When Britain joined what was then the Common Market in 1973, we were told that one of the main reasons for doing so was that Britain would become part of a club of rapidly growing economies. It is true that during the post war decades, the original six member countries had seen their economies expanding at about 5% per annum. Unfortunately, almost exactly as we took up membership, the growth rate on the continent slumped. For the next quarter of a century it averaged only just over 2% - considerably worse than Britain's previous record. Some of this huge deterioration in performance stemmed from the 1970s oil crises, although most other parts of the world recovered from them much more rapidly than did the Common Market economies. The change towards monetarism in intellectual fashion and in economic thinking was another important factor. The special feature which characterised what was by then the EEC, however, was the determination of its leaders to lock their currencies together, initially, between 1969 and 1975, in what was called the Snake and then from 1979 to 1993 in the Exchange Rate Mechanism (ERM). It was these misguided policies, more than anything else, which caused the catastrophic decline in the growth record of the EEC economies.
Unfortunately, the harder that EU leaders have tried to lock their economies together, the worse their performance has been. Learning nothing from experience, the Snake and the ERM have been succeeded by the euro. The result has been even slower economic growth. Since the introduction of the Single Currency, the twelve countries in the euro-zone taken together have seen their economies expand at barely 1% per annum, while those in the EU but outside the euro - Britain, Denmark Sweden - have done significantly better at 2.3%. For the first six months of 2003, the latest figures show that there was no growth at all in the euro-zone. With Germany, Italy and the Netherlands all in recession, while output is dropping in France, prospects for future growth in the euro economies are depressingly meagre. There are a number of entirely predictable reasons why performance should have been so poor. The EU is not a natural single currency area. There is little capacity to transfer resources from richer to poorer regions. Differences of history, language, social structure and culture have made sufficient real integration impossible to achieve. The EU gains very little from internal free trade on manufactured goods nowadays because world import duties are so low. 40% of imports entering developed countries have no tariffs on them at all while the average import duty on the rest is only 3.8%. On top of this, the reunification of Germany in the early 1990s destabilised the largest euro economy, causing it to join the Single Currency with an unsustainably high exchange rate. The overall result has been that the euro economy has done worse recently than almost anywhere else in the world.
Another entirely predictable result of the euro-zone's poor economic record is that public expenditure is under pressure. Partly, this is the result of high levels of unemployment which generate requirements for social expenditure not only on cash benefits but also on housing, health care and social services which would not be needed at least to the same extent if the numbers of people out of work were much lower. Partly, too, it is always more difficult to find the money for high quality public services if the economy is stagnant and there is no increase year on year in the tax take even if tax rates stay static. As unemployment increases, government finances deteriorate due to a combination of higher social security payments to the unemployed and their families together with reduced tax revenues received by the government as incomes stagnate. Because government budgets are, in consequence, under strain everywhere, there are all too familiar pressures to offload service provision to the private sector, and to reduce wages, salaries and conditions even if services themselves remain publicly funded. Much of the unrest seen recently in countries such as France derives directly from relentless pressure to reduce budget deficits by cutting the emoluments, pensions and services to which people have come to be believe that they are entitled.
Some of the problems faced by the euro-zone, however, are separate from those intrinsic to the general concept of a single currency area. They appear to have been added in a way almost guaranteed to make a bad situation worse. One of these is the Stability and Growth Pact, put in place at the Dublin Summit in 1996, at the insistence of Germany. This Pact limits the public borrowing of all the euro-zone economies to no more than 3% of their Gross Domestic Product and requires that total state borrowing should be no more than 60% of GDP. Rigid limitations of this sort - described by even Commission President Prodi as "stupid" - make no sense at all. Government borrowing to stimulate recovery has to be sensible when the economy is depressed, and 3% of GDP may be much too little, as France, Germany and other euro-zone economies are finding out at the moment. The draconian penalties which the Commission can inflict on any country which fails to comply with the Pact requirements, however, make all those involved more nervous of borrowing than they should be. The result is a further downward spiral in economic performance.
Yet another depressing influence on the euro-zone's economy is the strongly entrenched role of the European Central Bank (ECB). Run by bankers appointed for eight year non-renewable terms, charged with keeping inflation below 2% at all costs, and, by its charter, almost impervious to any democratic pressures, the ECB has consistently put its inflation target - even though it has failed to meet it - well above all other considerations. The result has been that the euro-zone's monetary policy has consistently been one where interest rates have been too high and money too tight in relation to the depressed conditions which have prevailed. The Stability and Growth Pact and the ECB's policies effectively preclude the pursuit of the type of positive demand management strategy that has proved to be relatively successful in both the UK and the USA over the last decade, keeping growth up and unemployment down without generating any significant inflationary pressures.
By 2004, the EU may well have an additional ten Member States. All of them, after transitional periods, will have to adopt every one of the policies encapsulated in the EU treaties. These will include being obliged to join the euro, to be bound by the Stability and Growth Pact and to have their monetary policies run by the ECB. There will no doubt be transitional adjustment periods before all the treaties are put fully into effect, but there is no doubt about the final outcome. Most of the accession countries have large agricultural sectors which are going to cause massive problems for the Common Agricultural Policy budget, where serious reform has now been postponed until at least 2013. They are all substantially poorer than the existing EU average and nearly all are in no position to take on the heavy obligations of EU membership without making their economies so uncompetitive that they in turn will get caught up with the same stagnant output which dogs the existing euro-zone economies. If the existing EU is not a suitable area for a single currency, it is hard indeed to envisage how this much wider grouping of countries can function satisfactorily within a much wider euro-zone. All the omens therefore indicate that the economic problems from which the EU suffers will become more acute as membership rises.
Against this background it is hardly surprising to find the opinion polls in the UK more and more solidly opposed to Britain joining the euro. The EU Single Currency project never made any economic sense. It was always driven by the political agenda of those who wanted to produce the "ever closer union" presaged in the Treaty of Rome, rather than by any rational economic reasons. Now that the failure of the euro-zone to deliver the prosperity which was promised is becoming apparent, disillusionment with the whole EU project is showing signs of becoming more prevalent in all Member States. In these circumstances, do we in Britain want to tie ourselves ever more closely into a project which is failing economically and whose political nature is becoming ever more alien to those which most people in Britain support? Do we wish to jeopardise the Labour Government's public expenditure programme on public services to meet monetarist inspired restrictions of the Stability and Growth Pact? Even more fundamentally, do we want to give up our democracy, our powers of self government, our reasonably successful economy and our capacity for independent action? The answer is very clear. This is not what the vast majority of people in Britain want. If other Member States in the EU want to run a Single Currency, that is their choice. It need not and should not be ours.
Go to Head of Page