EMU: a flightless bird

Dr. Brian Burkitt, Pudsey CLP and Senior Lecturer in Economics at the University of Bradford, argues that the single currency will stop our economy getting off the ground.

John Palmer, former European editor of the Guardian, has long been renowned as an ardent supporter of closer European integration in general and of EMU in particular. However, in his Tribune article of 13th November, his Euro-enthusiasm leads him to neglect economic reality. British participation in the single currency will prevent the Labour Government from achieving its basic objectives of restoring full employment, of improving the quality of public services and of reversing the Tories' regressive redistribution by directing resources towards the poor.

Economists have recently analysed the costs and benefits of sovereign states adopting a single currency. They concluded that monetary union proves beneficial when participating countries possess similar economic structures and international trading patterns. If they do not, a single currency is inefficient and in fact widens differences in performance between its component parts. Comparing the United Kingdom to other EU countries, it becomes apparent that divergences of structure and trade are so great that EMU will damage economic welfare. These divergences rest upon a number of factors, including the following:

Such disparities, particularly the UK economy's greater sensitivity to change in the short term interest rates, means that EU-wide policy will exert a different impact between countries. A recent Centre for Economic Policy Research report entitled The Ostrich and EMU demonstrated that interest rate variations exercise most of their impact in Britain within two months, compared to six months in Germany and Italy. In Britain, the impact of interest rate movements on economic activity after two years is four times the EU average. Under such circumstances UK participation in EMU would be a disaster.

Any change in European monetary policy will be disproportionately channelled through the British economy, which would thus become disproportionately volatile. The British economic cycle is not synchronised with the rest of the EU; between 1961-93, the UK grew or shrank in line with the EU average for only six years in every ten, as against nine years out of ten for France and Germany.

The impact of EU-wide interests could be softened to suit Britain through fiscal measures that loosen policy in downturns and tighten it during upturns. But the scope for budgetary flexibility within EMU is limited by the stability pact, under which countries can be fined if their state borrowing in any year exceeds 3 per cent of GDP. Had such rules applied from 1992-96, the UK could have been fined up to £15 billion. It will be many years, if ever, before member states can achieve the necessary budgetary scope for counter-cyclical policies. The room for manoeuvre allowed by the stability pact is extremely narrow.

Conceived in a different inflationary era, the single currency project ensured that the EU experienced deflation when it should have enjoyed reflation. Politicians who were long on historic vision but short on economic common sense have imposed it upon Europe's 20 million unemployed. For the foreseeable future, EMU cannot operate effectively, because it is trying to achieve an EU economic homogeneity that simply does not exist. Without flexible exchange rates, and with limited labour mobility, under-performing countries will suffer chronically high unemployment.

The main lesson of the EMU project is that economic policy can never be operated efficiently through rigid rules but needs to be interpreted according to changing circumstances. Critics of EMU are often reproached for putting European co-operation under threat. However, the greatest danger to EU harmony lies in the design of the single currency, that already has led millions of its citizens to identify with the EU economic and social deprivation, or even exclusion. The people of Europe deserve an economy that serves their interest.

Labour's priority should be creating jobs by stimulating aggregate demand, not deflating the economy to achieve the Maastricht criteria. In the long run increasing economic activity, which generates tax revenue and cuts expenditure on benefits, reduces government borrowing.

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.

Non-participation carries positive benefits, a fact that the Labour Government seems to have 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, monetarist Maastricht framework that John Palmer wishes to impose on us.

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