During the last ten years, the British economy has performed conspicuously better than those in the euro zone. Our inflation rate is currently about half theirs. We have much less unemployment. We have attracted a far higher rate of direct inward investment. Our growth rate, averaging 2.9% per annum, has been almost twice the 1.6% per annum managed by Germany, allowing substantially increased expenditure in Britain on public services. All this has been achieved outside the euro - indeed largely because we have not been in it, thus enabling us to avoid the deflationary policies imposed on all the economies in the euro zone by the European Central Bank. Why then are some members of the government so keen to join the Single Currency? The reasons have little to do with economic considerations. It is because they regard the building of EU wide political, military, legal and administrative structures as more important than retaining democratic control over political decisions through the British parliament and our national institutions.
It is because they know that this vision is not shared by a large majority of the British people that no referendum on joining the euro has yet taken place. All the major political parties have pledged that Britain will not join the Single Currency without a positive endorsement being given by a referendum. Can one still be held in this parliament? Possibly, but the timing is getting very difficult. A minimum of about three and a half years is required from a decision being taken to hold a referendum to euro notes and coins being introduced. Leaving aside the state of the opinion polls, current uncertainties about the reaction in the euro zone to the abolition of their traditional currencies makes it unlikely that a decision to proceed could be taken early in 2002, while the Jubilee is not the best background for going ahead later in the year. If a decision to have a referendum is delayed beyond the beginning of 2003, the process is bound to become an issue in the next general election, which must be held before early summer 2006. The attitude of the public is, however, the crucial issue. How likely is it that, even with a major effort, the current opposition to joining the euro could be reversed?
The first obstacle is that there would have to be a positive report from the Treasury on the five tests set by the Chancellor. These cover convergence of business cycles, the flexibility of the British economy to respond to changing conditions inside the euro, the impact of the Single Currency on inward investment, the prospects for financial services and the City, and the general prospects for growth, stability and employment. While it is widely recognised that these conditions are not precise, and that they are open to a wide range of interpretation, at least the Treasury and a significant proportion of informed opinion would need to say that they had been met. This is also beginning to look increasingly problematical, not least because a large number of former senior officials are now on record as saying that they do not believe that they can be achieved. Meanwhile the Bank of England is equally lukewarm about Britain joining the euro.
There are also likely to be major problems regarding the sort of referendum that might be held. If, as would probably be the case, it is held at the start of the process of Britain trying to join the Single Currency, there would be no certainty about a crucial issue not covered by the Chancellor's five test. This is the exchange rate at which Britain would join, supposing that this is the outcome to which the referendum result pointed. Without knowing this vital piece of information it would only be possible to endorse in a general rather than any precise way any proposal to join the Single Currency. It would be like signing a blank cheque. It is inevitably going to be much more difficult to persuade the electorate to do this than to agree to properly quantified proposals with an agreed exchange rate, as, for example, was the case when the Danish euro referendum was held in September 2000, especially as joining the euro is, according to the Maastricht Treaty, an irrevocable step.
Much may turn on the question to which the voters would be asked to give an answer if a referendum was ever held. In 1975, the question to which the electorate had to respond was heavily loaded towards the "yes" vote which the government wanted. Nowadays, it would be much more difficult for this to be done. The recently established Electoral Commission has been charged with ensuring that any referendum question has to be both intelligible and fair. In addition, there are now more constraints on funding than there were in 1975, when it was recorded in official government reports that the pros spent eleven times as much as the antis. Furthermore, it would be a scandal if we were to see a repetition of the situation which occurred in 1975 when three information leaflets were distributed to all the electorate, where only one was against but two, including the one produced by the government, were in favour.
If no-one knows what the exchange rate is supposed to be, the government's task in persuading the voters to agree to join the euro looks even more daunting than it otherwise would be. There are also many other reasons for believing that it will be much more difficult to manipulate public opinion, as was done at the time of the 1975 referendum. Then, with the exception of the Morning Star, every national newspaper was in favour of staying in. So were almost all business leaders, and almost the whole of the Conservative and Liberal Parties. Now, the press and business leaders are much more evenly split, with probably a majority against the euro in both camps. The Conservative leadership is also against the Single Currency. Furthermore, the polls now are much more opposed to the euro than against continuing membership in 1975, when, at peak, there was a balance of 17% against compared to anything up to 50% at present. In addition, a referendum on the euro, unlike in 1975, would involve changing rather than endorsing the status quo, which all the evidence shows is a much more difficult objective to achieve.
Even if there was a referendum which produced the result the government wanted, its problems would by no means be over. A pro euro outcome would merely trigger off the start of another process fraught with problems. To join the Single Currency, Britain would have to obtain the agreement of ECOFIN, the body made up of all the EU Finance Ministers, the acquiescence of the European Central Bank and the European Parliament, and the agreement of all the other EU Member States both on the process for joining and the rate of exchange. Would we have to join the Exchange Rate Mechanism again? Quite possibly. Would all the other EU Members agree to Britain having the competitive exchange rate we need? Very doubtful. Even if they did, how would we get the pound down to where it needed to be? Only by going back on all the anti-inflationary policies upon which the Chancellor has built his reputation. The major problem that Britain would have in conducting these negotiations is that, with a positive referendum behind them, our negotiators would inevitably be in an extremely weak position to oppose tough terms from the other Member States. We would be all too likely to be offered unfavourable terms, and told to take it or leave it.
There are thus two major risks for the Labour government in contemplating a referendum on the euro. The first is that the vote goes against them. The second is that they win the referendum only to find that they are baulked by the negotiation process with the other Member States from being able to agree reasonable terms. The downsides in each case are bound to be extremely damaging. A referendum campaign is not going to see most Labour leaders taking a neutral stand. On the contrary, they are likely to claim with increasing stridency - as the Conservatives did during the time we were in the Exchange Rate Mechanism - that our entire future depends on the referendum result going the way they want. If it then fails to do so, they will risk the same devastating opinion poll reversals that the Tories suffered after 1992. Much the same problems will arise, however, even if the referendum goes their way, but the negotiations with the other EU Member States and institutions go badly, as there is more than a fair chance will happen. At worst, there is a risk that the negotiations will break down altogether, leaving the government to inform the electorate that it had failed to secure satisfactory terms, and was therefore unable to carry through the result of the referendum.
Much of the Labour's poll lead flows from the reputation the government has achieved for good financial management outside the Single Currency. How can Labour, with considerable justification, boast of its economic success outside the euro, compared to how poorly the euro zone economies have performed, while at the same time claiming that it is essential for us to join? How too, can it consider advocating a course of action with which patently so large a proportion of Labour's natural supporters feel very uncomfortable? Remember, too, in this vital connection, that most of the economic arguments about the Single Currency are merely a smokescreen for a much more fundamental controversy about whether Britain wants to retain its ability to decide its own affairs, or whether these should be run from Brussels. Thus there are two basic reasons why running a referendum on whether Britain should join the euro is so dangerous for Labour. One is that there is no convincing economic case for doing so. The second is that the Single Currency is an irreversible step towards just the sort of European super-state which the British electorate does not want.
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