[A-List] UK eurozone membership

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

Who will demand their pound?

In the third of a series of articles ahead of Gordon Brown's announcement on
the euro on Monday, CATHERINE MacLEOD assesses the threat to sovereignty
The Herald, 4 June 2003

WHEN the late Sir Jimmy Goldsmith, leading the Referendum party, bounced
John Major and the Tory party into promising a referendum on the future of
Europe and monetary union in 1996, Labour instantly understood it would have
to follow suit.

Kenneth Clarke, the former Tory chancellor, still describes how Gordon Brown
gave him a dressing-down, demanding to know "what on earth they were
thinking of". Mr Clarke admits that he and Michael Heseltine, another
fiercely pro-euro Tory, had pathetically fallen into line to support the
embattled Mr Major. Mr Heseltine now describes that decision as one of the
biggest mistakes of his political life.

Mr Brown, who is reputed to have been even more pro-single currency than
Tony Blair back then, realised that the economic case for joining the euro
would have to be at the heart of any referendum campaign. Until then,
arguments about membership of the single currency had centred on politics
rather than economics.

British sovereignty and its right to control its own affairs was not an
issue then but has risen up the political agenda because of Europe's
reluctance to reform. Many say Britain already has relinquished a degree of
sovereignty, and once the economic conditions are met will prosper by
pooling more control.

While the prime minister and the chancellor insist the decision to hold the
referendum depends entirely on the economic implications for the country,
they have both made it abundantly clear they believe the UK's political
destiny lies in Europe.

As we have seen in recent weeks, the eurosceptic lobby is preparing to make
political sovereignty and political federalism two of its main campaigning
issues. As the euro's opponents limber up for the battle, they have used the
negotiations over the European constitution to give Messrs Blair and Brown a
taste of what is to come.

Ironically, the prime minister appears ready to make a campaign to join the
single currency a battle over Europe: does Britain want to stay within the
European Union, or does it want to leave. This probably reflects Mr Blair's
true position rather than a cynical tactical strategy to split the
anti-euro/pro-Europe camp.

After years of sitting half-in, half-out of Europe, the prime minister
believes the UK cannot be a leader in Europe if it is not part of Europe's
core and, according to the pro-euro lobby, that core is defined by the
single currency.

Political and fiscal sovereignty will dominate any referendum campaign. The
right-wing press will talk about losing the pound, the loss of British
and-or Scottish identity, heritage and history.

The sceptics on the left oppose the loss of any flexibility and the ability
to adjust interest rates. Sceptics already cite Germany's inability to
adjust interest rates as a reason for its growing unemployment.

The difficulties over interest rates centre on the one-size-fits-all for the
12 countries already members of the eurozone. Opponents argue that in the
last 18 months, since the US-led global economic downturn began, the UK has
been able to cut rates more often and faster than the European Central Bank,
and the economy has not suffered as much as those within the eurozone.

Unless the EU's growth and stability pact is reformed, it is difficult to
understand how Britain will not lose control of its fiscal policy. The EU is
already insisting that half a per cent is pared off each year from the UK's
budget deficit to reach a balanced budget.

On the other hand, the pro-euro camp will argue that Britain will influence
the necessary reforms of fiscal policy and the common agriculture policy
only if they are sitting at the top table. And history has proved that
whether in or out of the EU, decisions made in Brussels influence life in
the UK.

It is difficult, in an inter-dependent world, to make hard-and-fast
arguments on sovereignty. There is a strong argument that individual
sovereignty in the UK, as opposed to the state's, has increased since
Britain joined the EU. The Human Rights Act has extended personal freedom,
there is greater freedom to trade and travel.

Come the referendum, in the next parliament, if not in this, sovereignty
will hardly be the issue. As in every other election, voters are likely to
opt for the choice that offers the best standard of living.

Tomorrow: Economic growth

The Economic Tests: Flexibility

The flexibility test examines the extent to which the UK and the eurozone
economies are able to cope with future economic change, even with the
occasional dramatic shock to the system.

The Treasury sees this test as closely related to the central question of
convergence. Flexibility covers labour, product and capital markets.

In all of them, the issue is their capacity to respond to rapid change.

Do workers have the flexibility to respond to changing demand for particular
skills? Do firms have the flexibility to respond to pricing pressures?

In 1997, the government was particularly concerned about skills and
relatively high levels of long-term unemployment in the UK.

It will be interesting to see how far its much-vaunted labour market reforms
have eased these doubts six years on.

That said, rigidities in eurozone employment policies may well feature this
time round as reasons for believing this test has yet to be met.