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How many boats did we miss in Europe?

Sober economic analysis tells us that to join the Euro would damage our economy. The two main arguments have been well aired. The Governor of the Bank of England, Mr. Eddie George, has lucidly explained the first: the dangers of a 'one-size-fits-all' interest rate and Euro-fixed currency- for us with our global connections to the dollar area (i.e. the non-European world) the dangers are particularly severe. The second concerns the effects of European harmonisation on our competitiveness and has become much clearer in recent months with the arrival of Herr Lafontaine as Germany's Finance Minister; joining the Euro-club now has signing up to harmonisation as its price- something we can resist for ourselves and if necessary veto altogether if we do not wish to join. If anyone doubts the reality of this danger, please let them email me (MinfordP@cf.ac.uk), or click here and I will gladly supply them with our uncontroversial calculations of the effects of even going one third towards the levels of taxes, social charges, union powers and minimum wages prevalent in Germany. These effects will make their flesh creep and their hair stand on end- basically they would return us to the dark days of the early 1980s when unemployment was well into double digits and we had not yet tackled the rigidities of our labour market.

To these telling economic arguments we can add the decisive political argument- that the Euro is designed as a step to political union and a federal super-state. The British are unanimous in their opposition to being a part of that, whatever our partners may do.

Why is it then that voters in classes A and B (those 'chattering classes' again) tell pollsters that they are not quite sure about joining the Euro? (The balance of opinion in a recent poll was plus 2% in favour which is less than the margin of error.) They should by rights be as against as all our other voters from classes C1, C2, D and E: these have no doubts on the matter, registering balances against of 20-30%. Robust tabloid-reading voters, they presumably trust their political instincts and have a pretty good notion of economic realities.

No doubt many arguments jostle in these AB minds and over the next three years or so it will be important to take them out one by one and examine them. Too much is at stake over this decision to allow anyone the decent dinner party escape route of 'I know what I like'. But at the centre of that inchoate bunch of ideas that fuels the timid Europhilia of the BBC and its Radio 4 brigade lies the fear of missing the European boat. More precisely it is a sense that we missed its previous departures but were generously allowed to scramble aboard late; and that we are doing the same now, and must again be sure to avail ourselves of their kindness in permitting a late boarding of the Euro. Implicit in all this is the idea that this a great European project that has enriched us since we clambered aboard. So, it seems to follow, this latest phase may have its problems but they will no doubt be sorted out and, even if not, they are the price of being a part of a successful enterprise.

This argument has two parts. The first is that we have gained by being part of the EEC. The second is that if we do not join the Euro we somehow may forfeit our rights as a member of the EEC.

The second is easily disposed of. The Treaty of Rome, as amended at Maastricht and recently at Amsterdam, entrenches the rights of individual members through unanimity in the Council of Ministers, except in those areas where they have unanimously agreed to qualified majority voting, QMV. It is true we have agreed to QMV in some areas, principally over the Single Market, of which we were strong proponents. But giving away your rights is quite different from having them stripped off you. In other words, if we so wish we can stick with the status quo in the EEC, while remaining outside the Euro.

A variant of this argument is that somehow outside the Euro we would become victims of continental protectionism and this would reduce inward investment. But this would be illegal under the Treaty of Rome, the very treaty under which the Euro is going ahead. Protectionism would not in any case be in the interests of the continent, as we will see later, since they have a trade surplus with us in the relevant goods. The Europhile will reply that inward investment may suffer anyway because of the exchange rate uncertainty outside the Euro; a different argument but no less false. Investment for the EEC depends on the competitiveness of the location (and uncertainty about that not about exchange rates per se); Britain, inside the EEC but outside the Euro, can retain its competitiveness vis-à-vis the Euro area by maintaining its market flexibility. This in turn will ensure that its costs, even if the pound moves around against the Euro, always adjust to maintain their edge. The key is whether markets adjust, not whether exchange rates are fixed.

Turn now to the first of the two arguments: that the EEC has been good for our economy. Many of us have believed this over the years, and I am no exception. I remember even now the unlikely alliance of the prominent trade economists, the left-wing Thomas Balogh of Balliol College Oxford and the free market Professor Harry Johnson of the LSE, arguing against EEC entry in the 1970s on the grounds that this was a Customs Union which would harm our interests. They were ignored. Later, some prescient observers were worried that the Single Market went beyond free trade in a way that could invite excessive regulation. Their fears too were dismissed-the Market's competition would lower costs and raise EEC welfare.

A few years ago I attempted a balance sheet of the UK's gains and losses from the EEC (Britain and Europe: the balance sheet, European Business Review). The way a customs union works, you lose on the general protection against world markets but if you sell more to the rest of the union than you buy from it you gain from the higher value of your net exports. For example if we sold more cars to the continent than they buy from us then the EEC's high protective barriers against non-EEC cars ensure that we get a higher price for our cars sold; this will more than offset the loss to our consumers on having to pay more for a lesser number of cars. That calculus is pretty simple. You simply see what your trade balance is in the different EEC-protected goods; if you have a surplus you gain by the extra percentage on price due to protection times the surplus. If you have a deficit, you lose correspondingly. On top of all that you lose from the loss of overall efficiency because some of your production is due to EEC protection more expensive than the world competition.

My calculations were fairly straightforward and uncontroversial for agriculture. All analysts agree that the costs to us are substantial because we are both net importers of food and the general inefficiency produced by EEC protection is large- compare the best US farms with the smallholdings of central France.

On trade in manufactured goods, I suggested then that given time we could gain because inward investment in cars and electronics particularly was going on at a fast pace and should reverse our longstanding trade deficit with the continent. I also argued that the extra investment in these industries might not have come into other industries had we been outside the EEC because our wages would not have been flexible enough to attract them; EEC protection in other words created jobs for our less flexible manufacturing work force.

Brian Hindley and Martin Howe were sceptical about these elements (Better in than out?-IEA). Reworking these calculations today, I am inclined to agree with them. The facts of the past few years reveal that we still, even after all the inward investment, have the same-sized deficit with the continent on protected manufactured goods; that makes us losers on the manufacturing side of the customs union too. As for those extra jobs, again the facts show that all our job creation since 1984 has been in services - over 3 million jobs against a small net loss in both manufacturing and other industry. Our labour market has become flexible and well able to generate jobs and the associated investment in the service industries that are now our comparative advantage in world trade; it shows we have no need to feather-bed the old smokestacks (Rover-please note).

That leaves the Single Market. Again one wonders in retrospect why we felt that anything more than free trade within the EEC was necessary, let alone desirable, to promote competition. Free trade implies competition between rival systems of regulation. The Single Market imposes a single set of regulations, which tend to level up regulative burdens at best to the average and at worst to the heaviest. The Single Market is a burden on the EEC compared with free trade properly pursued, in services as well as goods. If we were outside the EEC we would not care. But inside it is an additional regulative burden on us.

It all adds up to bad news for the EEC lobby. That boat we boarded- with hindsight we made a mistake. The Baloghs and Johnsons were right. We should have stuck out for free trade with all comers. As for the Euro, the argument that should in the end most effectively clear those AB heads is just this one: that the EEC is in the end the wrong boat.

Patrick Minford is professor of economics at Cardiff Business School and visiting professor at Liverpool University.
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