1

Of the 15 countries in the European Union, 11 are committed to joining the Single Currency on 1st January 1999. Greece did not meet the Maastricht criteria, and Britain, Denmark and Sweden opted to stay outside the new system. The 11 countries which are going ahead will have the exchange rates between their currencies fixed, very probably close to where they are now, as the euro comes into being as the basic currency of all the 11 currencies at the beginning of next year. The national currencies ñ francs, Deutschemarks etc ñ will then become merely divisions of the new Single Currency. Initially, the euro will only be used for major transactions, and notes and coins will stay the same as they are now. Towards the end of the three year transition period, however, all national currency denominations will start being phased out, so that by 2002 only the euro will be left for all transactions, large and small. Since from 1st January 1999 all the currencies in the 11 countries effectively become one, all will have the same interest rates. There will then be one monetary policy for the whole of the single currency country area, run by the European Central Bank.

Until recently, it looked as if all might be set fair for the initial period after the Single Currency comes into being. The growth rate in the EU has picked up a bit recently from the very low levels of the early 1990s. In 1997, the EU economies have recently expanded by 3% compared to less than 1% during the early 1990s. As a result, unemployment has fallen a little - from 12% to 11%, although this is still a very high figure. World economic problems, however, have caused almost everyone to doubt whether the EU will continue to grow as fast as 3% a year during the coming period. As a result, there will not be enough growth to stop unemployment rising, investment falling, and strains on government finances everywhere becoming more acute. In these circumstances, it is going to be much more difficult for governments in the 11 countries to stay within the Maastricht convergence criteria, to which they are required to continue to adhere, than it would be in more prosperous times. The pressures for expansionist policies to deal with unemployment and low growth are going to become more acute just at the time when the rules and control structure of the Single Currency, underpinned by the Stability Pact, make them less likely to materialise. These eventualities mean that the initial prospects for the euro are likely to be a good deal more problematical than at one time seemed possible.

The European Central Bank is in a uniquely strong position compared to other central banks in the world. At least formally, it is largely insulated from political pressure. Its Board Members serve for non-renewable eight year terms. Its meetings are in secret, with no disclosure of voting. Its primary function is to keep inflation down. Growth and employment targets are not included in its remit. The recent spat over who should chair the ECB between France and other Member States has soured personal relationships among senior Board Members. All these factors have combined to make the ECB much more Europe centred and less internationalist than is desirable. In consequence the ECB has done little to respond positively to the worldís current financial and economic problems. Instead it has concentrated on internal EU problems, particularly those intrinsic to the setting up of the Single Currency, at the expense of carrying out a world orientated role. This could turn out to be a major mistake.

The long period of rapidly rising prosperity in Western Europe during the 1950s and ë60s was one when most of the countries now in the EU had accommodating monetary strategies, low real interest rates and competitive exchange rates. Unemployment was almost non-existent, and fast economic growth and high levels of investment were widely prevalent. By contrast, the last 25 years have seen exactly the reverse experience. Growth in the EU has been far below the world average, as the number out of work has risen inexorably and EU industries have become less and less innovative and competitive. The prospects for the EU for the early years of the euro depend crucially on whether the Single Currency is managed like national policies have been since the mid 1970s when monetarism became fashionable, or whether there is a reversion back to the policies seen in the ë50s and 60ís. Regrettably, all the evidence suggests that recent trends will continue, and that the euro will be a relatively hard currency, exacerbated by devaluations in the Far East and a weakening US dollar.

If the assessment in the previous paragraph turns out to be correct, the prospects for growth and employment in the 11 EU countries are unlikely to be any better than they have been for the past 25 years. During this period the growth rate has been only about 2% per annum, and unemployment has climbed from almost nothing to 11% of the labour force ñ and a much higher figure, closer to 30m, if all those who would like to work but who are no longer in the claimant count were included. The critical issue for the Single Currency project is whether it will be able to stand up to the political strains which will inevitably materialise if the EU continues to perform as relatively poorly economically over the coming years as it has over the last two and half decades.

Those who believe in the Single Currency claim that the euro will produce an environment where there will be more growth and less unemployment as a result of the greater stability and insulation from world events that a large single currency area can produce. But where is the evidence that stability and insulation from the world, on their own, produce better economic performance? The economies which have done best are surely those which have been most exposed to world trade, and which have ridden the waves of foreign competition most successfully because of their willingness to adapt and change. The danger from the "Fortress Europa" mentality is that far from becoming a beacon for the rest of the world, the EU will become an economic backwater, as its growth performance relative to the rest of the world continues to falter, and its political influence consequently declines.

There is little doubt that the Single Currency is a high risk project. The way it has been established entails EU economic policies having a deflationary bias which is bound to lead to political strains and very probably to labour unrest and rising racial tension as well. If to these are added the well known problems of low labour mobility in the EU, lack of redistributive taxation powers at the Brussels level, and disparities in average income, competitiveness and inflationary history among the constituent Member States, the intrinsic instability of the Single Currency becomes apparent. It is impossible to predict when the problems thus entailed will reach crisis point, but it is highly unlikely that over the coming years they will all remain quiescent. The crucial issue is what will happen when they surface.

World history provides hardly any examples of single currency areas remaining in being for any length of time unless they evolve into unitary states. This is the crux of the issue, which makes it is therefore relatively easy, therefore, to predict the broad shape of the way events will inevitably develop. When the EU Single Currency comes under severe strain, as it surely will, and it looks as if one or more countries might break away, one of two developments is bound to occur. One possibility is that the Single Currency régime will break up, probably leaving a hard core of countries in what would effectively become a latter day DM zone. The second is that huge political pressures would come into play to shore up the Single Currency by transferring much more power to Brussels. Since it is economic power which would be needed, the changes which would have to take place would be the transfer of taxation powers and spending control over major programmes such as Defence, Social Security, Education from national to EU level. This would be the only mechanism available to produce the large scale transfers of funds to the more disadvantaged areas necessary to hold the Single Currency together. Momentous changes along these lines, however, would not just have major economic implications. They would inevitably form a major step along the road to the establishment of a United States of Europe ñ the real objective which the architects of the Single Currency always had in mind - leaving existing national governments with little, if any, more power and autonomy than the states in the USA, or local authorities in Britain.

Why indeed? The Single Currency is a highly risky project, and we do not need to take part in a gamble which may well fail to hold together at all. If it does succeed in surviving, there is a very high chance that its continuing existence will depend upon a massive strengthening of the powers of Brussels over the constituent Member States, for which there is no evidence at all of popular endorsement in Britain. Of course, there is very widespread support for good relations between the countries in the EU, as well as those outside it. This is a completely different matter, however, to agreement to hand over hard won democratic rights over the raising and spending of vast sums of money to unelected EU Commissioners. Still less is there any popular enthusiasm in Britain for submerging our long established national identity into an EU structure which almost entirely lacks the democratic legitimacy which it has taken centuries to establish here at national level.

The greatest achievement so far of those who are sceptical about the motivation of those advocating the Single Currency, who are highly doubtful as to whether the promised benefits from the euro will materialise, and who are deeply concerned about the democratic implications even if they did, is that Britain has not yet joined, and is still uncommitted to doing so. We have been promised a referendum before any decision can be taken by Parliament to take Britain into the euro. Our key task now is to hold public opinion on our side, so that the referendum is never held. No government will want to hold a referendum, advocating that we go into the Single Currency, only to find its recommendation for acceptance rejected by the electorate. Undoubtedly there will be a propaganda onslaught, financed by the tax payer, to persuade the British people to change their minds. We need to marshal the same degree of commitment, expertise and money to oppose developments which all rational calculations show cannot be in our best interests. Across the political spectrum, and not least on the left, there is increasing evidence that this is beginning to happen.