MY EURO TERMS - Sceptics believe that Gordon Brown's five economic tests for taking Britain into the eurozone will be met - if at all - only when it is politically expedient for the Government. As a counterweight, MT asked 11 leaders of influence to propose their own. Some stick with the 'famous five' formula; others are more maverick. All enliven a debate vital to Britain's future.
Sceptics believe that Gordon Brown's five economic tests for taking Britain into the eurozone will be met - if at all - only when it is politically expedient for the Government. As a counterweight, MT asked 11 leaders of influence to propose their own. Some stick with the 'famous five' formula; others are more maverick. All enliven a debate vital to Britain's future.
ROSEMARY RADCLIFFE, chief economic adviser to PricewaterhouseCoopers. She is writing here in a personal capacity
Although the five tests are economic tests, the debate in the UK has been as much about politics as economics. I believe it should be rather more about economics, but there must be a better realisation of what the economic issues are. Weighty tomes from the Treasury are all very well, but it should be possible to have a debate without entering into the finer points of endogenous growth theory.
We should focus on just one economic test: 'Is there an expectation of a reasonable degree of real, sustainable economic convergence between the UK and Euroland?' In my view the five tests boil down to this one proposition anyway.
What do I mean by a reasonable degree of real convergence? I do not mean having to increase taxes to Scandinavian levels, adopt German labour market regulations, move tomorrow to fixed-rate mortgages, adopt Eurosausages, straighten out our bananas, or any of the other 'convergence' stories beloved of some parts of the press. I mean that to realise the potential benefits of joining a single currency without seeing them wiped out by disbenefits, our economy must be moving along broadly the same cyclical path as the euroland average, allowing us to live reasonably comfortably within a single interest rate regime. Simple tools can be used to see how this convergence is coming along, such as the PwC Convergence Index, enabling a sensible discussion on whether it is getting better or worse. We've become more convergent since the decision in 1997 not to join, although there are signs we may be less close in 2003. Is this good enough for my test to be passed? Well, that is where the debate should focus: using a test where people can look at some graphs and form a view. A better-informed view.
The official five tests are a political gambit. There is no reason for us to join the euro in the foreseeable future.
We need to retain control of our monetary policy. The euro is about hurrying political union. Political union means accepting the European way of doing things: the social market economy and the debilitating labour regulations that go with it.
All the competitive advantages we made under Margaret Thatcher in the 1980s would be lost and we would revert to being an uncompetitive economy.
1. Is the euro working for those countries that have joined? Without evidence that joining the euro is good for jobs and growth in the eurozone, we should stay out.
2. Will the eurozone begin the structural reform necessary to allow the euro to work in the long term? The eurozone has the problems of a single interest rate, a rigid stability pact, and a lack of labour mobility - all difficult to overcome. The eurozone should create a system of fiscal transfers - as in the US - that can shift money from prosperous areas to those that are underperforming. This would go some way to addressing the inflexibility.
3. Will further economic and political integration lead to more red tape? There is widespread concern in business that further European integration will encourage more business regulation from Brussels.
4. What do businesses think? While the euro campaign in Britain is driven by politicians such as Tony Blair, businesses will remain largely opposed. Businesses create the jobs on which the British economy depends - without their support it will be difficult to justify entry.
5. How do the polls look? Clearly, this is the real test. Quite simply, if the Government sees that the polls have moved in favour of the euro by next year's Budget, they will conclude that progress has been made on the economy. If not, they will say that the economics are still against early entry.
I have a big box in my office. It contains several kilos of paper produced by the Treasury to back up its equivocal stance on the chancellor's five tests.
1. The UK economy should be a sustainable best fit with the eurozone. We must look beyond the current eurozone economies to the accession countries, where there may be much economic instability, and to the rest of the global economy, in particular the US. We should not go into monetary union if we have a better fit with other economies or if the fit in Europe is a risk-laden one.
2. There must be a proper and audited cost-benefit justification. I worry that the conversion costs will dwarf the uncertain benefits. Consumers must know the costs and benefits if there is to be an informed referendum on euro entry.
3. The European Central Bank, which will be setting the one-size-fits-all interest rate, must be at least as transparent as our own Bank of England.
4. Joining the euro must not be a Trojan horse capable of attacking our economy. Its strengths include labour market flexibility and tax regime freedoms. We have enemies waiting to undermine our success.
5. The eurozone area should use English as its basic cross-border language. It's economically wasteful to maintain the current proliferation of languages. Aligning Europeans to the language used in much of the Western world, notably the US, would be a crucial step.
1. The UK has held a fairly worded referendum, with an overwhelmingly positive result and with over 50% of the population voting.
3. The EU has abandoned the Common Agricultural Policy, which overcharges consumers for food, disadvantages third world producers and encourages damaging farming techniques.
4. The eurozone countries have refinanced their bankrupt pension systems so that they are wholly solvent.
5. The EU has fired all the bureaucrats who run the system and installed democratic institutions in Brussels and Strasbourg.
We believe that the UK should not join the euro in the 'foreseeable future'. These are our own five tests:-
1. Sustainable economic convergence must be achieved, so that the UK could live with the European Central Bank's interest rates without the dreaded boom and bust. Without this convergence, interest rates would be either too high (as in Germany) or too low (as with Ireland). If we had been in the euro from its inception in 1999, our housing market would have caught fire (instead of being just red hot), unless there'd been swingeing taxes on homeowners. This is the chancellor's first test and the most crucial by a mile. There are few signs that it could be achieved in the foreseeable future.
2. A reasonable exchange rate when joining - say, pounds 1 = EUR1.35, or EUR1 = 74p. We are almost there.
3. Fewer EU directives interfering with our financial markets, taxation system, employment laws, environmental laws etc. This is, of course, whistling in the wind. In the light of the draft Constitutional treaty, there is likely to be more EU activism in these areas rather than less.
4. The EU and the national governments of the major member states (especially France and Germany) undertake economic reforms to inject some entrepreneurial dynamism into Europe instead of expecting the US to pull the world economy out of recession.
5. All politicians and lobbyists for the euro should be scrupulously honest at all times about the euro. The odds for euro entry would surely lengthen!
How much longer can we risk the welfare of future generations of our people by our lack of decisiveness in comprehending that unless we embrace our chance to join in the leadership of Europe now - and embrace its common currency too, now - we have absolutely nowhere else to go?
Deciding whether or not to enter the single currency based solely on an economic test is completely wrong. The criteria for adopting the euro should be based on how our nation will change as a result and whether the British people will welcome these changes.
On this there has been very little open and honest debate. Tony Blair and the pro-euros have decided that it is in the best interest of the British people to join, irrespective of what we think. There are issues to be discussed before a decision is made - issues that are far more important than the passing of five economic tests, about which the majority of the public neither understand nor care to.
They do care that our economy is in competent hands, and that as a nation we prosper, but there are as many arguments against adopting the euro as there are in favour. The health of our economy doesn't depend on whether we are in or out but on whether the economy is well managed.
It's more important to the British people how we as a nation will change over the years. Suddenly, we'll look back and see that we set ourselves on a course that has changed its fabric and character. We will no longer be a British nation, with all the quirks that make us peculiarly British - we'll be 'European'. If we adopt the euro, we will quickly and drastically alter and eventually erode the character of our nation as a sovereign state.
Again, the question is not whether it is right or wrong but whether it is what the British people want. I think not, but I believe that they should be allowed to answer this important question for themselves.
The chancellor's five economic tests are an attempt to inject objectivity into a highly charged issue. Yet anyone who suggests that economics is a rigorous science has never sat between two economists at a dinner party.
The real tests should be about people's perceptions of the effects on their livelihoods. And these must get to grips with their fears about the last of Britain's imperial power disappearing into the Babel of European bureaucracy.
Both the EU and the euro must become much stronger brands. This is not about logos and flags, but about having a clear central organising principle, and engaging people in a vision of what both are trying to achieve for people in the future that's worth buying into now. It helps to have a vision and clear organising principle in the first place, and if the managers of the EU and euro brands already have these, they must have their own reasons for keeping them secret.
Taking a people perspective, I would suggest testing for: will my house go up or down in value?; will my job/company be more or less secure?; will Britain still be able to behave as America's special 'friend'?; will the rest of the world still respect us, or see us as reporting to Germany?; and, even if we wouldn't go as far as saying 'Will Tony be the brand manager of Europe?', does he have the influence and stamina to be in the central driving seat?
1. How has Britain done outside the euro? We should not think about joining the euro when the British economy is outperforming the eurozone, with faster growth and lower unemployment. By keeping control of our interest rates and taxation outside the euro, we have had the flexibility to respond to changes in the global economy. Locked into the euro, we wouldn't have the same policy options.
2. Could we negotiate our exchange rate before joining? Some businesses are enthusiastic about the euro, believing it would lead to a lower exchange rate. In fact, we would have to vote in a referendum without knowing what rate we'd join at - this will be decided afterwards with the other eurozone members. We need at least some idea of the range we would be locking in at.
3. Will we sometimes have no say on interest rate decisions? The proposals on the ECB voting structure would give Britain a say on interest rate decisions only four in five times - unacceptable if we were in a recession and needed a rapid change in interest rates.
4. Will there be genuine changes to the Stability Pact? The German economy has had to cut public spending, despite being in a downturn because it has to keep its deficit below 3%. But this is the opposite of what is needed. The pact must be much more flexible.
5. Will it be good for Tony Blair? There are rumours that the prime minister sees euro entry as a stepping-stone to greater things in Europe. This may or may not be true, but what is clear is that Tony Blair sees this as his own personal project, while the economics come a clear second for him.