[A-List] UK eurozone membership: Blair cautious

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

Finance / One day the euro may come to be loved /

One day the euro may come to be loved

Larry Elliott on why Britain is not ready to embrace the single currency

Tony Blair has every reason to feel a bit miffed. A couple of months ago he
took the most momentous of political risks in taking Britain to war in Iraq,
yet now he is accused of being a weak, dithering wimp over his refusal to
back an immediate referendum on the euro. Whatever you might think of the
British prime minister, the idea that he lacks bottle is harsh, which has
made the recent attacks on him sound somewhat hysterical.There is, however,
none so bitter as a lover scorned, and those bracketing Blair with Harold
Wilson or urging that he should be sacked, feel that they have been left
standing at the altar. It's pretty clear that the euro nuptials have been
postponed, and that the chances of the ceremony taking place at any time in
this parliament are slim.

Blair, it is said, has been "got at" by Gordon Brown and his wicked Treasury
henchmen. The reason for the increasingly shrill attacks on the prime
minister are to put some backbone into Blair for a last-gasp struggle with
the chancellor to keep the option of a referendum open for this parliament.

Brown, for his part, seems remarkably unperturbed by the furore. He made it
clear last weekend that he was not a "no, never" man when it came to the
euro, but that the decision had to be taken on the basis of the national
economic interest. Sources close to the chancellor say that there is far
less disagreement between the first and second lords of the Treasury than
reports would suggest.

It is worth recalling that Blair has never promised there would be a
referendum, but simply promised to assess the five economic tests for entry
within two years of the 2001 election. This assessment would determine
whether there was a "clear and unambiguous case for joining a successful
euro", and the prime minister has stuck to the formula that the economics
had to be right. Yet it is impossible to argue that there is a clear and
unambiguous case for entry unless the euro is successful, and even a
politician as persuasive as Blair would be pressed to argue that it has
been.

There are three key points here. The first is that the performance of the
eurozone economy has been deeply unimpressive. Growth in the eurozone is
dismal, unemployment is high and rising, investment is weak, domestic demand
is stagnant and public spending is under pressure. Economists who support
British entry argue that eurozone countries are enjoying increases in trade
flows between them as a result of the currency, and that Britain would in
the future risk seeing inward investment dry up, but they tend to gloss over
the fact that the UK - while no economic nirvana itself - has its lowest
unemployment for 25 years while joblessness in Germany and France has been
rising since euro notes and coins were introduced.
A second factor is that the framework for conducting economic policy in the
eurozone is contributing to the weakness of employment. There is denial here
on the part of those who tend to view the single currency through
rose-tinted spectacles. The European Central Bank was constructed along
deflationist lines and the governing board has stuck to its founding
principles. Interest rates should have been cut last week, not just because
Germany is facing economic and political crisis, but  because the rise in
the euro's value since January has been worth a percentage point on interest
rates. With the stability and growth pact ensuring that fiscal policy is
also contractionary, the ECB's refusal to ease policy was incomprehensible
to all but the most rigid of monetarists.

As Brown will no doubt have pointed out in his discussions with the prime
minister, the third factor worth mentioning about the underperforming
eurozone is that the theoretical objections to a one-size-fits-all monetary
policy are now being supported by the hard evidence. Some of this is
blindingly obvious. In Germany, for example, policy is too tight; in Ireland
it is too loose.

But it's also interesting to look at the comparison between Germany and the
Netherlands, which from the early 1970s to the late 1990s were the two most
aligned economies in Europe. In the late 1990s the Dutch had a housing
market boom similar to Britain's, with equity withdrawal fuelling consumer
spending. The growth, inflation and unemployment rates of the German and
Dutch economies diverged sharply, suggesting that real and lasting economic
convergence can be a problem even for the most congruent of economies.

These three factors have proved compelling for the Treasury, if not for its
pro-euro critics, who are now seeking to move the argument away from
economics and on to politics. The clock has been turned back to 1989, when
the same arguments were used to demand Britain's member ship of the exchange
rate mechanism (ERM). As such, Britain must join not just to achieve
economic stability but also to punch its weight in Europe. In the end the
ERM led both to economic disaster and the marginalisation of Britain within
Europe.

Brown's case to Blair is that Britain's history is littered with dumb
economic decisions being taken for political reasons. The loss of
credibility involved in fighting and losing a referendum would be
considerable, which is presumably why the Conservatives are urging the
Government to hold one. Brown will argue that to take the advice of the
pro-euro lobby would be a colossal gamble, and that some of those purporting
to offer the prime minister friendly advice place a higher priority on
Britain joining the euro than they do on Britain continuing to have a Labour
government.

The fact that Blair appears to have heeded the chancellor's advice is deeply
worrying for the pro-euro camp, because the logic of Brown's argument is
that there may be no euro referendum in the next parliament either if the
next economic assessment is also negative. From the chancellor's point of
view, this is an entirely sensible position to adopt.

The euro experiment may eventually prove to be a success, but at the moment
it looks to the Treasury more like the creation of Dr Frankenstein. It is
not working now, and so it is right not to join. And if it is not working in
three or four years' time, it won't be right to join then, either.

The Guardian Weekly 20-3-0515, page 12