Just as hemlines go up and down, so do views on the merits of closer European ties. While it is tempting to focus on reports that suggest that the warmth of feeling towards Economic and Monetary Union (Emu) in Europe as a whole has dropped a few degrees over the past year, this is misleading. If anything Emu is more likely than ever.
The strength of feeling among Europe's leaders has certainly not diminished. Chancellor Kohl of Germany and President Chirac of France remain committed to the goal of Emu and seem determined to take the unpopular decisions needed to make it a reality. In Belgium, Sweden, Spain, Italy and elsewhere, other governments are continuing to do what they can to meet the convergence criteria.
At the European level, too, preparation is continuing apace. In the past year the Commission has produced its ideas on the transition. Member states, the European Monetary Institute, banks and companies have all commented on it. European finance ministers have also begun to reflect on the most difficult political decisions: what such a currency might be called, and how those countries who can participate in a single currency from the outset will relate to those who cannot.
Nor should we draw any conclusion from the fact that finance ministers have decided to focus on 1999, bypassing the option for Emu in 1997 given by the Maastricht treaty. This is not a sign of weakened commitment. Rather they feel that it is more important to ensure that the move to a single currency is done properly than that it is done at all. We should be under no illusions: Emu really is likely to happen.
The current mood of pessimism does not relate so much to the prospects for a single currency; paradoxically it arises from a dawning realisation that Emu is going to happen. And because this represents a significant change, which entails both potential cost and risk, it worries people. Perhaps if we were simply choosing to change the name of our money for no other reason than to strengthen our sense of "Europeanness," I too might wonder whether the cost and the risk would be worth the return. But this is not the case: Europe needs Emu-not only to move forward and compete on equal terms with Japan and the US, but also to avoid an unravelling of the European single market.
It is often argued that free trade does not necessarily have to be carried out in one currency. That is true. But the European single market goes much deeper than simple free trade. We have spent a great deal of energy over the past eight years ensuring that it is not only barriers at the borders which are eliminated, but also those barriers which exist because of differing rules in Europe on public procurement, national standards and state aids. It is this work which makes the single market unique-and it is this sort of work which could be at risk if we had no effective macro-economic co-operation in Europe. Already there have been unhelpful calls from some parts of French, German and Austrian industry for additional state aids or regional assistance in compensation for European exchange rate fluctuations. Earlier this year, Philippe Maystadt, the Belgian finance minister, floated the idea that those inside Emu should be able to respond to competitive devaluations undertaken by those outside, by putting up trade barriers or using subsidies. The French senate has discussed the idea of some sort of tax on non-participants; the German Social Democrats have expressed similar concerns.
The Commission has rightly refused to contemplate any of these suggestions. But it is able to reject them with ease only because there is an accepted macro-economic framework in Europe, in the form of the convergence criteria included in the Maastricht treaty, which ensure that all member states are pulling in the same direction. Provided that such a framework exists, it matters less whether all member states are in the Emu core or on the periphery; in the exchange rate mechanism (ERM) or outside it. What matters is that no member state of the European Union can be accused by any of the others of running beggar-my neighbour policies because all are pursuing sound economic policies. Emu acts, therefore, as vital glue in the single market.
Europe needs a single currency for more positive reasons too. Estimates from the Commission show, for example, that between a quarter and a half of one percentage point has been wiped off European growth figures in this year alone, as a result of the economic and psychological effects of exchange rate fluctuations. There is plenty of evidence to show that exchange rate uncertainty not only reduces trade but also leads to the postponement of important economic decisions. While in every other respect our firms have a domestic market as large as the US's or Japan's, in practice the existence of 15 different currencies artificially suppresses investment and mergers between firms in different states. Such an artificial barrier makes it harder for European firms to reach their critical mass. This is even before taking account of the Emu savings in transaction costs and insurance against exchange rate risk-not to mention the benefits of a more stable, low inflation economy.
Economic and monetary union can work. Various dire consequences of any move to Emu are often mooted, from higher unemployment through permanent recession, and even the wholly fanciful idea that it might lead to war. The idea that France and Germany will fall out over Emu only stands up if you believe that French and German goals are incompatible. But the experience of the past ten years or so suggests quite the opposite. Ever since the French began to pursue the franc fort policy they have clearly been pursuing the same end as the Germans-an economy founded on sound money. Indeed, there is no reason to believe that the French want to take over the Bundesbank simply to weaken it; if that were so, why would France have made its own central bank independent?
Equally there is no reason to believe that Emu necessarily contains the seeds of its own destruction. The argument goes that, as the price for joining Emu, Germany will insist on interest rates which are too high for the rest of Europe and which will lead to massive unemployment across Europe. First, there is no evidence to suggest that Germany would, even if it could, insist on interest rates which crippled the rest of Europe. When the president of the Bundesbank admitted that German interest rates were too high for the rest of Europe during the early 1990s, he added that Germany's central bank had to have a policy for Germany while the European bank (which we would have under Emu) would have a policy for Europe.
Second, there is no reason why the sort of policies which we would have under Emu would produce a greater tendency to unemployment than the sort of policy framework we have at the moment. If anything, the opposite should be true. The European central bank will be legally required to ensure low inflation, while governments will also be bound by law not to run up excessive debts-sound principles of Conservative economics which the rest of Europe has adopted. These policies will help to keep unemployment down, by creating a climate of stability which fosters growth and job creation. We will not make ourselves any more susceptible to unemployment by surrendering the tool of devaluation-a tool much used in the past by governments to make exports more competitive and thus artificially stimulate growth and employment. But more recently it has been discredited-in part because it usually leads to inflation by making imports more expensive, and also because it allows governments to avoid making necessary changes to the economy in order to maintain its competitiveness, whether by encouraging investment, training, or reducing labour costs.
Finally, is the right to devalue vital to our "enterprise zone" competitiveness? Recent work by the Commission has shown that there is no link between depreciation and cost competitiveness. Greece has had the highest rate of currency depreciation since the single market began, but equally it has had the greatest loss of competitiveness. What is of greater importance to the UK's competitiveness and its attractiveness to outside investors is that we can offer a stable, low inflation economy in which structural problems are tackled at source.
So what should the UK do next? In many ways we are in the most comfortable position of all. We have an opt-out. We can decide whether or not we want to join, once it is clear when Emu is going to happen, who is going to be in it and on what terms. There is no advantage whatever in deciding this issue prematurely. Our partners would think us crazy if we decided now, and nobody is pushing us to do so. Deciding now could look as if we were going weak on our commitment to reduce our budget deficit and maintain low inflation-which would create further pressure on the pound. On the other hand, if we say today that we will not participate in a single currency for at least another five years, it will have one certain effect: we shall be ensuring that the UK loses any further influence over the process of setting up Emu.
There is nothing in the Maastricht treaty which necessitates a two-speed Europe, even if some states join Emu before others. Those who keep their own currencies will retain the same weight around the table in all the discussions which we have on Europe, most of which are not macro-economic. The UK should take no decisions for the time being. Instead, we should devote our energies to ensuring that we play the fullest possible part in all of the discussions which are taking place about the European single currency.
