LABOUR EURO-SAFEGUARDS CAMPAIGN

BULLETIN FEBRUARY 1997

FUDGING THE CRITERIA

 

A year ago, it seemed likely that if the single currency began to operate on 1st January 1999, the members with the most weight within the new arrangements would be Germany and France. With the Bundesbank in the driving seat, there appeared to be a reasonable prospect that the Euro-currency, whatever its other demerits, would at least be underpinned by the respectability and reputation established by the Deutsche Mark.

No-one, least of all the Germans, seems to have anticipated the likelihood - now apparent - that several other countries with much weaker economic credentials might, through sleight of hand, appear to comply with the Maastricht convergence criteria. Italy, Spain, Portugal and Ireland now look like such potential candidates. And with membership of the single currency go votes on the governing body of the European Central Bank, which will control the Euro.

Little wonder, therefore, that Germany fought hard for its version of the so-called Stability Pact. This would have made fines mandatory and automatic on Euro currency members who fell from grace after joining the single currency, by allowing their borrowing to rise to a level higher than that set out in the Maastricht Treaty. The German proposal was for a system operated by officials, operating to a formula, untrammelled by political control. The decision taken at the Dublin Summit, supported by the French, was for a somewhat greater element of political control over the Stability Pact procedures, which was exactly what the Germans feared. Instead of being completely automatic, the penalties will now apply to any country whose borrowing requirements exceeds 3.0%, and whose GDP has not fallen by at least 0.75%. If it falls by between 0.75% and 2.0%, any country concerned can plead its case to the Council of Ministers. Only if the fall is more than 2.0% will there be exemption from penalties.

This is still a draconian regime, however, particularly when the European Union is very likely to be plunged into a further period of slow or nil growth, increasing unemployment, fiscal deficits and rising borrowing, as each state hoping to join the single currency attempts to deflate its economy sufficiently to appear to meet the criteria. Once through 1997, the crucial year when the eligibility tests for single currency membership will be applied, what prospects are there that financial rectitude will stand in the way of rising budget deficits, as both unemployment and pressures for more public expenditure soar?

Increasingly, it is becoming clear that the dam is likely to break, bringing rising fiscal deficits in train as deflation bites deeper, and public expenditure pressures become irresistible. These are just the conditions which will trigger the Stability Pact penalties. This is not the basis on which the single currency has been sold to its dwindling band of supporters, whose confidence has already been eroded by the patent fudging of the convergence criteria which has been allowed to occur.

The French government has been permitted to appropriate the accumulated pension rights of those working for France Telecom, which is being privatised, to reduce the French PSBR. Belgium is selling part of its gold reserves for the same purpose. Italy has imposed a special tax to bring down its public finance deficit, but with promises that the sums involved will be returned to the tax payers once the qualifying year for the single currency has passed. All of these arrangements, at best, involve "one off", and therefore unrepeatable massaging of their public sector accounts. None of them has anything to do with producing genuinely sounder finances.

The danger of all these developments is manifest. The fudging which is going on, acceding to political pressures from political and business élites in countries desperate to join the Euro system, is undermining the very stability which the whole project is designed to achieve. There is a grave danger of all those involved getting the worst of all worlds. This would be a combination of slow growth, higher unemployment and PSBR problems as the deflationary impact of Maastricht bites, coupled with an unmanageably severe fiscal discipline, through the proposed penalties, which would be unable to contain the resulting pressures.

This is not a recipe for growth combined with low inflation, which those supporting EMU insist will be its outcome. On the contrary the combination of tight monetary policies and unavoidable fiscal deficits, which is now in prospect, is the high road to stagflation. This is the evil mixture of slow growth and mounting unemployment, combined with rising inflation, which it is the expressed intention of those advocating monetary union to avoid, and which those opposing the single currency most fear.

 

TELETEXT EMU POLL

In November 1996, Teletext ran a poll asking the question "Do you back a single European currency?" 10,000 viewers voted. The response was as follows:

Yes 22%

No 78%

VAT ON EVERYTHING?

 

Pledges on VAT are back in the news as the general election approaches, but there has been little mention of the European Union impact on British VAT rates. Yet, the EU Treaties signed by Britain place heavy constraints on the freedom of manoeuvre of any future British government. How many people realise just how hemmed in we are by existing EU agreements concerning both the rates and coverage of VAT, and by likely developments during the next decade?

Already we are precluded from abolishing VAT on anything on which it has previously been charged. This explains why Labour cannot abolish VAT on fuel. Now the Commission is launching a much more far-reaching attack on zero-rating and, indeed, the whole system of collecting VAT. In a little reported paper submitted to the Dublin Summit in December 1996, the Commission asserts that "the new system of VAT will have to satisfy the following criteria: it must abandon the segmentation of the single market into 15 tax areas." This entails moves to a uniform VAT rate of at least 15% on almost all forms of consumption throughout the European Union.

Even more radically, the Commission proposes that all VAT payments should in future accrue to the Commission, with the surplus over Community requirements then being returned to the member states. The present advisory committee on VAT is to be turned into a regulatory body, which would make its decisions by qualified majority voting. These plans are an extension of proposals which already exist for harmonising VAT throughout the EU by 2004. The Sixth VAT Directive, which laid the foundation for VAT harmonisation, goes back to 1977. It was signed, incidentally, when Britain held the presidency.

Could Britain veto these developments? It is not clear. We might well wish to do so, because Britain, with Ireland, has a much larger range of zero rated goods and services than other EU countries. Unanimity is supposed to be required to change taxation systems. It may well be argued, however, that previous commitments given by Britain will allow this issue to be decided by qualified majority voting. Should there be a conflict of authority, the European Court of Justice might have to give a ruling. Precedents suggest that it would, as usual, support proposals which strengthen the hand of the Commission against member states.

If this happens, by early in the next century, whatever the promises made now by British politicians, we may find that VAT has to be charged on food, at a cost of some £7bn a year, as well as on books, newspapers, bus and train fares, children’s clothes and new houses, with all the extra proceeds being paid to Brussels. With these threats hanging over us, can any British politician realistically promise that VAT rates will not be raised, if not in the next parliament, during the one after that?

ECONOMIC GROWTH IN THE

EUROPEAN UNION

 

The Common Market was established by the Treaty of Rome, which was signed in 1957. Serious attempts to co-ordinate European currencies began in the early 1970s with the so-called Currency Snake. The first moves towards establishing a single European currency were taken when Lord Jenkins was Chairman of the Commission in the late 1970s. These led to the establishment of the Exchange Rate Mechanism in 1979, which lasted until it collapsed into meaninglessly wide bands in 1993. More recently, as a result of the Maastricht Treaty, European monetary union is once again back on the agenda, with the prospects of the single currency coming into operation at the beginning of 1999.

What has happened to growth rates while all these moves towards economic integration have been going on? As attempts to achieve monetary union have proceeded, has there been a noticeable tendency for the EU economies to grow faster? There has not. Set out below are the statistics showing the rate at which EU economies have grown over the last few decades, together with estimates for the percentage of people registered as unemployed on average during the same periods:

Average Average

Growth Unem-

Dates Rate ployment Period

1950-1957 - 5.1% 1.7% before the Common Market was set up

1957-1969 - 4.6% 2.2% before the Currency Snake got going

1969-1979 - 3.4% 3.9% before the ERM began

1979-1993 - 1.9% 9.1% while the ERM lasted

1993-1996 - 2.8% 10.6% after the ERM had broken down

Of course there are always special factors, and reasons can always be adduced to explain away awkward figures. More than 45 years is a long time for special factors to apply, however, especially if they seem to affect only the European Union. The growth rate for the rest of the world have fallen gently from about 4.5% in the 1950s to about 3.7% in the 1990s.

Could it be that the problem is not special factors but that trying to co-ordinate successfully the monetary policy of economies with such highly divergent economic characteristics, and with such different political and social institutions, has proved to be an impossible task?

Published by the Labour Euro-Safeguards Campaign

72 Albert Street, London, NW1 7NR

Tel: 0171-388 2259 * Fax: 0171-388 3454