Britain and the Euro Oct02
the UK, with the world’s fourth largest economy based on global trade
and investments, join a eurozone that has so far failed to respect the
rules of economic management? Ongoing difficulties amongst Europe's Member
States with growing budget deficits and public debt, continued aid for
state-owned enterprises, labour inflexibility and corrupt governance are
hardly signs of encouragement.
Euro continues to fluctuate against the US$ and Sterling and it's value
remains well below the $1.16 at which it was first launched in 1999. The
European single currency is managed by the European Central Bank (ECB),
and functions much like the German Bundesbank. The ECB’s brief is to
maintain an inflation rate of 2.5% maximum throughout the eurozone and it
has an interest rate policy which is less reactive to the Euro’s
exchange rate against the US$.
EU, unlike the USA, has no single federal tax structure that can offer
appropriate help to weaker states. Labour is highly mobile in the USA as
there is a common language and ‘culture’. There is flexibility of
wages, terms of employment and easy access to housing in the USA that
encourages people to simply pack their bags and move from state to state
for work. The EU has 15 Member States with significant differences in
financial architecture e.g. unemployment levels are different in each
Member State; many German Länder (local authorities) own their own
utility companies and own their own banks whilst all these are privatised
in the UK; Italy and Spain continue to subsidise their airlines whilst the
UK does not; the Swedish government owns all alcohol and pharmacy outlets
whilst most other states do not, most people in the UK own their own homes
whilst there is a higher trend for rented and social housing in other
the economic situation in the 15 Member States cannot be easily managed
with a single currency and a common fixed interest rate, as such a
situation will not allow individual governments to manage employment and
inflation to suit local conditions. This is why Germany, with a £23bn
deficit and high unemployment, is struggling to kick-start its economy
because it cannot lower the interest rate. Before joining the Euro,
Ireland had a growing economy without inflation. On joining, its interest
rate dropped from 6% to 3%, property prices shot up and so did domestic
demand. Ireland, like Spain, now suffers from high inflation and needs
higher interest rates to reduce domestic demand and inflation. Public debt
as a percentage of GDP is too high in Italy, France and Belgium and such
poor economic management of national economies breaches the rules of the
stability pact and weakens the Euro exchange rate. This immediately
impacts on inward investment and economic growth for other Member States.
UK experienced great difficulties, including loss of reserves and high
unemployment, when it was locked in the Exchange Rate Mechanism (ERM).
Clearly, there is to date no significant convergence between the major
economies in the EU to justify the UK joining the Euro at present.
is true that 60% of UK exports are to the EU but the UK has a trade
deficit with the EU. Trade does not necessarily increase with a single
currency. For example, German trade with France has increased less than
its trade with other countries outside the eurozone since the introduction
of the Euro. The members of NAFTA have their own national currencies but
have still managed to
increase their mutual trade substantially by reducing customs duty and
decision to join will be one for the British people. Economic convergence,
labour mobility, wage flexibility and national government adherence to
financial discipline will determine the success of the eurozone.
Ultimately a tax raising central government of the EU may well be the
outcome – is the UK ready for this? I am not so sure!