Speech delivered on the Pound and the Euro

- Thursday, 23rd September 1999

 

The real estate business is a hugely important industry.

It affects the competitiveness and flexibility of all our business and commerce.

But at first sight it does not look likely to be much affected by the subject you have asked me to address ? the ? and the Euro.

However, few industries are more directly affect by interest rates, inflation and the availability of credit than the property business.

And the decision about whether or not we keep our own currency will dramatically affect the sort of monetary conditions in which your industry operates in the UK.

So it is a vital issue for you.

I just want to make a few points about the nature of that decision.

First, that decision does not and should not depend on whether you are pro or anti Europe.

As David Owen has said, you can be pro-European, but against the Euro.

For my part, I did an apprenticeship in a French laboratory.

My first job was in Holland and Belgium.

I speak tolerable French and I have a home in France.

I want the current generation to be free to travel, to live, to work, to study throughout the European Community by abolishing unnecessary barriers between us.

I relish the diversity of the Europe that I have come to know and love through exercising those freedoms.

But I believe that that diversity is ultimately threatened by trying to put it all in one political straitjacket.

It could be threatened and incompatible with the Euro.

Second, the decision as to whether or not we keep our own currency is not a minor matter about getting the timing right.

It would be the most momentous decision this country has ever made in the matter of monetary relations; more significant than going back on the Gold Standard between the wars or linking the pound to the dollar as we did for several decades after the war, or joining the ERM, as we did at the end of the 1980s; because all those systems had an exit door.

If something went wrong, if circumstances changed, if they did not work out as we hoped, then we could leave.

And indeed in each case that did happen: they did work out to our disadvantage, we did leave, and we were subsequently able to restore our prosperity.

But the Euro is different.

It is irrevocable.

It has no exit door.

There is no legal way of leaving and regaining your currency if you decide to join it.

So you should only even contemplate abandoning the pound and replacing it by the Euro if you are convinced that that will be good for Britain not just now, but for all future time; not just in times of prosperity, but in times of economic hardship, recession and difficulty; not just for some companies but for the whole economy and the whole country.

These are very demanding tests.

To its credit, the government has published a document entitled ?The Five Economic Tests of UK Membership of the Single Currency?.

It is actually quite a good document.

I like to think it is good because we forced them to publish it a couple of months ahead of their intention.

So it is largely the raw work of officials before the spin doctors got at it.

They concluded that membership of the Euro would not at present be in Britain?s interests because we have a different economic structure and a different economic cycle from the Continent.

That brings me to the third thing about this decision of whether to join the single currency.

A single currency means a single interest rate ? the same from Berlin to Birmingham and from Aberdeen to Athens.

It is a one size fits all interest rate policy.

Normally, of course, interest rates are raised if the economy is growing too fast - to prevent it overheating and igniting inflation.

And when the economy slows down or is in recession, you cut interest rates to encourage people to borrow, invest and create jobs.

But we have a different economic cycle from the Continent.

Britain tends to be growing strongly when they are in recession and vice versa.

So, if we had to have the same interest rate as the Continent we could find ourselves cutting interest rates when the UK economy is growing too fast.

That would make it overheat and trigger inflation.

Worse still, in a recession we might have to have the high interest rates needed to cut the boom on the continent.

That would make our recession deeper, longer and worse.

We know that that is not just economic theory, because we carried out a laboratory experiment.

We put Britain into the Exchange Rate Mechanism; we behaved as though we were already part of a single currency zone.

And we found it had just those effects, that we held interest rates down unnecessarily low during the period in the late 1980s when we were shadowing and joined the Euro, and then had to keep them high when we were in recession.

So it was the longest, deepest and worst recession since the 1930s.

No industry was harder hit by the experience in the ERM than the property industry.

And millions of home owners were forced into negative equity.

So abandoning your own currency and joining the Euro can be bad for you.

The government, in their document, reached the same conclusion:

?If the UK were to enter monetary union without durable convergence, then the loss of domestic monetary policy and lack of exchange rate freedom could make the United Kingdom economic cycle more volatile. That lack of stability would damage investment, and the underlying rate of growth and employment would all suffer.?

So the government officials looked to see if the difference between the British and continental economic cycles was just a temporary aberration.

But they found it had existed throughout the period of over a quarter of a century which they examined.

What is more, our economic cycle has not been converging with the continent.

It has got more out of line with the rest of Europe and more in line with the Anglo-Saxon economies.

The fourth thing about this decision that we need to know is that the Euro is not primarily an economic project.

When I was a Cabinet Minister and used to meet my colleagues from our Continental partners, they were faintly amused that we in Britain treated the Euro as if it is primarily an economic issue.

For them, the Euro is primarily a political project, with secondary economic consequences, some good, some bad, but they are prepared to take those in their stride.

Recently, the former Prime Minister of Spain said, ?We must never forget that the Euro is an instrument for the project of creating a united Europe?.

For most of the political elite on the Continent it is a political project which will lead from single currency to single government to single State.

And they are probably right, because there has never been an official currency in the history of the world which has not had a government to run it - a government equipped with powers to tax, to spend, to borrow and to regulate the financial system.

Almost certainly, they will have to create such a government with such power.

That is why they have begun rapidly to move down the path of tax harmonisation.

What they want is to eliminate what they consider unfair tax competition.

For Britain that is inevitably disadvantageous, because we have managed to keep our burden of tax significantly below the burden of tax of most of our competitors on the Continent.

Any process of harmonisation is likely to involve harmonising our taxes upwards.

That would deprive us of a relative competitive advantage, reduce our incentives and dynamism and increase the costs that we face.

That will affect taxes on property too.

It is probably no coincidence that the British government has begun to raise stamp duty to match the higher property taxes imposed by many of our EU partners.

But, fifthly, this decision is not inevitable.

The government would like us to believe that it is, that we do not need to bother our little heads about the pros and cons of membership because somehow or other membership is ?inevitable?.

[The argument of inevitability is not an argument; it is a substitute for argument; it is invariably a symptom when used that the people concerned have no positive, coherent case to put forward.

It comes from the same stable as people who said that socialism was inevitable, that inflation was inevitable, that trade union power was inevitable, that incomes policies were inevitable.

Indeed, many people on my side of the political spectrum tended to believe that those people were right and that all we could do was to manage those inevitable trends a bit better than those on the Left or the Centre could.

Then along came Mrs Thatcher and showed us that policies that are not desirable are not inevitable.

You do not have to have them.

You can roll back the power of the State.

The same, I believe, is true of the Euro: you do not have to join if you consider it bad for this country.]

If it were inevitable that a medium-sized country alongside a large currency zone had to adopt that currency, then a country like Switzerland, alongside the massive German economy with which it is closely economically integrated, would have been unable to run the most successful and strongest currency in Europe.

Or Canada, alongside the United States, would not have been able to run its own currency separate from that of the United States.

A little while ago, I asked a group of British and American businessmen whether they believed that Canada would inevitably have to abandon its own currency and adopt the US dollar.

They looked at me as if the question was barking made.

None of them had ever considered it; it is a matter of irrelevance.

Of course, Canada is an independent country and has its own currency, which allows it to adapt successfully to minor variations between its economy and that of its great neighbour, the United States, with which it is more closely linked in trading terms than any two major countries in the European Community.

 

 

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