Time to reopen the euro debate

Ten years ago when 11 European countries agreed to freeze their exchange rates in preparation for a single currency, a number of sceptical economic correspondents predicted financial calamity. Then, when the euro was going through a difficult teething process, they were quick to deride it as a 'toilet currency'. That within ten years of its creation, the same economists are now anticipating that the euro will overtake the US dollar as the world's principle reserve currency, demonstrates the economic strength and stability created by the euro.

So, when will Britain (Europe's second largest economy) become a member? This question has, quite simply, dropped off the political radar in recent years, but EMU's 10th anniversary is surely no better a time to re-open the argument and question whether by staying out Britain is missing out. It is difficult to accurately estimate the damage to inward investment and job losses caused by our non-entry. However, companies ranging from US construction giants Caterpillar to car companies Toyota and Nissan have made it clear they will not increase or even maintain their investment in the UK while we intend to stay outside the single currency.

Steady inflation rates of a fraction over 2%, the lowest interest rates in a generation, the creation of 16 million new jobs in the eurozone, increase intra-area trade and a deeper, more integrated financial market are just some of the achievements that serve as a testament to the euro's success. The euro's transformation is no better illustrated than by the observation that, whereas in 2001 it accounted for 27% of the global financial pie, compared with 51% for the dollar, it now accounts for 45% of the global market compared to the dollar's 37%.

The next step for the single currency will be for world commodity prices to be fixed in euros rather than dollars, a development that would also strengthen the arguments for UK membership. At present, manufacturers in Britain and, indeed, the eurozone are hostages to fluctuations in the US economy that have nothing to do with our suppliers or our own economy. Having world commodity prices fixed in euros would transfer the US's current economic advantage to Europe.

That being said, European monetary union remains unfinished business in more ways than one, and it would be disingenuous to claim that monetary union has been a painless process. Several countries sweated under the initial strain of having interest rates set jointly through the European Central Bank. Moreover, with currency devaluation no longer a quick fix for their finance ministries, Spain and Italy (and no doubt others in the future) have to face up more quickly to structural adjustments to maintain the competitiveness of their respective economies.

But the case for monetary union is still strong. Indeed, as ex-German Chancellor Helmut Schmidt put it, "who ever heard of a single market with 11 currencies", an argument that is pertinent now as it was back in the 1980s when he made it. With that in mind, lets re-open the argument in Britain.

Meetings in Malta

Am in Malta for a meeting of European Socialist parties. This month, Malta adopted the euro as its national currency, which most seem pleased about, apart from the currency exchange kiosks who will have far fewer opportunities to rip people off with extortionate exchange rates. (Good pub quiz quetion: which two Commonwealth countries joined the euro this year?)

Also interesting to see The Sunday Times of Malta, the entire front page of which is devoted to EU issues, not least the question of what action the EU might take to require Malta to cease the practice of indiscriminate and massive shooting of migrating birds as they fly over Malta from Europe to/from Africa. There is not much point in agreeing a Europe-wide system of protecting migratory birds (as we have in the EU birds directive) if one crucially-located member state does not respect it.

Also interesting was an article about Malta's MEPs being more well known and more popular than its MPs, and the European Parliament enjoying higher trust levels in opinion polls than the national parliament. I must remember to tell some of my Westminster colleagues!

Godfrey and his fistful of euros

Following this week’s part session I dashed back to Yorkshire to go head to head with my favourite curmudgeonly UKIPer Godfrey Bloom, in a debate at the University of York on Britain’s place in the EU.

Godfrey imparted his usual mix of myths, allegations and outrageous statements to the audience, culminating with him calling for an end to all aid to Africa because it was holding the continent back.

So no real surprises until Godfrey led the charge to the bar for the post-debate drinks. Kindly offering to get a round in, Godfrey dipped into his pockets but found, to his consternation, that he only had euros! "No Problem" said the students -we accept euros here..

Although the issue of whether Britain should join the euro remains on the margins of political debate, as far as companies looking to invest in the UK, the question refuses to go away, as demonstrated by this recent article in the Financial Times.

Britain's consistent economic growth during the past years has pushed the euro off the political agenda. However, if investment decisions by major companies start to go against the UK because of Britain's status outside the eurozone, a re-think may be in order.

Just to give some examples of the feelings of the business community, Hans Haefeli, Vice President of US construction company Caterpillar, which employs 11,000 Britons, has stated that "fundamentally it would make life easier for us if Britain were in the euro" while Andreas Ludwig, head of Austrian company Zumtobel which employs 650 people in County Durham, commented that "not being in the euro means we are exposed to currency fluctuations and that is a problem".

Moreover, Toyota, the world's largest car manufacturer, is expected to decide within the next year whether to make a big investment in its UK plant in Derby or to increase its resources in other sites in Europe. This decision will be a good litmus test of whether by staying out of the euro the British economy is being hamstrung.

Last month the European Parliament approved the applications of Malta and Cyprus to join the euro. The steadily growing number of countries adopting the single currency makes Britain’s position outside the euro look increasingly conspicuous.

A series of multinationals, including Ford, Toyota, Honda and Unilever have all expressed concern about the effect of Britain's non-entry on their ability to invest and maintain their manufacturing bases in Britain. Indeed, a month ago the chief executive of Honda, Takeo Fukai, told the Financial Times that for Honda, Britain's apparent reluctance to join the euro meant that the company had "no plans to expand". However, in the same breath he added that "we may change our minds if Britain were to join". Meanwhile, Honda's rival Nissan has often said that Britain staying out of the euro threatens jobs at its Sunderland plant.

Companies with UK bases that sell good to the EU have to bear hedging and conversion costs of currency that our German, French, Dutch, Irish etc. competitors don't, leaving the latter with a clear advantage.

Moreover, the euro is rapidly establishing itself as the world’s strongest currency and has now displaced the US dollar as the main denomination for world trade, accounting for 45% of the global market compared to 37% for the dollar. Indeed, it is likely that world commodity prices will soon be denominated in euros rather than dollars. It is becoming increasingly clear that for the UK, staying out of the euro means being economically hamstrung.

It is curious to see Tony Blair lambasted in Conservative and UKIP circles for having "sold out to Europe". In much of the rest of Europe he is considered to have done precisely the opposite!

To read the Belgian or Italian press, for instance, you would have thought that Blair had single-handedly prevented the rest of Europe from carrying out the modest reforms it sought to the current EU system - or where he was unable to do so to negotiate instead an opt-out for Britain. Blair is, along with the Dutch, blamed for killing off the notion of an EU constitution. He blocked certain changes from unanimity to qualified majority voting. He has an opt-out of the Charter of Rights and kept Britain out of the euro and Schengen. He even opposed a reference in the treaty to the long standing primacy of EU law. I could go on - and many of the criticisms are unjustified. But they do illustrate how the Eurosceptic attacks on Blair in Britain are, to put it mildly, somewhat one-sided in their analysis.

I came across this excellent article by Ivan Massow this morning. In it Mr Massow describes his conversion on the single currency and calls for the party of which he is a member, the Conservatives, to reconsider their hostility to the euro.

In it he rightly points out that the euro has become the predominant and most stable currency in the world, while the French have not become less French, nor the Spanish less Spanish for having adopted it.

He also explains the economic sense of consumers not having to change money when they travel, commenting that if only half of us visited mainland Europe once a year at an average exchange commission of three percent, this amounts to conversion costs of £5.4billion.

Moreover, the beneficial impact of the single currency on British business must be emphasised. Massow, who is a millionaire businessman himself, asserts "I cannot think of a business that would not benefit if exchange commissions and fluctuating currencies disappeared", pointing out that the euro has rapidly surpassed the dollar in becoming the world's number one choice.

Let us be quite clear that in the case of the UK and the single currency, staying out means missing out.

The news that the euro has displaced the US dollar as the world's principle currency accounting for 45% of the global market compared with 37% for the dollar, offers yet another illustration of the potential economic gains of British membership of the single currency.

As Europe's share of world trade is greater than that of the US, it was always likely that the euro would replace the dollar as the main denomination for world trade. Nonetheless, when you consider that, as recently as 2002, the euro represented 27% of the global financial pie, compared with 51% for the dollar, it is clear that, after some initial teething problems, the euro is rapidly establishing itself as the world's strongest currency. Certainly, it conclusively rubbishes the notion put about by eurosceptics in the UK that the euro was a 'toilet currency'.

The creation of the single currency in 1999 has enabled the development of a deeper and more liquid financial market, consolidated by a strong, growing eurozone. As Rene Karsenti, President of the Internal Capital Market Association, puts it: "it is the stable interest rates in Europe that have helped and the fact that the euro has strengthened and shown resilience".

From the perspective of the UK, this news again demonstrates why, in the UK's case, staying out means missing out. Firstly, UK companies within the EU have to bear hedging and conversion costs of currency that our German, French, Dutch, Irish etc. competitors don't, leaving the latter with a clear advantage.

The next step for the single currency will be for world commodity prices to be fixed in euros rather than dollars. At present, many of our production costs rise and fall with the value of the dollar. Because of this, British manufacturers are hostages to fluctuations in the American economy that have nothing to do with our suppliers nor our own economy. This advantage that the Americans currently enjoy, of having world commodity prices fixed in their own currency, will be transferred to Europe. It would be nice if the UK were able to take advantage of this.

Apparently, seven out of ten people believe that the pound will be axed if Britain ratifies the new EU constitution - according to The Sun yesterday.

Yet there’s absolutely nothing in the treaty that says this. In fact, it says exactly the opposite – the UK will never have to join the euro unless it wants to.

So what does this so-called ‘news story’ tell us? Simply that people are confused about what’s in the treaty. Wouldn’t it be more useful for The Sun to cut through the confusion and report the facts – rather than muddying the waters further?