[A-List] UK eurozone membership

["Michael Keaney" <michael.keaney@xxxxxx>]

Euro offensive loses its charm

Larry Elliott
Monday November 18, 2002
The Guardian

Britain will not be voting to join the euro in this parliament. That's a
prediction rather than a statement of fact, but judging by last week's
Queen's speech a reasonable one. Plans to put the issue to the public have
not so much been put on the back burner as left smouldering on a pile of
leaves somewhere at the bottom of the garden. So much for the idea that
November would be euro D-Day, the moment Tony Blair decided to launch his
big offensive.

Proposed legislation in the Queen's speech was supposed to be the final
stage of the government's build-up. First, there was reconnaissance. Voters
would travel to Europe in the summer and come back enthused about the euro.
Come September, the government would wheel out its heavy guns for a
bombardment of speeches designed to extol what Britain was missing by being
on the outside. After a couple of months of softening up, the prime minister
would finally send his troops over the top. Something, it seems, has gone
wrong with the plan. What we saw last week was not the start of an
offensive; more the sense that the government is quietly removing its tanks
from the front line but has yet to work out how to put a positive spin on
the strategic withdrawal.

Whitehall insiders say that Blair has not yet given up all hope of a vote
next year, and the option has been left open. But it would require all of
the following to happen - a robust recovery in the eurozone economy, the
reform of the stability and growth pact, a downturn in the UK, the treasury
concluding that Gordon Brown's five economic tests have been passed and the
expenditure of a great deal of government time and effort to win over a
sceptical public. The likelihood of this happening is, to be frank, slim.

Does it matter if the referendum is put on ice? Not at all. The original
argument, that Britain would suffer grievous economic damage by being
outside the new currency, has rather lost its lustre as the design flaws in
this ill thought-out experiment have started to become apparent. Even
supporters of the project now accept that there may be one or two problems
with a one-size-fits-all monetary policy backed up by a deflationary fiscal
policy.

The new line of argument is, therefore, that Britain could do more to
rectify these deficiencies by being on the inside than it can on the
outside. This is a bit like saying that the best way for Abraham Lincoln to
abolish slavery would have been to set up and run his own cotton
plantations. Britain has far more influence on eurozone economic policy by
doing the right things on the outside than it would have by doing the wrong
things on the inside.

That certainly appears to be Gordon Brown's view. The chancellor is also
rightly concerned about the impact of monetary union on the stability of the
UK economy. With house prices rising at 30%, it is hard to believe that
Britain needs the easing of monetary policy which membership of the single
currency would entail. The Bank of England is already warning of the risk of
a property crash; joining the euro when Britain's domestic demand is so much
stronger than the eurozone's would make it a certainty. It would also leave
the government with only one method of cooling it down - tighter fiscal
policy. Taxes are already going up in the spring, while higher public
spending is the centrepiece of Labour's domestic agenda. Somehow, it doesn't
quite feel right. Likewise, it would hardly help the eurozone - struggling
as it is with low growth - to add the UK economy to the mix, since it would
add to inflationary pressure and lead to higher interest rates.

Brown adopts a trappist-like silence about the euro. It is a reasonable bet,
however, that he sees a referendum next year as a gamble of enormous
proportions and a diversion from the government's agenda to improve public
services. Although there are some who believe that the economics of monetary
union are inconsequential when set against the politics, the chancellor is
not one of them.

Theoretically, there is a possibility that Blair would pull rank on a
reluctant Brown. In practice, however, this would be a recipe for political
suicide and is unlikely in any case as a result of the wording of Labour's
policy on the euro laid down in October 1997. The statement said that the
government would only recommend entry if the five tests were met. Had Blair
said that Labour would join when the tests were met, he could have been
campaiging for a yes vote for the past five years while waiting for economic
convergence. As it is, he has been prevented from doing so, and cannot do so
until Brown says the tests are passed.

Rubicon

The fact that it is "if, not when" means that the prime minister has a way
of saving face if there is not to be a referendum. Every time he has
mentioned the euro recently - and, significantly, such occurrences have not
been frequent - he has made a point of saying that the economics must be
right. If they are not, he can say that the government's political support
for the euro remains firm but the necessary convergence has not yet been
achieved.

It is, however, not quite as easy as that. Blair's hopes that a miracle may
occur which will allow him to call a referendum are born not just out of
conviction but from the knowledge that he will have some explaining to do to
those convinced that he would cross the Rubicon in this parliament.

For a start, there is Britain in Europe, which will find it much harder to
secure financial support for its pro-euro campaign if a referendum is
delayed. Then there are the company bosses, such as Niall Fitzgerald of
Unilever, who believe the prime minister gave them personal assurances that
a vote would be held. Finally, there are the other European leaders, who may
feel that the prime minister has been stringing them along. Make no mistake,
if the referendum is off, there will be bitter recriminations.

Blair has enough political nous to smooth things over, not least because the
eurozone is in such a dreadful mess. In the end, he knows that the pro-euro
camp has nowhere else to go. He may be more worried about how a failure to
hold a referendum would lead to accusations of "bottling it" from the
right-wing press. But, ultimately both the economics and the politics point
in the same direction. The prime minister may believe the enthusiasts for
monetary union when they say there's a price to be paid for not joining, but
there is scant evidence of that at present.

Politically, next year is mid-term, traditionally the time when voters tire
of governments and like to give them a bit of a duffing-up. As far as
disgruntled Labour supporters are concerned, there is no shortage of issues
to get their dander up - PFI, Iraq, top-up fees, the establishment of
American star wars bases in the UK, the erosion of trial by jury and so on.
Those who would not dream of voting for the Lib Dems or the Tories in a
general election would have the perfect opportunity to give Blair a good
kicking in a referendum, safe in the knowledge that it would not lead to a
change of government.

Except, of course, that it might. Defeat in a referendum would be a
catastophic blow to the government's credibility, while even a narrow
victory would also have implications for the next general election were UK
entry into the euro to coincide with further weakness in the eurozone
economy. Such weakness, sadly, is all too likely, since if Europe finds it
impossiible to reform the common agricultural policy there is not much
chance of it effecting the necessary reforms of the European Central Bank
and the stability pact. The commission's response to the crisis in the
stability pact is instructive: it should have more powers to police the
pact, even if that means going against the wishes of elected governments.

So here's the deal. Blair is going to call a referendum when the eurozone is
flirting with recession, when its biggest economy is threatened with fines
by the European commission unless it cuts spending or raises taxes, thereby
making the recession worse, when the stability pact is in tatters and when
member states are being urged to give up fiscal powers to make monetary
union work. Somehow, I don't think so. This would not be Monty on D-Day.
More like Field Marshal Friedrich Paulus at Stalingrad.