The UK, the euro and the Convention on the Future Shape of Europe

Citation

Colvin, D. (2002), "The UK, the euro and the Convention on the Future Shape of Europe", European Business Review, Vol. 14 No. 3. https://doi.org/10.1108/ebr.2002.05414cab.003

The UK, the euro and the Convention on the Future Shape of Europe

David Colvin

Keywords: Currency, EMU, Development

The Convention on the Future of Europe agreed by the Laeken European Council last December held its inaugural meeting on 1 March 2002. It will pave the way for an Intergovernmental Conference (IGC) in 2004 to address three major challenges. First, how to bring the citizens closer to Europe. Second, how to organise politics in an enlarged Union. Third, how to develop the Union into a stabilising factor and model in a new, multipolar world.

These are large and important questions for a Union whose credibility, relevance and legitimacy are problematic in many member states. The UK, along with Denmark and Sweden, face an additional question, whether to join the euro and, if so, when to attempt to do so.

This paper provides a short history of Economic and Monetary Union (EMU) and explains why euro membership is not relevant to the UK's position in these negotiations. It argues that, furthermore, it would be premature and misleading to put the question of euro membership to the British people before the 2004 IGC has completed its work and clarified the nature of the European Union to which we would be invited to surrender part of our economic and financial independence.

The future shape of Europe

This brief history of EMU shows that, apart from the 1972-1973 period, the UK approach has at least been consistent throughout. It is well understood by our partners. The opt-out negotiated by John Major means that the UK is fully and legally entitled to resist imposition of the euro unless and until the UK voluntarily decides otherwise. With the UK economy performing relatively well outside the eurozone, now is hardly the time to risk de-stabilising it by calling a referendum. Moreover, as Prime Minister Tony Blair has unequivocally stated: "we absolutely have not and do not need to be a member (of the euro) to make our position strongly felt." In short, there is no reason to fear that UK influence in the Convention and subsequently will be impaired by remaining out of the euro.

On 2 January 1999, The Economist welcomed the euro's arrival in an article entitled "Europe's adventure begins." EU enlargement from 15 to 20-30 countries coupled with the fact that four countries were staying out of the euro "is likely to mean that the Union should become a multi-system entity, with some countries signing up to everything and others opting for a different blend. It may well prove perfectly rational, in the long term, for some EU countries to stay out of even a successful euro. But that, too, is a happy thought: a Europe that is broad as well as deep, that takes account of national differences and is not thought of as a federalising bully. If the euro succeeds in creating such a Europe, its launch of January 4, 1999 will be looked back on as really quite a moment."

It is hard to improve on this as a Mission Statement for the New Europe, for "a different approach from 50 years ago," which the Convention is tasked to consider. If the IGC elaborates a Europe which opens up fresh opportunities, not imposes further red tape, which sees national and regional differences as enriching, not threatening, the cause of European unity, in short a Europe which does not come across as a federalising bully, it would reassure those outside the euro. Otherwise the outlook is not promising and the Union will become more, not less, adrift from European public opinion. The influence of the "ever-closer union Ayatollahs" needs to be curbed in the European Union's own interest.

The Laeken Declaration itself acknowledges the point: "In coordinating the economic, financial and fiscal environment, the basic issue should continue to be proper operation of the internal market and the single currency, without this jeopardising member states' individuality." This is explicit recognition that the individuality (i.e. identity)) of member states is indeed at risk if the Union develops in the wrong direction.

That is why, independently of HM Treasury's assessment of whether the UK has "clearly and unambiguously", in Tony Blair's words, satisfied Chancellor Gordon Brown's five economic tests, it would be premature and misleading to contemplate a referendum on surrendering the pound sterling until the outcome of the 2004 IGC is known. The intervening period will also provide more time in which to reach a better informed judgement, in the light of practical experience, on the performance of the euro, the extent to which it satisfies or falls short of the claims made in favour of it, and of the attractions and advantages of the alternatives.

Unprepared, not warned and not willing

Thirty years ago, an EC Summit in Paris set the target of full economic and monetary union (EMU) by 1980. The UK signed up but with a particular agenda in mind. Under the terms of entry, the UK faced paying a large, inequitable, even unacceptable, net contribution to the EC budget when all transitional arrangements ended in 1980. From the start, this unpleasant prospect acted as a powerful spur on the Heath Government to push on with developing the enlarged EC as quickly as possible. EMU, a large Regional Development Fund (RDF) to bring in more receipts, even secret plans for a British initiative for an EC version of the US Food and Drug Agency (only now getting off the ground) were all grist to the mill.

The period 1972-1973 was a unique but fleeting moment in the history of the UK's troubled relations with Europe, the only time when a British government was prepared to give absolute priority to rapid European integration. It was due to a combination of circumstances unlikely to recur. This "golden" period was brought to an abrupt end by Conservative electoral defeat at the hands of eurosceptic Labour who, to the annoyance of our partners, immediately sought to re-negotiate the terms of UK entry, with the ink of the Accession Treaty barely dry.

The incoming Wilson Government avoided the mistake of seeking radical changes entailing treaty amendment (and therefore ratification by reluctant partners). The key event was the Dublin European Council in March 1975, which agreed the principle of a budget correcting mechanism. Once that was in the bag, the subsequent referendum on the UK staying in the EC was winnable and the Dublin breakthrough could be laboriously translated into a fully-fledged and permanent corrective mechanism. It took nine years and much broken crockery before settlement at Fontainebleau in 1984.

Meanwhile, "EMU by 1980" had run into deep trouble, and not because of the British. Its epitaph was pronounced, again in Paris: "internal and international difficulties have prevented in 1973 and 1974 the accomplishment of expected progress on the road to EMU". Among the internal difficulties was the non-negotiability of resource transfers under the EC budget large enough to compensate marginal regions for their marginality within the EMU. Amazingly, this issue was simply ignored by the architects of the euro and has never been settled. Whether it is a fatal flaw, or can be compensated for by expedients such as the development of local quasi-currencies or local exchange trading systems, remains to be seen. Bundesbank reluctance to agree to reserve pooling, particularly after the German government had given the contrary impression, was another blow.

My superior in the Foreign Office at that time, Sir Michael Butler (1986), who was UK Permanent Representative to the EC (UKREP) from 1979 to 1985, wrote:

Whatever the Heads of Government may have thought at the time about EMU, the finance ministries in almost all member states were deeply sceptical about a commitment to have it by 1980. They could see that, in order to implement it literally, including fixed parities or a single currency, giant strides would have to be made not only towards similar rates of inflation and productivity growth, but also towards sharing sovereignty in the fields of fiscal and monetary policy, giant strides for which political parties and electorates were totally unprepared – in both senses of the word, not warned and not willing.

In 2002, the British can no longer plead any lack of warning. Euro notes and coins are a reality. But the British still show every sign of being unprepared and unwilling to abandon the pound, particularly if it involves "sharing sovereignty in the field of fiscal policy". In this, their instincts are firmly rooted. British constitutional history, from feudal barons via monarchs to parliament, effectively concerns control over "supply" (i.e. taxation). It would still be hard to find anyone in this country (or in most other EU member states) who would regard the prospect of transferring the power to tax to Brussels with anything other than alarm. Yet Sir Michael may be right. Such a transfer, if only partial, may yet prove necessary if the euro is to function properly, whether euphemistically described as fiscal coordination or fiscal harmonisation. Time will tell. Meanwhile the UK would do well to rest on the opt-out and see how matters develop.

European Monetary System (EMS)

After the damp squib of "EMU by 1980", it was not until 1978 that moves towards economic and monetary cooperation resumed. It was foreshadowed in a speech delivered by, to date, the only British President of the EC Commission, Roy Jenkins (and largely the work of another Briton, Michael Emerson). This was taken up by President Giscard of France (now Chairman of the Convention on the Future of Europe) and Chancellor Schmidt of Germany. They invited the British to join them in elaborating a tripartite scheme. Prime Minister Callaghan and Chancellor Healey, nervous of the enterprise, resisted. As UKREP press spokesman at the 1978 European Councils in Copenhagen and Bremen which took key decisions on the EMS, I recall some elaborate spin-doctoring on the British side to extricate the country from what was perceived to be a potentially dangerous entanglement. A clinching argument was that the intervention arrangements of the Exchange Rate Mechanism (ERM) were asymmetrical, putting excessive onus on deficit countries like the UK, and not enough on surplus countries like Germany. Britain abstained. Not even the lure of subsidised loans from the European Investment Bank (EIB), pocketed gratefully by Ireland and Italy, would induce a change of heart.

Single European Act

In 1986, EC Heads of Government agreed the Single European Act, the treaty establishing the single market, the EC's great success story. Its preamble specifically recalled the 1972 Summit and re-committed Member States to the "progressive realisation of Economic and Monetary Union", thus smuggling EMU back on to the EC's agenda, characteristically by a side door. John Major has written that he never understood why Prime Minister Margaret Thatcher accepted this reference and did not seek an opt-out. What is sure is that the political commitment was regarded as an albatross round British necks by those concerned at Maastricht.

Maastricht

In the period before the Treaty on European Union, a variety of alternative monetary schemes were proposed for the transition to monetary union, including the existing ECU basket, a frozen ECU basket, a hard ECU basket, a two-tier hard ECU and an official hard ECU. The British came up with a hard ECU managed by a European Monetary Fund. It would have functioned as, in effect, an additional EC currency. Rather than an approach based on the imposition of a single EC currency (which the UK consistently opposed), the hard ECU would either have gained ground over the years and developed into an EC currency or, without drama, faded out of the picture as an experiment whose time had not come.

To avoid a divorce developing between the existing ECU and the new hard ECU, the Spanish proposed the hard basket ECU approach. Unlike the ECU (a basket of EC currencies weighted according to the size of each nation's economy, and revised every five years to take account of changes in the size of national economies), the Spanish plan involved weightings adjusted only in the event of realignment of national currencies. To prevent any devaluation of the ECU against the strongest EC currencies, those currencies that devalued would have seen their weighting within the ECU diminish. As a result, by maintaining a fixed central exchange rate against currencies not experiencing devaluation, the ECU as proposed by the Spanish would have remained as strong as the strongest EC currency. That in turn, the Spanish argued, would have encouraged the ECU's use in commercial transactions, paving the way for its adoption as a single EC currency in due course.

Regrettably (and former German Chancellor Schmidt for one still regrets the dumping of his creation, the ECU), none of these ingenious market-driven and decentralised approaches was adopted. Regrettable because they would have avoided creating Ins, Pre-Ins and Outs, the need to satisfy or fudge performance criteria (by fair means or foul) or to hold referendums in certain countries. It is important to be clear that there were credible alternatives to the route chosen at Maastricht of a centralised and imposed euro, with a one-size-fits-all-but-suits-few-if-any interest rate, set in somewhat opaque fashion by a European Central Bank in Frankfurt.

It was also regrettable that Europe's leaders should have persisted with a scheme shown to be highly problematic in 1972-74. Hitherto unthinkable events were happening daily. Communism and the Soviet Union had just collapsed. German re-unification was on the agenda. The whole future of Europe and of European integration were in evident need of a radical re-think. Instead, exponents of the classic Community system and method (like former Belgian Prime Minister, Jean-Luc Dehaene, a Vice-Chairman of the Convention) could not disengage the auto-pilot on which they had been flying since the "EMU by 1980" debacle in 1974. We can now see that if the EU had been less obsessed with the EMU project throughout the 1990s, it would have made a better fist of the bloody collapse of Yugoslavia and of extending prosperity and stability, within a liberal order, to the countries of Eastern and Central Europe emerging from a half century of communist tyranny. It is an indictment of Europe's statesmen, particularly of those who even today cling to a discredited and costly policy like the Common Agricultural Policy (CAP), that these countries have still not joined the EU.

Black Wednesday

Having stayed out of the ERM for a decade, the UK finally took the plunge, in order to squeeze inflation out of the system, in 1990. Within two years, re-unification meant that Germany needed a tight monetary policy at a time when the domestic situation in a number of ERM countries, including the UK, required an easing of monetary policy. The result was the political and economic calamity known in the UK as Black Wednesday. Italy's currency was the first to go, to the distress of Prime Minister Giuliano Amato (the other Vice-Chairman of the Convention). I recall from my then vantage point as Minister in the British Embassy, Rome, that Prime Minister Amato also had to take draconian steps to bring Italy's ballooning budget deficit under a semblance of control. One of his measures was "una tantum", a one-off raid on everyone's bank account of six lire in every 1,000. Not even foreign diplomats were exempted! But with financial catastrophe round the corner, drastic measures, even of the third-world kind, were needed.

These traumatic events hardened Italy's determination (and need) to qualify for the euro from the start, to submit to externally imposed financial discipline and to dispense with the treacherous lira as soon as possible. The British tended to draw the opposite conclusion. Black Wednesday confirmed the perils of fixed but variable exchange rate systems (which had kept us out of the ERM at the start) and, a fortiori, of being entombed permanently in a single currency, at the wrong rate and with no means of escape.

These issues were debated at length in Rome, Brussels and other European capitals as the date for fixing national parities with the euro approached. Re-visiting the transcripts makes for some interesting and amusing reading. A Conference in Rome in July 1996 sticks in the mind. One speaker (Professor Vaciago) said that being an early participant would be advantageous if EMU lasted for 20 years but not otherwise. The jury will be out for long time. Another (Niels Thygesen) said that the strength (sic) of the euro would draw participants in. Traders would embrace the new currency eagerly and the EU would have actively to mismanage it to keep the euro from catching on. Gianni Agnelli (Honorary President, FIAT) described EMU as the bitter medicine Europe needed to come back from decline. He endorsed EU Commissioner Mario Monti's judgement that the Treaty on European Union was "the best ally of future generations." He also noted that the US Federal Reserve System was only born in 1913 and had been a fragile project until it reached maturity during the New Deal and the Second World War. To place the euro in even deeper perspective, he might have added that it took the USA no less than 147 years from the birth of the Republic to create a true single currency zone.

The future shape of Europe

This brief history of EMU shows that, apart from the 1972-1973 period, the UK approach has at least been consistent throughout. It is well understood by our partners. The opt-out negotiated by John Major means that the UK is fully and legally entitled to resist imposition of the euro unless and until the UK voluntarily decides otherwise. With the UK economy performing relatively well outside the eurozone, now is hardly the time to risk de-stabilising it by calling a referendum. Moreover, as Prime Minister Tony Blair has unequivocally stated: "we absolutely have not and do not need to be a member (of the euro) to make our position strongly felt." In short, there is no reason to fear that UK influence in the Convention and subsequently will be impaired by remaining out of the euro.

On 2 January 1999, The Economist welcomed the euro's arrival in an article entitled "Europe's adventure begins." EU enlargement from 15 to 20-30 countries coupled with the fact that four countries were staying out of the euro "is likely to mean that the Union should become a multi-system entity, with some countries signing up to everything and others opting for a different blend. It may well prove perfectly rational, in the long term, for some EU countries to stay out of even a successful euro. But that, too, is a happy thought: a Europe that is broad as well as deep, that takes account of national differences and is not thought of as a federalising bully. If the euro succeeds in creating such a Europe, its launch of January 4, 1999 will be looked back on as really quite a moment."

It is hard to improve on this as a Mission Statement for the New Europe, for "a different approach from 50 years ago," which the Convention is tasked to consider. If the IGC elaborates a Europe which opens up fresh opportunities, not imposes further red tape, which sees national and regional differences as enriching, not threatening, the cause of European unity, in short a Europe which does not come across as a federalising bully, it would reassure those outside the euro. Otherwise the outlook is not promising and the Union will become more, not less, adrift from European public opinion. The influence of the "ever-closer union Ayatollahs" needs to be curbed in the European Union's own interest.

The Laeken Declaration itself acknowledges the point: "In coordinating the economic, financial and fiscal environment, the basic issue should continue to be proper operation of the internal market and the single currency, without this jeopardising member states' individuality." This is explicit recognition that the individuality (i.e. identity) of member states is indeed at risk if the Union develops in the wrong direction.

That is why, independently of HM Treasury's assessment of whether the UK has "clearly and unambiguously", in Tony Blair's words, satisfied Chancellor Gordon Brown's five economic tests, it would be premature and misleading to contemplate a referendum on surrendering the pound sterling until the outcome of the 2004 IGC is known. The intervening period will also provide more time in which to reach a better informed judgement, in the light of practical experience, on the performance of the euro, the extent to which it satisfies or falls short of the claims made in favour of it, and of the attractions and advantages of the alternatives.

ReferenceButler, M. Sir (1986), Europe: More than a Continent, Heinemann, London.