THIS ARTICLE FIRST APPEARED IN THE FINANCIAL TIMES
needs the euro
Contrary to first impressions, the European Union is coping
fairly well with economic and political turmoil.
The problems seem rather to lie with its member states. So
far, four EU governments have had to resign as a result of the global economic
crisis. (Lithuania, Latvia, Hungary
and the Czech
Republic). In especially difficult circumstances, Brian Cowen, Ireland’s
prime minister, struggles on.
In March the European Council took a number of coherent
decisions to address the turbulence across the region. €5 bn will be spent on
the economic recovery plan to be agreed with the European Parliament and
European leaders doubled (to €50 bn) the EU’s facility to
support non-eurozone member states in balance of payments difficulties. They
resolved to increase EU members’ contribution to the IMF by €75bn. They gave
political backing to the Commission’s proposals to increase EU level
supervision of the banking, insurance and security markets – while taking a
satisfying side-swipe at tax havens.
They even agreed language to use at the G20
summit on keeping markets open and avoiding all forms of protectionism.
The European Council reiterated its determination to return
the EU to the sound fiscal discipline of the Stability and Growth Pact “as soon
as possible” (although nobody should hold their breath).
What nobody has yet embarked upon is a serious reappraisal
of the problems and prospects of the euro. Under President Sarkozy’s
leadership, the eurogroup met at heads of government level for the first time
last autumn. But neither that nor subsequent meetings at ministerial level have
delivered the urgently needed decision to get the eurogroup to speak with one
voice within the IMF. Nor has there been progress on the matter of relaxing
euro entry conditions for the growing number of hard-pressed candidates –
notably Denmark and Iceland.
Meanwhile, the cohesion of the single market risks being
undermined by competitive devaluations of non-euro currencies, including
sterling and the Swiss franc.
The position of the UK, with its opt-out from the euro,
needs rigorous examination. Gordon Brown, in an otherwise good speech to the
European Parliament this week, said nothing about it. So he may need some help.
is a small, open economy heavily in debt. According to the IMF, the UK’s
budget deficit next year will be 11 per cent (against a G20 average of 6.3 per
cent). Its foreign assets and liabilities are four times the size of its GDP.
Its currency has lost a third of its value against the euro in the last
eighteen months. The UK’s
performance in terms of equity markets and bond yields is deteriorating, as
unemployment grows. This is the economy which Mr Brown has managed since 1997.
In that year, Mr Brown devised five national “economic” tests to set alongside
the Maastricht convergence criteria by which to
judge whether the UK
was ready to join the single currency.
The Treasury last reported on these tests as long ago as
2003. In today’s critical conditions, all five tests – which concern economic
cycles, flexibility, investment, the City and jobs – are either passed or null
and void. Lost and gone forever too is Mr Brown’s “golden rule”.
The fact that nothing further has come from Mr Brown
encourages us to begin the debate about sterling’s membership of the single
This spring’s European Parliamentary elections are a good
opportunity for Britain’s
political parties to revive the debate.
The original claim of the proponents of economic and
monetary union is proven to be good: that integration would consolidate the single
market and boost trade and investment by eliminating exchange rate uncertainty.
The end of devaluation within the eurozone has removed one of the main causes
of inflation. Britain,
on the outside, is not so protected and now faces the invidious choice between
higher inflation or higher taxation. It will take a long time for the UK to
live within its means again, and without the external fiscal discipline of the
Stability and Growth Pact it will take even longer to return to rectitude. The
reality is that Britain
needs euro membership to re-build its economy in the medium term. Sterling lacks
credibility. This is very dangerous for Britain’s highly leveraged economy.
As a recent authoritative report has it, ‘the City of London will only be able to flourish if it is
supported by a lender of last resort in a global reserve currency’.
Yet the argument about whether and when Britain should join the euro should
take into account the much faster pace of integration which is likely to follow
on from the current crisis. The economic and monetary union of 2010 will be a
different one to that prescribed by the Treaty of Maastricht twenty years
before. The euro did well in times of boom; lessons will now have to been
learned about how it does in times of bust. Already Jacques de Larosière has
proposed the tighter regulation of finance under the supervision of the
European Central Bank. As the search for national credit gets desperate, the
demand to float eurozone bonds is growing. If the Lisbon
treaty comes into force, the European Investment Bank will get more scope to
invest directly in Europe’s enterprise
economy. The long-anticipated review of the EU’s financial system is bound to
propose a larger EU budget more attuned to meeting the goals of the Lisbon competitiveness
agenda as well as supporting the strong development of the EU’s common foreign,
security and defence policies. Joint spending at EU level will provide more
added value and cost efficiency than badly coordinated national plans for
economic recovery. The UK
rebate will go in these budgetary reform negotiations, just as France
will have to accept a greater degree of co-financing of the CAP.
As the Union becomes more
federal in fiscal terms, so also will it in political terms. Vain efforts to
coordinate national macro-economic policies will be replaced by an emerging
common economic policy of the eurogroup. This move, long advocated by Jacques
Delors among others, will be hastened if ever one of the existing eurozone
member states has to be bailed out by the rest. As the political confidence to
unite builds at home, so it will abroad. The EU could well support the
establishment of a global network of prudential supervision across currency
zones, with the longer term intention to create a world currency unit. In all
these large matters, Britain
left alone with a weak and volatile sterling would play no meaningful part.
The time has come for Britain to decide to join the euro.
The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.