Britain and EMU: Emerging from Denial

By
Forex Currency Exchange on White Background
Britain and EMU: Emerging from Denial - Alan Butt Philip

The widespread and publicly expressed skepticism about economic and monetary union to be found in the United Kingdom conforms to a long established pattern. Doubt and ambiguity concerning the European integration process has dominated British attitudes toward the EC, and now the EU, since the 1950s. Government and people have usually been at one in this respect. Britain was wrong-footed by the development of the EEC, failed to appreciate the dynamizing impact of the Single European Act and pretended too long that economic and monetary union was not going to happen. Observers of the European integration process inevitably have a distinct sense of deja vu as the new Labour government starts to clear the political decks in preparation for possible late entry by the UK in the Euro-zone. Even now the discussion in Britain is dominated by fears of being left behind by the economic downside of being on the edge of the Euro-zone, and concerns about loss of political clout arising from maintaining a position of splendid isolation -all negative reasons which avoid making the positive case for renewed steps to achieve further economic and political integration in Europe.

The British approach to the development of the EU results from an over-economic perspective in the integration process generally. It has always been thus. So high politics justifications of building up an economic and monetary union in order to secure the post-1945 and post-1989 settlements of past European conflicts appear to have escaped the British. Such justifications are not part of the common currency of political debate and are rarely expressed, even by the EMU supporters in the UK.

In fact there is a growing problem, still largely hidden from view in the UK, which is that too many younger people just do not know anything about the political context which spawned and has driven the European integration process forward for fifty years. The good thing is that most people in the UK seem to accept that the EU is here to stay and should be treated as a fact of life that has to be dealt with and cannot be avoided. The bad thing is that so many still don't appreciate why Britain ever joined today's Union in the first place.

Even at the level of the political and economic elites in Britain there is precious little insight into the reality of European integration. Not only has the teaching of history in our schools and universities been marginalised and dumbed down so that few people under 35 have much sense of the twentieth century history of Europe as a whole. But our political class, still heavily recruited from the universities of Oxford and Cambridge, has not been educated about European integration. Oxbridge did not discover European integration as a legitimate subject of study until the 1990s, and even then the subject is taught mainly to postgraduates recruited from overseas!

Given the skepticism about the EU prevalent among the mass media and public opinion, and the continuing ignorance of our political and administrative elites on matters European, it is not surprising that Britain is unprepared for EMU. The wonder is that our government is now taking seriously the option of joining the single currency at all. The arguments in favour that do command attention in the UK are almost all economic - just as Britain's original decision to join the ECs was primarily governed by economic self­interest.

The British mindset became fixed upon the economic advantages of membership in the ECs back in the 1960s. The political case for European integration was seen as a secondary consideration and heavily qualified by claims that Britain could always protect her national interests by recourse to a national veto in the Council of Ministers. This has proved to be an unreliable crutch in the longer term, as the enlargement of the EC and the pressures to complete the common market have forced significant shifts in the decision­making procedures of the EC/EU towards voting by qualified majority in the Council, with powers increasingly being shared with the European Parliament. Events in the 1980s and 1990s have laid bare the British illusion that the EC could be run as an intergovernmental regime based upon co-operation rather than full integration. To stay in the political and economic game the UK has had to accept far more political integration than it had bargained for. Even in 1998 there are many in Britain, particularly on the right of the political spectrum, who do not understand that just to achieve the famous level playing field which governs the single market it is necessary to pay a political price, in terms of centralised rule-making by qualified majority through the European Community institutions.

Economic and Monetary Union thus represents for many in the UK yet another step (and a very major one) being taken down the slippery slope towards full economic and political integration in Europe. Conservative governments from 1979 to 1997 were hostile to this project, but once the EU embarked upon it they were keen to shape its development and to keep open Britain's options in relation to the single currency. Even that vital and modest concession to reality broke the unity of the Conservative party and, as much as anything, ensured the rout of the Major government at the polls in May 1997. The tone of the new Blair government in regard to the European Union represents an enormous reversal of policy. A positive face is now being put on matters European, and the framework of debate in Britain has now been transformed. But the substance of British actions so far in the European theatre of politics has not changed much, apart from the belated acceptance of the social chapter of the Maastricht Treaty. There is a delicious irony in entrusting to the British presidency the responsibility for setting the final arrangements for the launch of the single currency in January 1999. Indeed Britain's very detachment from the original EMU decision may prove to be a bonus in giving the Euro, and the decision on which countries are eligible to participate in the first wave, extra credibility. Yet, even if the Maastricht convergence criteria are met (however nominally) by the eleven applicants for first wave Euro status, there is increasing recognition in the UK that the indicators of the real economic convergence necessary to underpin the credibility of the new currency are not being measured or even weighed in the balance when the decisions on participation are being made. Such indicators would have to include rates of unemployment, GDP per head, and rates of economic growth.

As far as the UK's own position in relation to the Euro, it is now dawning on the business and financial communities just how extensively they will be affected by the advent of the Euro, whether or not Britain formally joins it. When Marks and Spencer announce that they will be able at all 11,000 of their sales points to handle transactions in Euros this suggests that the Euro could quickly become a parallel currency in some sectors of industry and commerce in the UK. But lack of a government lead in the mid-l 990s now means that there is no way that Britain could be made ready to join the Euro in time for 1 January 1999. The new Labour Chancellor, Gordon Brown, told the business world last year to get ready for the single currency and at last there are clear signs that the onset of the Euro is being taken seriously rather than dismissed as another European pipedream -just what British officials also said about the common market in the 1950s ! Academic economists however are still critical of the timing of the project because so few of the hallmarks of an optimal currency area are in place.

But to get the British out of a mindset of denial about the Euro, the Labour government first of all had to promise that the UK will not sign up to the single currency without there first being a referendum held to assent to this step and secondly, Mr. Brown has pledged that the government will not propose such a move unless five further tests have been applied and satisfied. These are that there is 'sustainable convergence' between the UK and other economies participating in EMU; that EMU has the flexibility to cope with economic changes and its impact upon employment is positive. The impact of EMU upon investment in the UK and the financial service industry will also be assessed. Overall the Chancellor wishes to be satisfied that it will be in the UK's interests to join the Euro­zone and he may well come to this conclusion even if all five tests are not met in full. The question of the exchange rate parities which will be fixed for sterling upon joining the Euro is of great concern to British exporters of manufactured goods. They are currently being crucified by a strong pound, which is generally reckoned to be as much as 15 percent overvalued in relation to the German mark. No one is discussing how a major devaluation of sterling is to be achieved before the pound gets locked into the Euro, but everyone is all too aware of the potentially fatal impact of locking sterling into the 'wrong' rate, given the very raw memories of Black Wednesday 1992 when the pound was catapulted out of the exchange rate mechanism. Technically, the pound ought in any case to be rejoining the ERM up to two years ahead of any planned entry into the single currency, according to provisions in the Maastricht and Amsterdam treaties, but that is another subject that politicians in the UK would rather not talk about just now.

The British attitude to the Euro will above all be conditioned by how the Euro performs after its launch next year. If it performs well and is credible in the market place, then the UK is likely to put its own progress towards the Euro on a 'fast forward' track: the Labour government could even be forced to join forces with pro-EMU Liberal Democrats and Conservatives to carry Parliament and the ensuing referendum on this subject. If the Euro performs badly and does not enjoy market credibility, British caution will appear to have been justified, even though the role of Cassandra does not win friends and the course of European integration would have been damaged, perhaps even irremediably. Either way Britain's approach to the single currency will have been an example of her walking backwards towards European integration. Business as usual!

Alan Butt Philip is the Jean Monnet Reader in European Integration at the School of Management, University of Bath, England. He won the Charles Douglas-Home Memorial Prize in 1989 and served as Specialist adviser to the House of Lords Select Committee on the EC.