will consist for the
forseeable future of hundreds of independent nations,
operating with varying degrees of co-operation, plus one
established superpower, America, and one experimental
confederation, the newly created euroland. How far
Britain should commit itself to this experiment is a huge
political question and there is nothing inevitable about the
answer. As long as Britain continues to enjoy a reasonable
degree of success as an independent economy, voters will
be unimpressed by warnings about the cold and loneliness
of existence outside the eurozone.
This points to a troublesome paradox if Mr Blair calls a
referendum on the heels of the next election. Just as his
impressive leadership in Kosovo has undermined his own
argument that Britain would lose its international role if it
stayed outside EMU, Labour's successful management of
the economy is steadily discrediting the claim that Britain
will face an economic disaster if it opts for economic
independence. The better the economy performs in the
next few years, the harder it will be for Mr Blair to argue
that the only alternative to giving up Britain's monetary and
fiscal independence is economic ruin.
If he wants British voters to believe that they have no
choice but to join EMU, Mr Blair will have to persuade
them that his own Governement's economic success
outside EMU has been a chimera.
Far from taking credit for the good times that are likely to
prevail around the time of the next general election, Mr
Blair will have to become a prophet of doom. He may
boast in the election that Labour has made Britain
prosperous, but then, in the referendum immediatley after,
he will have to warn the voters that this prosperity is built
on sand. He may boast of making the Bank of England
independent, but then he will have to argue that the Bank
cannot be trusted to manage the pound. He may boast of
Labour's record on taxes and public spending, but then he
will have to explain that British Budgets should in future be
supervised by Euro-X.
Even for Mr Blair and his spin-doctors, this paradoxical
message will be hard to sell. The only thing inevitable
about Britain's membership of EMU will be the difficulty
of persuading British voters. With luck, Mr Blair may start
to understand this on Thursday.
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