The single most important issue facing the European Union, and one which will cast a shadow stretching into the next century, concerns the relationship between the "ins" and "outs" of the Euro single currency.
In an ideal world all the large European economies would join the single currency at the same time, thereby completing the logic of the single market. But this is unlikely to happen. The deal that is struck between the ins and the outs therefore becomes crucial-and has the potential to cause irretrievable damage to the European cause.
The in-out relationship can be a technical subject, but none the less public debate in Britain has so far been disappointingly thin. One reason for this silence is the broad opposition in the UK (on both left and right) to the project of the single currency itself. Opponents seem to believe, rather complacently, that as they have rejected the idea of a single currency, the continentals will see the light and reject it, too; there is thus no need to bother with the small print such as the relationship between ins and outs.
But as Michael Mertes, Chancellor Helmut Kohl's adviser on European policy, explained in Prospect (May 1996), Germany's Christian Democrat "true believers" will not be knocked off course by a few opinion polls showing that many Germans fear the Euro.
Germany will remain on course and will take with it an inner core of other countries-certainly France, Austria and the Netherlands. Probably the Italians, too, who seem to believe that somebody else running their monetary policy is better than running it themselves. The psychology of not wishing to be left out may also drag in several smaller states.
The outs, including possibly the UK, will then be in the invidious position of having to go on trying to meet the convergence criteria, including exchange rate stability, without having any say in the timing or management of the single currency.
A half-in, half-out status for the UK in the EU is untenable in the long run, as Christopher Johnson argues in his new book, In with the Euro, Out with the Pound: the Single Currency for Britain (Penguin). But in the short run we may need to manage a situation in which the UK is inside the single market but not the single currency.
The UK and France agree that there will have to be a new relationship between the ins and the outs, but they have opposite motives. France is one of the countries most concerned at the potential disruption from "competitive devaluation" by the outs. The UK is worried by the danger that the single currency will split the single market, and leave EU members outside it isolated.
The European commission has been worrying about this in-out issue too. It has proposed a "monetary pact" between the ins and the outs or an "ERM 2" to prevent disruptive exchange rate changes, to be agreed by the time of the Dublin summit in December. Since the UK government is unwilling even to rejoin the present ERM, it is unlikely to be any keener on the new model. The UK line is simply that we will behave responsibly if we are outside the Euro zone and ERM 2, so as not to disrupt the markets. But the markets seem sceptical.
Lack of exchange rate discipline between members and non-members of the Euro will certainly damage the European market in many ways. Even those who do not accept that one market needs one money may come to see that many monies moving in different directions can lead to many markets. Opting out of the single currency is a form of Europe ? la carte. It offends against the principle that members of the EU should obey all its rules and not only the ones that suit them. A "two-speed" concept, on the other hand, is quite different, because it implies that the members that have been left behind are committed to catching up as soon as they can.
A two-speed approach to the Euro is not only feasible-it is essential. Indeed, it would be wholly undesirable for all the member states to enter into a single currency at the same time. It would, among other things, involve a massive increase in the subsidy from the richer to the poorer EU states.
But it is a moot point whether a country of the economic weight of Britain can be on the outside of the single currency, even in its first stages, without causing great damage both to ourselves and to the insiders. If this is correct, then it reinforces my preferred conclusion-we should join, and even lead, the first group into the Euro zone.
If we do remain outside, the Euro zone countries will need our co-operation to solve the in-out problem. That gives us clout, but we should not abuse it. If our government does not like the idea of ERM 2, then we cannot sit on our hands. We are a great European nation and we should strive to inspire an imaginative compromise.
If a sensible way forward cannot be found, I fear that this dispute could mark the beginning of the end of the EU as we have known it. The real danger here is a political one. If the inner core moves ahead into a Euro zone, it will create a new political dynamic-if they can act together without reference to the outs on currency matters, what is to stop them doing so on other matters, too? Then we really will have arrived at a looser, ? la carte, Europe. Some Euro-sceptics may welcome this-I contemplate it with dread.
