Essay, Research Paper
Political consequences of a Single European Currency The basic political argument for retaining our own currency is that adopting the European single currency, in the absence of measures to buttress the intergovernmental pillars of the EU, could prove a decisive step towards turning Britain into a mere province of Europe, with a consequent loss not only of independence but of democratic accountability as authority is transferred from London to Frankfurt and Brussels. This fundamental political issue was defined, as long ago as 1961, when the question was put whether Britain wanted to be part of a federal Europe and become a Texas or California in a United States of Europe.We have not yet become such a federal Europe, although much of the EU’s decision-taking has edged us ever closer. Already a considerable number of decisions suffer from a “democratic deficit”. It is still possible for the EU to retain its unique design of being an intergovernmental body with supranational structures covering in particular the single market. But membership of EMU has wide implications and the “democratic deficit” already considerable in the EU will grow.It is worth recalling that in the 1975 UK referendum campaign the official document sent out on behalf of the ‘Yes’ grouping, in the section on ‘Money and Jobs’, said, “There was a threat to employment from the movement in the Common Market towards an Economic and Monetary Union. This could have forced us to accept fixed exchange rates for the pound, restricting industrial growth and so putting jobs at risk. This threat has been removed.”If the UK adopts the single currency, much detailed economic policy would no longer be managed by the British Cabinet, answerable to the Westminster Parliament. Under the “Euro-11″ committee, a club of single currency finance-ministers from the eleven participating nations, existing pressures within the single market to harmonise economic policies will grow. Euro-11 will have to operate within a regime in which a European Central Bank sets a European-wide interest rate at whatever level is required to restrain inflation measured on a Europe-wide basis. In other words, the ECB will watch an index of inflation across Europe – as the index rises, interest rates will be pushed up, and as the index falls interest rates will be reduced.When each member country in Euroland submits its budgetary and other economic plans to the committee, as it is obliged to do, Euro-11 will evaluate those plans in the light of their inflationary, and hence interest rate consequences, for Europe as a whole. If the Spanish, Italian or French governments pursue budgetary policies which have inflationary consequences, the results will be felt not only in the country concerned but by everyone else in the zone because the ECB will in response raise interest rates across Euroland to contain the rise in the European inflation index. Because, as a result, all member countries will be affected by the fiscal decisions taken by any individual member, they will all wish and more importantly will be entitled to influence the policies adopted by individual governments. The Euro-11 committee will make recommendations about each country’s budget, backed in extreme cases by the imposition of fines. Because of the inherent instability of this system the dialogue between individual finance ministries and Euro-11 will be virtually continuous. These Euroland finance ministers would, if we were part of EMU, effectively replace, for all purposes directly or indirectly connected with economic management, our own Cabinet and Bank of England operating within our parliamentary system. The Euro-11 committee may initially seek to concern itself simply with the size of budget deficits and surpluses in the member countries, but it will quickly move to much more detailed discussion and intervention if the single currency is not to fall apart.Arguments will be deployed to justify collective decision taking in Euro-11 over many other areas of national government – corporate taxation, working hours, proposed changes in the welfare system, minimum wages – which will all need to be harmonised eventually within a single currency zone. The fact is that Euro-11 is the putative economic government of that part of Euroland which operates a single currency. Not surprisingly many of the politicians in these countries welcome a federal Europe. They have more faith in that than in the continuation of a number of self-governing nation states.
Were the UK to be a member of Euro-11 – or Euro-12 as it would then be – we would be able to cast one weighted vote out of 12 to help determine the economic policies of France, Germany and Italy, which we cannot do today. But the downside of that – to have only one weighted vote out of 12 in the determination of what most of us see as our own affairs – is a massive price to pay. Many people will not be prepared to pay this price without very clear evidence that membership of the Euro carries with it a substantially higher standard of living and greater international security and even then they may prefer to retain the independence, identity and freedom of being part of the nation which they and their ancestors have lived in peacefully over the generations.There are political dangers of instability and even insurrection from having a ‘currency straitjacket’ imposed across the diverse 15 nations within the present EU, even more so for an enlarged EU. Some of these flow from the rigidity of the single interest rate system. If inflation rises in Italy, everyone’s mortgage rates in the UK would go up. Would our people accept this? An interest rate that was too high for our own economic circumstances would have a devastating effect on company profits, far eclipsing any gain from the absence of currency risk. Would the Spaniards acquiesce in higher unemployment levels as a result of policies pursued miles away in Berlin? This is not fanciful scaremongering. Viewed over the perspective of thirty or more years single currency zones have either broken up in the past or chosen to coalesce into one larger nation. Looked at another way, if Northern Europe were to experience a sustained boom, whilst Southern Europe was in a long recession – a perfectly possible outcome – would the North be prepared to transfer even larger resources than are already transferred within the EU to the South in an attempt to relieve those countries and stop them breaking away from a Euroland which was imposing on them high interest rates and high unemployment? It is likely that in so far as rich countries in the EU have to transfer resources to the poorer regions of Euroland, they will only be willing to do this in exchange for ever increasing political control. This is an almost inevitable consequence in every single currency area.A single currency works within the United Kingdom because if the Southeast of England is overheating and the Bank of England raises interest rates accordingly, the people of Scotland and in the north of England have been prepared to accept this without challenging the union. Equally, people who live in the Southeast accept the large transfers of resources, which have taken place to maintain UK-wide living standards. The policies are acceptable because the British currency union is underpinned by a common sense of British identity within our political union which has hitherto been strong enough to allow common policies to be pursued – by no means always in everyone’s economic interest all of the time – without sections of the UK rising in protest and electing to withdraw from the system.The UK is experiencing considerable constitutional changes at present, the effects of which will need time to work through. To add economic and monetary union to this will be to open many new arguments: for example, separatists in Scotland will claim that independence becomes far easier once they are within a single European currency zone.The most profound political worry associated with the European single currency is that a single political identity does not exist between the populations of the various member states. Establishing currency union before there is a political union is putting the cart before the horse; and it inevitably means that for Euroland to succeed, sooner rather than later political union will have to follow for the countries within the currency union.