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what is the case for the Euro?
The arguments against the euro are well known to Telegraph readers. The Nott Commission Report recently set them all out carefully.
So what are the arguments for the euro? I had the good fortune to hear them in debating on the Tory Fringe (courtesy LSE's Centre for Economic Performance) against a redoubtable duo, Adair Turner of the CBI and Dick Freeman olim chief economist of ICI. Forget the pathetic muddle which is Britain in Europe. These two did an honest job.
Begin with the dogs that did not bark. they did not tell us that Britain's monetary policy would be better run from Frankfurt, one of the favourite arguments a few years back. Stand up the Monetary Policy Committee and take a bow.
Nor were we told that business 'was in favour' and so the British people should defer to it and come quietly. That claim no longer holds water after careful polling by Business for Sterling. We now know that business support comes mainly from the small group of multinationals who have a vested interest in pleasing Brussels, their new one-stop lobby shop.
Nor would the euro 'reduce the high pound' (a favourite illusion of the car industry): if we joined, it would be at long-prevailing market rates, just like other countries. The market seems to think Britain's economy can stand a high pound and so far it has been right- but even if the market view changed, we would still have the same rate if we entered as if we stayed out.
So what were the reasons we should join? The first was that our prosperity would increase because the continental economies are and have been 'more successful' than us: so, to be 'harmonised' with them by taxes and regulations would be good for us! This surprising claim, greeted by catcalls, is of course bunk. Since we started our reforms in 1979 growth per head here has risen and closed much of the gap with West Germany and virtually all of it with France; our living standards have risen even faster so that we have overtaken them. We use capital more productively: their 'high investment' share of GDP is much of it waste. As for unemployment say no more: not only is measured unemployment running at over 10% in Germany and France, but if one adjusts these rates for those who are simply not applying for jobs ('low participation'-among women, the young and those over 55) they soar to over 20%. All the evidence points to our free market approach being superior to the regulated one of the continent.
The second argument was also about economic efficiency. Joining the euro would produce 'transparency', would lead to a lower cost of capital in a more integrated European capital market, would reduce currency risk and would encourage foreign investment.
'Transparency' (ease of price comparison) is largely unimportant in a sophisticated modern economy and the age of electronics. Basically it only matters in border areas where people cross to and fro to shop. For firms in trade it is irrelevant; we were told car price differentials with Europe were due to currencies-not so: read the 1990 Monopolies Commission Report of which I am a proud co-author. Variable country price differentials are the predictable result of inter-brand competition between car companies who naturally try to suppress intra-brand competition (would you want your product warred over by your own agents?)
Cost of capital lower? The EU gave up on that argument five years ago: the real cost of capital is set in world markets and is the same in all currencies. Risk premia are set according to the borrower's status-AAA, junk etc. The euro as such is irrelevant though some countries (Italy?) may well find they get a poor risk status in it if they do not reform their finances.
Currency risk? For UK trading companies approximately 60% of whose trade in goods and services is outside the Euro area, effectively in dollars, joining the Euro is no help and indeed may make matters worse, by increasing dollar risk.
And foreign investment? It comes here because our relative costs (converted into dollars, say) are low, our competitiveness is high. Relative costs have, almost by definition, nothing to with monetary arrangements. The currency risk in the long run over which plants make money is probably unimportant as exchange rates and costs trends tend to offset each other; in any case as we have seen joining the Euro may make matters worse with our large dollar share.
The third argument was a rebuttal of the widespread fears about harmonisation and political union: for those foolish enough to dislike these EU plans, 'they were nothing to do with the euro'. Here we had yet one more pretence from the pro-euro lobby that, like previous 'limited steps' we took, the euro is merely a technical gizmo. This flies in the face of endless statements by continental politicians that the euro is a step to closer union and that to make it work its participants must harmonise; joining this club within a club thus clearly signs us up for this agenda which outside it we can veto or at least opt out of.
The final (Blairite) argument was that opposition to the Euro is covert opposition to the EU itself. This is like saying of two people who refuse to marry that they must therefore wish to have no dealings with each other. Untrue in general, though possible if there is a great deal of unpleasantness. So with Europe; as powerfully argued last Thursday by Michael Portillo in a Centre for Policy Studies debate with Hugo Young, the British wish to be self-governing and were persuaded to give up this sovereignty by loss of economic self-confidence in the terrible 1970s. Now the economics looks different; we want our sovereignty back- friendship, not marriage. But there is no hurry: we can wait and see how the EU jumps- to ever-more harmonisation or back to flexibility? The urgent debate today is about the euro alone: it must not be confused with issues which can be decided later.
Patrick Minford is professor of economics at Cardiff Business