1.What has happened to the exchange rate between sterling and the euro since the Single Currency came into being on 1st January 1999?

When the euro was established at the beginning of 1999, many of its proponents were confident that it would turn into a strong and stable international currency, sought after for international trade and investment, and rivalling the US dollar. This is not what has occurred. In fact, the value of the euro has gone down and down against the dollar, hitting a new low recently at $0.88 per euro, compared to $1.17 at the beginning of 1999, a devaluation of 25%. Why has this happened? The main explanation for the euro being so weak is that the euro zone countries have not been seen as an attractive place for investment, compared to competing areas, including Britain. The cost base in much of the EU is still high, compared with the rest of the world, making it cheaper to locate production facilities and a wide range of service activities elsewhere, particularly, in Germany’s case, in Eastern Europe. As a result, encouraged by relatively low euro interest rates, money has poured out of euro zone, bringing the euro exchange rate down with it.

2.Why do exchange rates matter?

Does it matter that the euro is so weak? Yes it does. While a low value for the euro may reflect lack of confidence among investors, it also makes all goods and services produced within the euro-zone more price competitive than they otherwise would be. This is the main reason why the EU growth rate has recently picked up. The high value of the pound against the euro is inevitably causing serious competitiveness problems for British manufacturing. In consequence, even companies which are still managing to export are suffering from a major lack of profitability, reflected in the present turmoil in car production, and in many other less high profile industries which are not so regularly in the news.

3.What needs to be done?

There is little doubt that the value of sterling needs to come down against the euro. Why has this not happened? There are clear and simple reasons. Our interest rates are higher than elsewhere, reflected in a tight and restrictive monetary policy, while foreign direct investment here still remains at a high level, partly because of our low tax regime. British short term base rates, at 6% per annum, are currently 1.5% higher than they are in the euro-zone. Both income and company taxes are on average about one third greater in the euro countries than they are in Britain. The way to get the pound down is to lower interest rates, to relax monetary policies, and to raise taxes both to avoid the economy over-heating and to discourage the inflow of foot loose money to Britain. For a variety of reasons, the present government is unlikely to adopt this strategy. The consequence is that the pound stays high, and is likely to continue to do so.

4.Is joining the euro now the answer?

Joining the euro in present conditions is therefore fraught with problems. Almost everyone agrees that going in at the present exchange rate would be suicidal, leaving Britain locked into an impossibly uncompetitive international position for the foreseeable future. The value of sterling therefore has to be brought down. Making sure this happens, however, means implementing exactly the monetary and tax policies which the present government is so reluctant to contemplate, and which are therefore unlikely to materialise. This is why the government is in no position, at the moment, to advocate strongly a policy of joining the euro, even if it had the support of the public for doing so, which is clearly not the case. Going into the Single Currency in the immediate future is simply not a feasible option.

5.Should we have joined at the beginning?

Some people believe that the current high pound and low euro provide a strong case for arguing that Britain should have gone into the Single Currency when it was launched, thus avoiding the competitiveness gap which now exists. The problem with this argument — leaving aside the wider issues to do with democracy and self government, let alone the long term viability of the euro project — is that the exchange rate which existed between sterling and the euro when the Single Currency began was even then too high to be sustainable for any length of time. More fundamentally, however, this argument is completely misconceived because we could have had a lower and more competitive exchange rate at any time since the beginning of 1999, if the government had wanted one. All that would have been needed were lower interest rates and a more accommodating money supply, combined with some extra taxation. There is a strong case for a policy along these lines, especially for working people and trades unionists, but we do not have to be a member of the Single Currency - or thinking of joining it - to secure its benefits. It can be implemented by our own government whenever it chooses to adopt such an expansionist strategy.

6.What about the future?

Successive governments have promised that Britain will not join the euro unless the consent of the electorate is secured in a referendum. It is now inconceivable that this could happen until after the next general election, which has to take place by the summer of 2002, but which may well happen earlier. Some time over the next two or three years, therefore, there may be a referendum. No government will go ahead with one, however, unless it is reasonably certain that it will achieve the positive "yes" result it wants. At present, about two thirds of the electorate are opposed to entry. Even if, however, during the run up to a referendum - to try to garner support - the pound were made to fall against the euro, this would still not deal with any of the fundamental long term problems involved in trying to run as large and diverse an area as the euro-zone with a single interest rate and monetary policy. On economic grounds alone, therefore, opposition to joining the euro is likely to remain strong.

7.What will happen to the economies in the euro zone?

In the longer term, is it likely that membership of the Single Currency will come to be seen as an increasingly attractive option, even if we do not go in during the next few years? There are two major reasons for thinking not. The first is that the euro zone has never had the characteristics required to make it look like a successful single currency area. It lacks the reasonably even living standards, the common culture, the cross-border mobility of labour, the rough equality of industrialisation and competitiveness, and the civic uniformity of purpose, all of which are needed to make common levels of inflation a permanent reality over the whole euro zone. Without this happening, strains are bound to appear as some parts prosper increasingly obviously at the expense of others. This leads to the second prospect which is going to look an unattractive option to almost everyone. The only feasible way of counter-acting the differential performance between varying parts of the euro zone will be to engineer massive financial transfers between them, through the tax and expenditure system, as happens in all nation states. This will mean shifting from the EU Member States to Brussels powers of taxation and spending on major programmes such as education, social security, defence and the environment. Are the British people, let alone the electorates across the rest of the EU, going to be prepared to see this development occurring? There seems little likelihood that they will.

8.What about democracy and self government?

Problems of democratic control over developments in the EU highlight issues to do with joining the euro which are even more important than those involved with economic matters. These concern the extent to which Britain or any other country can run its affairs at all as a self governing, democratic country if it lacks control over something so fundamental as its money. Joining the euro is not simply, or even principally an economic matter. It is of fundamental constitutional significance, determining whether the primary democratic unit is to be Britain as a nation state, or a pan European super state with Britain as little more than a mere province. No-one should be under any illusion about which of these alternatives is the goal for a majority of the political elite in the EU. The creation of the euro was a political step towards the creation of a United States of Europe. Economic arguments for its formation were at best a side show, and in fact largely irrelevant to the decisions taken to establish it.

9.What do the British people want?

The results of one opinion poll after another make it crystal clear that the British people have accepted neither the economic nor the political arguments in favour of Britain joining the euro. They know that the pound is far too strong for us to go in now. They can see that the situation is unlikely to change much in the immediate future, and that, even if it does, any convergence thus achieved is likely to be of only temporary duration. They also understand that the economic arguments involved in the pros and cons of joining the euro are only a relatively small part of the picture. Much larger constitutional and democratic issues are at stake. It may well be the case that we ought to lower interest rates, relax monetary policy and raise taxation. Many people in the Labour Party would support such a change in strategy, and would be willing to take the chance that we could carry the electorate with us. The crucial issue is whether we are going to be able to go on taking these decisions ourselves, or whether we should hand them over to unelected bankers in Frankfurt. As long as the British people realise that this is fundamentally what is at stake, there is little doubt that our likelihood of joining the euro now or in the future will remain as low as it is at present.

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