LABOUR EURO-SAFEGUARDS CAMPAIGN

Since the establishment of the Single Currency at the beginning of 1999, the value of the euro has fallen by about 11% against the dollar. This reflects the strength of the US economy, in contrast to the sluggish performance of most of the EU. The fall in value of the euro has been a great disappointment to its supporters, who hoped that it would rapidly become a reserve currency, rivalling the US dollar. On the other hand, the weakening euro has made output in the Single Currency area rather more competitive internationally, thus providing some increase in its growth prospects. The crucial questions are whether this trend is likely to last, and whether it is likely to be strong enough to offset other developments in the medium term which may well turn out to be exceptionally difficult for the EU to handle. The problem can be simply stated. The complex structure of treaties and agreements underpinning the establishment of the euro is essentially designed to combat inflation, whereas in fact the major problem in the EU is how to avoid deflation, low growth, rising unemployment, and increasing disparities in income, wealth and life chances.

The consensus of opinion among forecasters is that the growth rate in the Single Currency area is likely to be around 2.5% over the next year or two. This is considerably better than the achievement of recent years, but even so, it is almost certainly not sufficient to reduce unemployment significantly. This is because the productivity of the existing labour force is rising at about 2.0% per annum, and the labour force is increasing by just under 0.5% per annum. 2.5% growth therefore is only just enough to stop unemployment rising. It will not make it fall to much lower levels. If adverse trends materialise beyond the next two years, causing the growth rate to fall back again to well below 2.5%, unemployment will almost certain to start increasing again.

During the run up to getting the euro established, there were massive cuts in public expenditure budgets across the whole of the Single Currency area. Almost all the governments involved slashed expenditure to get within the 3% borrowing to national income ratio required by the Maastricht criteria. Most of these cuts were real, though some of them were notoriously phoney. While some countries, such as France and Italy, may have resorted to dubious accounting to reach the Maastricht criteria, all are now caught by the Dublin accord on controlling government financial deficits, which the Germans are determined to enforce. Pressure is therefore now on all the Single Currency economies to restrain public expenditure. This is why even in Germany, with over 9% unemployment, and where the economy badly needs to be stimulated by counter-cyclical state spending, the supposedly left of centre German government is currently involved in axing £10bn worth of welfare expenditure.

In these circumstances, it is hardly surprising to find that in many EU countries, the public is becoming increasingly disenchanted with the way in which the EU is developing. Recent polls have shown mounting resentment at the remoteness of EU institutions, the lack of transparency with which the EU operates, the levels of fraud and corruption evident from recent investigations, the centralisation of power in Brussels, and the constant attempts by EU bureaucrats to impose uniformity across the whole of the Union, whether this makes sense to ordinary people or not. Despite a constant barrage of propaganda from the Commission, disillusionment with the EU appears to be becoming more widespread, not only in Britain but across the whole Union, as the recent dismally low poll in the euro elections shows. Any serious further altering in the EU's economic performance can only make these trends more marked.

The EU's problem is that a fall in the current none too impressive current growth rate in the Single Currency area may well be on the cards. The value of most of the currencies in the Far East is already much lower than was the case two years ago. With the USA's trade deficit now running at $250bn a year, it is hard to believe that the exchange rate for the dollar is not going to start to fall some time fairly soon. If this happens, the likely result is going to be a substantial strengthening of the euro against all other currencies, including sterling. This may make the financial markets feel more bullish about the euro, but the consequences for everyone else in the Single Currency countries are all too likely to be disastrous. Growth will fall, unemployment will rise, and governments throughout the Union will find themselves under increasing pressure to implement further cuts in welfare expenditure.

One of the most revealing, but also alarming aspects of discussions about the euro is how little time is spent reviewing the problems which would occur if the Single Currency broke up. They would be massive. First, all the expensive and disruptive changes to notes, coins, accounting and computers systems, required to get the euro established in the first place, would have to be reversed. Second, in the nature of the kind of crisis which would precipitate the collapse of the Single Currency, there would be very little warning of what was in prospect. This highly disruptive possibility is nevertheless regarded as the probable outcome of the Single currency project by about 30% of those recently polled in Britain. Those taking this view may well be right, judged by the almost universal failure of many other attempts to create single currency areas in the past. It is obviously not communautaire even to consider such a possibility. No doubt this is why one of the major risks involved with the Single Currency — its quite possible demise - is brushed under the carpet, and almost never discussed, as it should be.

Of course, when the Single Currency comes under pressure, which is bound to happen, all those involved in supporting the EU will move heaven and earth to stop it collapsing. What could they do? The only practical solution would be greatly to increase the amount of taxation and expenditure controlled by Brussels, at the expense of the Member States. Taxation could then be concentrated on the more prosperous parts of the EU, and expenditure on disadvantaged areas to even up the strains, as happens within nation states. But will this happen? Would electorates across the EU be willing to see control over expenditure programmes such as Education, Social Security and Defence moved away from national parliaments. Even if they were, would the stronger economies be willing to contemplate massive transfers to weaker ones, without which nothing would be gained in terms of shoring up the Single Currency?

All these issues have a heavy bearing on whether it would be wise for Britain to join the Single Currency. By staying out of the euro, at the very least, Britain avoids the risk of being caught up in an enterprise which fails, bringing with it enormous costs in terms of disruption, falling confidence, and an inevitable major negative economic and political fall out. It would also make it easier to stand out against the centralising pressures which are bound to accumulate to try to hold the Single Currency system together. The plain facts are that the British people want good relations with their European neighbours, they welcome exchanges of goods and services with them, and they enjoy the removal of restrictions on travel and places of work. They certainly want no return to the belligerence which disfigured the first half of the twentieth century. But they also do not want to become part of a centralised European state.

It is also increasingly clear both from opinion polls and from the general tenor of the arguments about the Single Currency, that the British people are more and more conscious of the positive benefits of staying outside the euro. Britain’s trade cycle is out of synch with that of continental Europe. We remain a magnet for much higher levels of inward investment than other EU countries. A majority of our trade is with non euro-zone economies, and growing proportionately much faster. Much more of Britain’s overseas investments are outside the Single Currency area than within it. Our levels of unemployment are much lower. By staying out of the euro, we can tailor our economic policies to suit our needs, without having to adopt the "one size fits all" interest rate and monetary policies to which all Single Currency countries are now bound.

Indeed, by not becoming part of the Single Currency system, we can retain the most important attribute of all for a self governing democracy, which is to run our own affairs. No area of policy is more important than control of the economy, and this is essentially the freedom which would be given up if we joined the euro. The problem is not just that British people have some considerable unease about sharing sovereignty with other nations whom they may like and admire, but who have markedly different histories, traditions, priorities, values and ways of doing things. The problem is also that the EU is simply not a democracy like its constituent Member States are. There are no true EU wide political parties. Nearly all citizens of EU countries feel a greater sense of loyalty to their own nations than to the EU as a whole. Reflecting this, the EU institutions are essentially centralist and technocratic, with only a fig leaf of democracy in sight, providing a veneer of credibility which is only wafer thin. The British electorate senses all of this, and does not like what it sees. This is why public opinion shows such solid support for Britain retaining the pound, and staying clear of the Single Currency. Friendship and co-operation with our EU partners? By all means. Submerging ourselves in an undemocratic European super-state in the making? This is not what the British people want, as poll after poll clearly shows.