The debate about the euro in Britain has changed dramatically since the
introduction of euro notes and coins on 1 January 2002. This shift should
give pro-Europeans every confidence that a referendum on the single
currency can be won. Consequently, it has already left anti-Europeans appearing
disheartened and disoriented.
This historic changeover to the euro was obviously a profound change
for the 300 million citizens of the twelve countries that adopted
the currency. It was a revolution on Britain’s doorstep that has practical
implications for most British citizens.
Most obviously, Britons make 40 million visits to the euro-zone every
year, either on business or holiday.
From 28 February, when the old European
currencies were finally withdrawn from circulation, these visitors will have to
use the euro exclusively.
In addition, tourists from the euro-zone are expected to make 13 million
visits to Britain this year. Those visitors will come here with euros in their pockets,
thus any British business that is able to deal in euros will have a significant
advantage in competing for European tourist business from now on.
There is already some anecdotal evidence of hotels that do not accept
euros losing out to those that can. More worryingly for the British economy,
there is a serious risk that European tourists may choose to holiday within the euro-zone rather than incurring the money-exchanging costs and extra
inconvenience that a trip to Britain would entail.
British firms have every reason to complain that the British government
did not do enough to prepare business for this momentous change.
More could
and should have been done. After all, two years ago the government spent? 60
million raising public and business awareness of the millennium bug, and? 380
million tackling the threat to its own systems. It even set up a company, Action
2000, to give the issue a high-profile.
By way of contrast, Gordon Brown, the Chancellor of the Exchequer,
disclosed in November 2001 that the Treasury had only spent? 9.
9 million on
preparing British firms for the introduction of the euro. This negligence on the
practical question of preparations for the euro may well leave British businesses
vulnerable in commercial terms.
The Impact of 1 January
Prior to 1 January, most British people took little interest in the issue of whether
or not Britain should join the single currency. The euro was an intangible, virtual
currency. Although it had already had a major impact on British businesses, it
was not a visible reality for the vast majority of British people.
In fact, most British people knew little about the euro; as a result, they
told opinion pollsters they did not support British membership of the euro yet.
However, public opinion polls carried out since 1 January have showed
substantial rises in public support for the euro. Although it is expected that
support will fall away in the coming months, it indicates that opposition to the
euro is shallow and moveable.
Support for joining the euro among British business has risen dramatically
over the past few months. An HSBC survey of 14, 000 companies, mostly small
and medium-sized, carried out after 1 January, showed that 61 percent now
believe that euro membership would benefit their company. The figure was only
23 percent in 1999. The annual MORI Captains of Industry Survey of FTSE
500 senior board directors found that 59 percent would like Britain to join the
euro in the near future.
The figure was 44 percent in 2000.
Additionally, polls show rising public and business support for a sooner
rather than later referendum on the issue. A recent Institute of Management
survey found that 64 percent of managers think that 2002 should be the year
the government makes clear its timetable for British entry. Significantly, a poll
of public opinion carried out in February 2002 found that 67 percent of the
general public wanted the issue resolved soon by a referendum.
As a result of this dramatic shift in public opinion, and the momentum
that it has given to the pro-euro campaign, speculation is growing that the
government will call a referendum in the Spring of 2003. Pressure from business
and political leaders for the government to announce its intentions has been
intense.
The introduction of the euro has made people aware that there is a
political and economic price to be paid for Britain’s isolation from the new
currency.
The Price of Isolation
Isolation from the euro carries serious risks for Britain. As long as Britain’s
position remains uncertain, it risks losing trade, inward investment, and jobs.
And of course British consumers will continue to be burdened by the highest
price levels in Europe.
Britain has long been a trading nation. For the past 200 years our
economic success and the prosperity of our people have depended on our ability
to trade competitively with our partners in other countries.
Today, Europe is
Britain’s most important trading partner. Over half of our trade is with the
countries of the European Union, and almost 60 percent of British exports go
to those countries. It is estimated that 750, 000 British businesses are involved
in trade with Europe.
Britain’s trade with its European partners has expanded dramatically
since it joined the European Union in 1973. At that time, only 35 percent of
British exports were destined for European markets. Over time, the European
Union has systematically removed tariff and non-tariff barriers to trade between
its members.
This liberalization has been of enormous benefit to Britain. Indeed,
the United States is experiencing the same effect as NAFTA reduces barriers to
its trade with Canada and Mexico.
By creating a single currency, the European Union has removed the last
major barrier to trade between its members. This is a liberalizing step with
potentially enormous significance, the effects of which are already starting to
be felt in the euro-zone.
For example, in 1998, prior to the creation of the euro, German imports
and exports to other euro-zone countries accounted for 27.
2 percent of GDP.
By 2001-even before the notes and coins had been introduced-that share
had risen to 31. 4 percent. This phenomenal rise has been replicated in other
euro-zone countries. In France, the corresponding figures are 28 and 32 percent.
In Italy, 23 and 24.
4 percent.
By contrast, Britain’s imports and exports to the EU have fallen slightly
as a share of GDP, from 23. 4 to 23 percent. Britain is already missing out on the
trade boost-and therefore to our national prosperity-that the euro is already
starting to deliver for its members.
In the long term, this effect could be enormous. One U.
S. academic,
Professor Andrew Rose of the University of California, has predicted that
membership of a common currency could triple the amount of trade between
member countries over 20 years. Even if this proves to be an overestimate, the
fact that Canadian provinces do twenty times as much trade with each other as
they do with U. S. states an equal distance away, and with whom they share
culture, language, and a single market must tell us something about the importance
of a separate currency as a barrier to international trade.
Business in the UK has suffered a serious competitive disadvantage as a
result of the volatility of the pound sterling. The overvaluation of sterling, and
its frequent and unpredictable fluctuations on the foreign exchange markets,
makes it difficult for British exporters-and their customers in Europe-to plan
ahead with any degree of confidence.
The euro means that; for instance, a French firm selling to Italy no longer
has to worry about whether the currency will change in value. However, British
firms still do. Over time this uncertainty and the extra risk involved in buying
from a firm based in Britain could well erode the competitive position of Britain
in the European market.
Indeed, Britain is more exposed to currency fluctuations than either the
United States or the euro-zone.
This fluctuation is caused by the fact that
manufacturing exports to countries with a different currency account for 37
percent of UK’s manufacturing output, compared to 19 percent of the euro-
zone’s, and 14 percent of the United States’. Joining the euro would reduce
these kinds of fluctuations and risks with Britain’s biggest trading partner.
In addition, every year British firms selling to Europe spend? 4. 5 billion
dealing with the costs of having a separate currency. That is a Sterling Business
Tax of? 12 million every day that British businesses pay because we are isolated
from the euro. By eliminating these costs, Britain’s European competitors have
taken one step ahead, while we are left behind.
Up to 3. 5 million British jobs depend on Britain’s exports to Europe.
Many of those jobs are at risk as a result of Britain’s isolation from the euro.
Since the start of the euro on 1 January 1999, around 3, 500 job losses every
month have been blamed on Sterling’s volatility outside the euro.
Exporters
that have lost orders, foreign firms that have cut back on investment, and the
small firms that supply them have all been affected.
The risks of long-term exclusion for Britain’s prosperity could be
profound. Indeed, if Britain does not decide to join the euro soon, the
consequences could be similar to those we experienced as a result of the disastrous
decision not to join the EEC at its inception in 1958. By the time Britain became
a member in 1973, its competitive position relative to its European partners
had already been seriously eroded.
While we were outside the EU, French and German economic growth
and increases in productivity far outstripped Great Britain’s. Between 1950 and
1973, Britain’s GDP per capita increased by 2. 5 percent per year, while France
and Germany raced ahead
with figures of 4. 1 and
5. 0 percent, respectively.
By contrast, British,
French, and German
average growth rates have
been almost identical
since Britain joined the
EU in 1973, at 1.
7, 1. 6,
and 1. 8 percent. German annual productivity growth between 1950 and 1973
was more than double Britain’s, but the figures are virtually identical for 1973
to 1995.
Britain’s economic decline relative to its European neighbors was marked
in the period it spent outside the Common Market. Between 1958 and 1973,
Britain’s share of investment into Europe declined from around 40 to 15 percent.
Since joining, its share has risen to 28 percent in 2000.
Membership in the European Union has helped Britain attract enormous
amounts of investment from foreign firms looking for a base to export into the
European market. Britain offers many attractions, but access to Europe is one
of the most important. Those foreign investors have created up to 1 million
jobs and the new expertise and investment that they have brought to Britain
have had much wider benefits for the competitiveness and productivity of the
British economy.
Ruling out membership of the euro would put this investment at risk.
The longer Britain stays out, the more likely it is that international companies
will think twice before they consider Britain as a viable proposition for inward
investment. U. S. and Japanese investors have made it clear that if Britain rejects
the euro, they would reject Britain and move to Europe.
Figures released by Ernst and Young show that Britain’s share of new
inward investment projects coming into Europe fell in the first half of 2001.
The figures also showed that Britain attracted 21 percent of new European
investment projects. In 1998, the year before the euro was launched, Britain
attracted 28 percent of such projects.
The decision by Nissan to continue producing cars at their Sunderland
plant was directly linked to the decision by the government not to rule out the
single currency. This has guaranteed thousands of jobs at the Nissan plant and
thousands more in the local economy.
As Jac Nasser, former chief executive of
Ford Europe made clear: “When we sit down and think about a major investment,
Over time this uncertainty and the
extra risk involved in buying from
a firm based in Britain could well
erode the competitive position of
Britain in the European market. our assumption is that the UK will be within the euro-zone at least at some time
during the lifetime of that investment.” Unless Britain decides to join the euro
in the relatively near future, more investors will begin to seriously question the
validity of this assumption. Prolonged delay will be seen as a de facto decision
to reject the euro.
Isolation from the euro is not only a macroeconomic issue, affecting
trade, inward investment, and national prosperity, but it also affects the price
British consumers pay. It is known from bitter experience that it is cheaper to
shop elsewhere in Europe than in Britain. A number of independent studies
confirm that Britain is more expensive than countries in the euro-zone for most
branded goods.
A recent study by the Economist Intelligence Unit compared
prices between Britain and France. In France, the latest U 2 CD was? 3 cheaper
than in Britain, Levi jeans were? 5 cheaper; Reebok trainers were? 11 less; and
a Panasonic TV cost? 90 less. This is the Sterling Shopping Tax -and it is a tax
that British consumers would not be paying if Britain joined the euro.
Not only are prices in Britain higher than those elsewhere in the euro-
zone, but there is also evidence that sharing a currency is narrowing the disparity
between the countries of the euro-zone. A recent study by investment bank
Dresdner Klein wort Wasserstein, has shown that the coming of euro cash is
already widening the gap between British prices and those in the euro-zone. In
Amsterdam, Frankfurt, Paris and Rome, prices have moved to within 2 percent
of each other, but in London they are 16 percent above the euro-zone average.
As Leo Doyle, chief economist of DEW said, “Big brands are moving to euro-
wide prices on the Continent because they cannot get away with different prices
after January 2002. In Britain costs cannot easily be compared.”
If Britain joined the euro, British consumers would benefit as price
transparency forced prices down here. This is because the euro promotes
competition, and competition brings prices down. It would be much easier for
shoppers to see price differences, and massive consumer pressure would push
prices down.
About 300 million consumers in the euro-zone can now compare prices
in the twelve countries that have adopted the euro. Every price is in the same
currency with no exchange rate movements to distort them.
Retailers in Europe
now face the kinds of competition experienced by their U. S. counterparts: those
with higher prices have nowhere to hide and so are forced to cut them.
If British shops did not cut their prices upon euro adoption, many of
their customers would shop overseas over the Internet or by mail order.
With
easy price comparisons and no exchange rate movements, more people than
ever would do this. Thus, British shops would have to respond or risk losing
business. The people of the euro-zone are already benefiting from the spur to
competition that one common currency has brought. The extra competition
that Britain would enjoy would not only benefit British consumers, but
businesses as well.
The extra consumer pressure would force British producers
to innovate, to improve productivity, in order to become more competitive and
benefit from the wider economy.
These are all serious economic concerns, which will weigh increasingly
heavily on the British debate over the coming months. They are concerns that
the government will have to take into account when they assess their five
economic tests by which they will judge whether entry is economically appropriate
for Britain.
Tony Blair has made clear that the result of the government’s assessment
of those tests will be made public no later than June 2003. A positive assessment
will lead to the government recommending entry to the British people, who will
have the final say in a national referendum.
A further delay beyond this time frame would be equivalent to a firm
rejection of membership.
Anti-Europeans-most of whom oppose British
membership of the euro on political and constitutional grounds-know that
prolonged delay is their best hope of keeping Britain out of the euro. Of course,
there would be political as well as economic costs to a decision not to join the
euro. The European Union has recently embarked upon a far-reaching discussion
of its future structure, responsibility, and objectives, as it prepares to welcome
up to twelve new member states from central and eastern Europe.
It is crucial that Britain’s influence in these discussions be maximized,
so that it can ensure that Europe develops in a way that serves Britain’s interests.
But we cannot really expect to shape these discussions if we decide to turn our
backs on Europe’s most important development-the euro.
The anti-Europeans who propose delaying a decision on euro membership
until we can see the outcome of these negotiations know perfectly well that
Britain’s clout will be less if it stays outside the euro. Many of them would
secretly welcome an outcome of the Inter-Governmental Conference that did
not serve Britain’s interests. Such an outcome would help to provoke a terminal
rupture in Britain’s relations with the rest of Europe, which is the ultimate
objective of isolationists and europhobes.
To say no to Europe and rule out the euro would be to give up on a
course that has yielded so much for so many over the past three decades. Politically
and economically, Britain has much to gain through membership, and much to
lose if it makes the wrong choice-or worse, if it does not have the confidence
to make a choice.
Recent events have reinforced the belief that the British people have
too much sense to reject increased prosperity in favor of isolationism. The Prime
Minister and the Chancellor of the Exchequer should have every confidence
that the British people would vote yes to the euro in a referendum. Britain
cannot afford not to.