Tuesday, June 28, 2016

Not joining the Euro was the beginning of the end for pro EuropeanBritain

When in 2007 Gordon Brown announced that the United Kingdom would not be joining the Euro few British pro Europeans like me realised that this signalled the beginning of the end for Britain in Europe. Despite the fact that almost all the major EU countries were in the Eurozone Britain had previously secured an "opt out" that it would not be a condition of its EU membership to join them. The Labour Government which took office in 1997 had declared its intention to adopt the single currency subject to certain conditions being met. But by 2007 this had looked increasingly unlikely and this led to the Government's decision not to pursue the matter further. Part of the reason was undoubtedly political. Labour was under pressure not just from the anti Euro Conservatives but increasingly from the further right "United Kingdom Independence Party" which actually had the symbol of the Pound Sterling in their logo! Politically rejecting the Euro took one area of criticism of Labour off the table. But for Britain that decision meant that we were increasingly to be on the fringes of the Union on key economic and financial issues.

The case for the Euro within the EU was always political. Membership of the Eurozone forced integration and "ever closer union" - a key EU goal. Every nation state knows  that how it manages its finances - especially its currency and associated exchange rate and interest rate levels - is a key part of its governance. So if the EU was to act co-jointly across the governance spectrum a single currency was highly desirable. By not joining the Euro the UK opted out of more than just the single currency. It opted out of being a major player in the Union at all despite the UK's size and importance in other areas.

When the world was rocked by the financial meltdown and banking crisis of 2007 onwards the Eurozone as a whole was hit hard and some countries within it especially. The single currency was work in progress - the most ambitious experiment in trans-national economic cooperation ever attempted. It was going well. Businesses and citizens alike were benefitting from the lower costs that resulted from no longer needing to pay to  exchange currency. You could drive from Holland  to Belgium to France to Spain to Portugal and pay in one currency (and effortlessly compare prices along the way if you wanted to). If you used your Dutch credit card in Spain you paid what you paid - there were no currency exchange costs added when your monthly bill came in. The business case was also very strong indeed - for the management of the supply chain it was a boon. Costs of procurement, transport etc. were  transparent and no currency hedging was necessary. But at a national governance level it was more difficult. 

A Eurozone member could not fix its own dollar exchange rate - especially important if you are a net importer of dollar denominated commodities like oil and gas, as most Eurozone countries are. The exchange rate is a mechanism of fiscal management and potentially crucial in the control of your balance of payments - you can boost your exports,  if that is what you wish to do, or similarly lower your import costs if you feel that is necessary. The Eurozone members forewent the this crucial lever of national economic control in return for participating in and benefiting from the single currency. Technically each member of the Eurozone participated in the setting of the external exchange rate but in reality it was the big players - Germany especially - who ruled the roost. For a while this was not a problem but the turmoil of the banking crisis from 2007 meant that the "one rate for all" imperative of the Eurozone came under pressure. 

The introduction of the Euro saw some convergence of interest rates  - but countries in the zone remain free to determine their own rates - especially important in managing Government expenditure as well as being a means of boosting growth, or dampening it down to control inflation. 

The response to the financial crises from 2007 onwards was made more difficult because some countries - notably Greece - had entered the Euro at an exchange rate which overvalued their currency, the Drachma. This, combined with an economy which boomed in the good times but crashed in the bad, caused the Eurozone's biggest crisis. Doom merchants forecast not only that Greece would leave the single currency but others as well leading to the Euro's complete collapse. British politicians across the parties congratulated themselves that we had had the good sense, as they saw it, not to join the Euro. But Greece is still in the Euro and the single currency has shown that it is robust to turmoil. So far the merchants of doom have been proved wrong - but the rescue of the Greek economy has been and still is at a cost. Unemployment, especially among young people, is shockingly high as a result of cuts to Government expenditure and other austerity measures. The crisis has also caused a rethink of some aspects of the Eurozone's processes and priorities. 

Britain has largely been on the sidelines as all this has been going on. Gordon Brown played an important part in the European response to the financial crisis but he was not a player on the crucial currency issues. And Cameron's Governments have been largely sidelined in Europe on matters relating to the single currency and the management of the Eurozone. The gradual modification of some aspects of the way the Euro is managed has been without Britian's involvement. Most notably the recognition that the single currency is a political tool and that you have to have more central control of essentially political matters - like the levels of Government expenditure by nation States - has occurred without any meaningful input from Britain.

The European Union is about more than economics and currency management. Britain and other non Eurozone countries play a constructive part in the EU on such matters as trade - but the single market is more effective when currency exchange is not an issue. Not least because trading arrangements can be longer term when fears of exchange rate fluctuations between trading partners are removed. For Britain and other non Euro countries the penalty is either higher costs (via currency hedging) or greater uncertainty which is never good for business. But it can work and has been working.

As I say the decision of the U.K. not to enter the Euro was a mistake - in the longer term anyway. The recovery from the crisis of 2007 onwards in Britain was partly helped by the UK retaining the pound and managing its own foreign exchange (etc.) so, yes, in the short term it was beneficial. But looked at strategically and politically Britain would have been better at the centre of the EU/Eurozone than on the fringes. And in time all the other benefits of the single currency would have justified a bit of short term pain. 

Britain has always been an unconvincing European partner. Maastricht opt outs, rebates from the budget, and above all the failure to join the Eurozone have made us at times peripheral. But this could have changed and, I think would have changed had we voted "Remain". We had the chance to at last be at the centre of Europe rather than on the edges (I have no doubt that in time this would have seen us adopt the Euro). But sadly that is gone and we have chosen the wide open sea. It's desperately sad. 


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