Gordon Brown’s statement on Labour’s European Monetary Union (EMU) policy on 27th October was a masterpiece of short term political tactics.
The combination of a clear commitment to the Single Currency in principle with a pledge not to enter in the lifetime of this Parliament was a double-whammy sufficiently adroit to silence critics on both the pro and anti-Single Currency wings of the party. It also possessed the additional bonus of re-opening Tory divisions.
However, its status as a benchmark of future Government strategy on this crucial decision is dubious, while its relevance to a socialist programme remains still more obscure, particularly when Gordon Brown stresses the need for “a mainstream, pro-European, national consensus — stretching across the country and in particular the world of business”.
Just saying the UK will join EMU only when it “works” economically begs crucial questions. Not least, who does EMU “work” for — unelected central bankers, bureaucrats and corporate Europe or for the socially excluded or unemployed?
The Maastricht criteria have already caused unemployment and taxation to rise. If we adhere to them in a recession, public expenditure will be pulverised, with catastrophic increases in unemployment as a result. Also what happens if EMU stops “working”? How can Labour be sure that the regime it joins will operate efficiently in perpetuity? All fixed exchange rate regimes in history have ultimately collapsed due to changing circumstances.
After eighteen years of Tory rule, which initiated one of the largest-ever redistributions from the poor to the rich (a Robin Hood in reverse amounting to around £31 billion through changes in public expenditure and taxation), it is unrealistic to expect Labour to reverse completely such divisive policies over the course of one Parliament. However, it is imperative that a democratic socialist government taking office in these circumstances produces an effective strategy for moving towards at least three objectives:
The Labour Government has (almost) ruled out EMU membership during the present Parliament, but appears committed to it over a longer period. Press comment suggests that Blair and Brown believe (in defiance of historical evidence that alternatives always exist) EMU membership to be inevitable. Socialists within the Labour Party face two tasks:
EMU could conceivably establish and preserve full employment, with associated rapid rates of economic growth, if all participating countries agreed: (a) to co-ordinate their economic policies, (b) to use such co-ordination to achieve levels of employment unheard of since the 1970s. At the present EU conjuncture, (a) is feasible though improbable, but (b) will never happen within present lifetimes, because on the remote chance that (a) occurs, it will do so on the basis of the existing, deflationary Maastricht criteria.
A recent study estimated that EU members suffered a deflation of around 4.5% of their national income during the 1990s through pursuing these criteria. It is essential to realise that the arbitrary fiscal convergence targets of the Maastricht Treaty not only stifle growth during the run-up to the Euro’s launch on 1st January 1999, but will also do so permanently thereafter because they must be achieved subsequently on an annual basis. In theory “Britain leading in Europe” (Blair’s mantra) could change the Maastricht provisions, but in the actually existing world the difficulties of ratifying Maastricht render any such reforms highly unlikely.
Opportunities to enhance the quality of public services will be diminished by the EMU process. The establishment of a European Central Bank (ECB) implies a uniform monetary policy, rate of interest and exchange rate. These can operate effectively only if participating countries possess similar economic structures and international trading patterns. For Britain, at least, these conditions do not apply. Any change in EMU monetary policy will be disproportionately channelled through the British economy, which would thus become disproportionately volatile. A recent study by the Centre for Economic Policy Research demonstrated that in Britain the impact of a given movement in interest rates on economic activity is four times the EU average. Consequently an EMU-wide monetary policy can never meet the individual requirements of each member nation. Crucially any convergence ameliorating such problems would inevitably be temporary.
In a dynamic economy changes in productivity and technology continuously undermine any apparent convergence, whether at Gordon Brown’s target date of 2002 or any other arbitrarily chosen time. These divergent monetary requirements will generate pressures on fiscal policy; the so-called “growth and stability pact” is all stability and little growth. Consequently British Government budget decisions would be focused even less on welfare recipients’ needs and even more on the outdated, monetarist Maastricht criteria. The implications for future welfare spending are dire.
Opting-into EMU does not formally preclude a Labour Government from redistributing resources, with the associated life chances, from the rich to the poor. However, it is likely to prevent such a strategy in practice. The ECB, an institution removed from any democratic influence, whose sole objective as laid down by the Maastricht Treaty is price stability, will be anxious to assume the mantle of successor to the Bundesbank. Accordingly, it will tend to err towards over-deflationary policy, which will increase the already high level of EU unemployment (currently at 18.5 million), which is the largest single cause of poverty. Simultaneously, budgets will contract. As the countries joining EMU, with the exception of Luxembourg, only just meet the Maastricht criteria, they will be compelled, after entry, to concentrate upon fiscal retrenchment. Economies that perform relatively strongly will be happy to accrue surpluses, while the relatively weak will be forced to raise taxes or cut spending to ensure that deficits do not exceed the specified limits. In these circumstances, redistributive measures are unlikely to be undertaken at all; if they are, their scope will be severely limited by the EMU and stability pact provisions.
If EMU goes ahead, the overwhelming probability is that much of the EU becomes further depressed and unemployment will rise. Political support for European integration will weaken, racist groups thrive and nationalist pressures increase. The difficulties of meeting the Maastricht targets have ensured that the Euro begins life as a soft currency, which could do profound damage to EMU members. Britain gains nothing from economic fragility and political instability on the continent, but will suffer its consequences less if it remains outside a single currency.
Labour’s priority should be creating jobs by stimulating aggregate demand, not deflating the economy to achieve the Maastricht criteria. In the long run government borrowing is reduced by increasing economic activity, which generates tax revenue and cuts expenditure on benefits.
The Treasury estimates that each involuntarily unemployed person costs the Exchequer approximately £9,000 per year via lost tax revenue and higher social security payments. Labour must reject the Single Currency because its risks of deflation and greater unemployment are too high.
Conceived in an inflationary era, the Single Currency project has ensured that the EU experienced deflation when it should have enjoyed reflation. It has been imposed on Europe’s unemployed by politicians who were long on “historic vision” but short on economic common sense.
By opting-out of EMU, Labour can ensure that UK citizens possess an economy that serves their interests. Non-participation carries positive benefits, a fact that the Labour Government has completely overlooked. Outside the Single Currency, Labour could pursue an expansionary economic strategy by reducing interest rates, increasing the money supply and allowing the exchange rate to reach the level required to achieve balance of payments equilibrium at full employment.
The success of such a strategy will enable Labour to create jobs, improve welfare services, abolish poverty and reduce inequality. Indeed the successful expansion of employment in Britain might eventually stimulate new ideas within the EU outside the obsolete, anti-prosperity Maastricht framework!