Importance of Manufacturing

- Wednesday, 10th March 1999

 

It is a great privilege to address this conference today.

I accepted your invitation with enthusiasm for two reasons.

First, because of the importance of this audience.

And second, because of the significance of the topic you asked me to address.

I have always believed in the crucial importance of manufacturing.

When I was Secretary of State for Trade and Industry, I constantly emphasised that we cannot have a prosperous economy without a vibrant manufacturing sector.

Those who pretended we could replace manufacturing by services were self-evidently wrong.

Manufacturing and Services are not alternatives.

We need a vibrant manufacturing sector in order to have a strong service sector.

And those who forecast that manufacturing was set to decline inexorably in this country have been proved wrong.

Even over the last couple of years, the dice have been loaded against manufacturing through an artificially high exchange rate, an increased burden of tax, the weakness of export markets in the Far East and Eastern Europe and the ferocious competition from their manufacturers following the Asian crisis - despite all those things, British manufacturing output has proved amazingly resilient.

Just imagine how successful you would have been if our monetary policy, our fiscal policy, our educational policy, our trading policy were - as they should be - tailored to the needs of British industry.

THE CRUCIAL ISSUE

Yesterday was Budget Day.

But you haven?t asked me here to discuss primarily whether that budget was in the interests of British industry.

You rightly recognise that there is an even more crucial issue facing this country.

An issue which, in the view of many people on both sides of the debate, will determine whether or not in future this country has a Budget in any meaningful sense.

The decision about whether or not we retain our own currency will determine whether we retain the ability to set our own taxes, our own public spending programmes, our own monetary policy according to our own needs.

The issue of whether we keep the pound or scrap it and join the Euro is clearly of immense significance.

Wherever I am invited to discuss it, I find a thirst for more information, for reasoned discussion and for the full implications of what is at stake for our country to be spelt out.

And there is great resentment at those who seem to want to stifle the debate or reduce it to petty party political point scoring.

Whatever you think about the government?s objectives, it was extraordinary that when the government published its national changeover plan it did not say a single word about whether its own economic tests of the merits of membership of the Euro would be met and no indication of the full implications for this country were we to join.

So today I simply want to spell out the nature of the decision with which this country is faced.

NO WAY OUT

First of all, it is quite different in kind from any similar decision we have taken about monetary arrangements ever before.

It is far more momentous than the decision to go back on to the gold standard between the wars, or to link the ? to the $ as we did for 30 years after the war, or to join the Exchange Rate Mechanism as we did at the end of the 80s.

Because all those systems had an exit door.

If something went wrong, if circumstances changed, if the system was no longer to the advantage of this country, we could leave.

In all three cases that did happen.

They ceased to work to our benefit.

Britain did leave.

And we were subsequently able to restore our prosperity.

But the Euro is different.

It has no exit door.

There is no legal way of leaving it.

Once you join, it is irrevocable.

So even to contemplate joining, you at least need to know that it would not just be in the interests of this country now, but for all time.

Not just that it would work in times of economic prosperity - most things work when the economy is growing strongly.

But whether it would also work in times of economic difficulty, hardship and recession.

Not just that it was in the interest of some companies, but that it was in the interests of the whole economy.

And those are very demanding tests.

The Labour government has published its own assessment of the five economic tests which it believes would need to be passed for it to be worthwhile abandoning the ? and replacing it by the Euro.

It is actually a surprisingly good document.

We forced them to publish it a month or so before they intended.

It is thus the fairly unbiased work of civil servants before the spin doctors could get at it.

It concludes that it would not be in Britain?s interests at present to join the Euro because our economy has a different structure and a different economic cycle from the continental economies.

If we were part of a single currency, there would have to be the same interest rate from Berlin to Birmingham and from Aberdeen to Athens.

Normally you want to raise your interest rates if there is a danger of the economy overheating, to prevent inflation taking root.

And you want to reduce interest rates in a recession to encourage people to borrow, invest and create jobs again.

But our economy tends to be out of phase with the continent.

We tend to be growing strongly when they are in recession and vice versa.

Consequently, if we had to have the same interest rate as the Continent, we may find that we have to raise interest rates when we are in recession because the Continent was growing strongly.

That would make our recession worse and deeper.

The government?s document itself concludes that the loss of our ability to set our own interest rates would result in our economy being more volatile.

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 UK cycle more volatile.

This lack of stability would damage investment and the underlying rate of growth and employment would suffer.

And we know this isn?t just economic theory.

We carried out a laboratory experiment.

We put Britain into the Exchange Rate Mechanism and behaved as if we were already one currency.

As a result we kept interest rates down too low, the economy over-heated, inflation took root.

And in the subsequent recession we had to put up interest rates far too high for far too long and made it the longest, deepest and worst recession we?ve had since the 1930s.

That is why many people called the ERM the Extended Recession Mechanism.

In the six years since we left the Exchange Rate Mechanism, British business has created more jobs than the whole of the rest of the European Community put together.

Influence

The second thing that has become dramatically clear recently, membership of the Euro is not about gaining influence over monetary policy in Europe.

The new German Finance Minister, Oscar Lafontaine, recently showed how little influence even he has.

He called for lower interest rates and was told in no uncertain terms by the European Central Bank to get lost; it was none of his business; the Bank is constitutionally independent; indeed under the Treaty of Maastricht it is illegal, and I quote, for any member state ?to seek to influence the members of the European Bank or [even their own] national central bank in the performance of their tasks.

Nor would membership of the Euro give us any extra influence over the rules and structure under which the policy is determined.

Those were all laid down in the Treaty of Maastricht.

We exercised our influence in determining those rules.

They could only be altered with the full consent of every member state including those who do not belong to the Euro.

They would only need to be changed if something was going wrong.

Surely no-one would urge us to join the Euro so that if and when the wheels fall off we can help fit them back on again.

Political Project

The third thing that has become clear about the decision on whether to join the Euro is that it is not just about monetary and economic matters.

As a Cabinet Minister, I used to talk to Continental ministers.

They were always slightly amused that Britain discussed the Euro as if it was primarily an economic project.

To them it is essentially a political project, with secondary economic consequences - some good, some bad.

But they are prepared to take them in their stride.

The main political purpose of the Euro is to propel countries of Europe to move via a Single Currency to a Single Government to a Single State.

And they are probably right.

After all there never has been a currency in the history of the world without a government to run it and a state to back it with its authority.

A European single currency, like every other currency in the world will require, alongside the Central Bank, a government equipped with powers to tax, spend, borrow and regulate the system.

Indeed it is already the policy of the French government to establish ?un gouvernment economique? for Europe.

That is why the continental countries are pressing ahead rapidly with tax harmonization.

If we were part of Euroland, we would have to participate in that process.

That is bound to be to the disadvantage of Britain.

Over the last 20 years we have managed to keep the burden of tax in Britain [much lower] than the continental countries.

Here the government spends less than 42 per cent of the national income in taxation.

On the continent it is nearly 50 per cent - and rising.

If we harmonize our taxes that inevitably will mean an increased burden of tax in this country, reduced incentives and a less dynamic economy.

Inevitability

Finally it should be clear that the decision as to whether we decide to join the Euro is not inevitable.

The government would like us to believe that it is.

They are in effect saying ?Forget about the arguments, it doesn?t matter whether you like it or not. We are going to have to join so we might as well get on and prepare for it?.

But they can no longer use this assertion to sweep argument aside.

Because they cannot pretend simultaneously that it is inevitable that Britain has to abandon the ? and join the Euro and claim that it is not inevitable that once we join we would have to harmonize our taxes, our spending, our borrowing and our financial institutions.

These are the people who spent most of their lives telling us socialism was inevitable, and trade union power was inevitable, and inflation was inevitable and incomes policies were inevitable.

But along came Mrs Thatcher who said ?policies which are not desirable are not inevitable? and she demonstrated that you can roll back the frontiers of the state, you can tackle trades union power, you can curb inflation, you can do without incomes policies.

It is only because the advocates of the Euro cannot demonstrate that it is desirable that they are forced to rely on the hackneyed assertion that it is inevitable.

If it were inevitable that a medium sized economy, like Britain, alongside a large single currency zone would be forced to adopt that currency, then it would follow, too, that Switzerland, alongside Germany, would long ago have had to adopt the mark.

And Canada, alongside the States would have had to abandon its own currency and adopt the US.

I spoke some while ago to a group of Canadian and American businessmen and asked them whether they thought it was inevitable that Canada would have to abandon its own currency and share the $ with the USA.

They looked at me as if the question was ?barking mad?.

Nobody has the least intention of doing that in North America despite the fact that the two countries are more closely linked together commercially in the North America Free Trade Area than are the countries in the European Union.

The simple fact is that the United Kingdom has the fifth largest economy in the world.

There are 140 other countries in the world outside Euroland with smaller economies who have their own currency.

None of them has the least intention of merging its currency with that of its neighbours.

If there were obvious economic benefits of merging currencies, then surely some of those countries would be thinking of doing so.

Wouldn?t Singapore want to merge its currency with Malaysia; or Korea with Japan; or the countries of Latin America with each other?

All of them intend to retain their own currencies because they think it is in their interests to be able to tailor their monetary policy, exchange rate, tax and other policies to their own national needs.

I submit the same is true of the United Kingdom with the fifth largest economy in the world.

Conclusion

But should we rule out for all time the possibility of joining the Euro?

By temperament, I am the sort of person who never likes to say never.

Indeed, it is precisely because the decision to join the Euro would mean saying that we could never have our own currency or independent monetary policy again that I am so reluctant to join.

But it certainly seems to me unwise in the extreme to contemplate joining unless and until we have seen the Euro work in bad times as well as good.

We believe so long as Britain has a different economic structure and cycle from the continent, we will need different economic policies tailored to our own needs.

Moreover, abandoning our currency would not only remove control of our own monetary policy but is likely to lead inexorably to loss of control over economic policy as a single currency leads to a single government and a single state.

It is inconceivable that differences between the British and continental economics could be eliminated and seen to have been eliminated in the lifetime of a Parliament.

Nor could the fears that a single currency will lead to a federal Europe be dissipated in so short a time.

That is why we believe Britain will prosper best if we keep the ? throughout the next Parliament.

 

 

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