Lagging Behind:Britain and the Euro

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The debate about the euro in Britain has changed dramatically since the

introduction of euro notes and coins on 1 January 00. This shift should

give pro-Europeans every confidence that a referendum on the single

currency can be won. Consequently, it has already left anti-Europeans appearing




disheartened and disoriented.

This historic changeover to the euro was obviously a profound change

for the 00 million citizens of the twelve European Union countries that adopted

the currency. It was a revolution on Britain’s doorstep that has practical

implications for most British citizens.

Most obviously, Britons make 40 million visits to the euro-zone every

year, either on business or holiday. From 8 February, when the old European

currencies were finally withdrawn from circulation, these visitors will have to

use the euro exclusively.

In addition, tourists from the euro-zone are expected to make 1 million

visits to Britain this year. Those visitors will come here with euros in their pockets,

thus any British business that is able to deal in euros will have a significant

advantage in competing for European tourist business from now on.

There is already some anecdotal evidence of hotels that do not accept

euros losing out to those that can. More worryingly for the British economy,

there is a serious risk that European tourists may choose to holiday within the euro-zone rather than incurring the money-exchanging costs and extra

inconvenience that a trip to Britain would entail.

British firms have every reason to complain that the British government

did not do enough to prepare business for this momentous change. More could

and should have been done. After all, two years ago the government spent £60

million raising public and business awareness of the millennium bug, and £80

million tackling the threat to its own systems. It even set up a company, Action

000, to give the issue a high-profile.

By way of contrast, Gordon Brown, the Chancellor of the Exchequer,

disclosed in November 001 that the Treasury had only spent £. million on

preparing British firms for the introduction of the euro. This negligence on the

practical question of preparations for the euro may well leave British businesses

vulnerable in commercial terms.

The Impact of 1 January

Prior to 1 January, most British people took little interest in the issue of whether

or not Britain should join the single currency. The euro was an intangible, virtual

currency. Although it had already had a major impact on British businesses, it

was not a visible reality for the vast majority of British people.

In fact, most British people knew little about the euro; as a result, they

told opinion pollsters they did not support British membership of the euro yet.

However, public opinion polls carried out since 1 January have showed

substantial rises in public support for the euro. Although it is expected that

support will fall away in the coming months, it indicates that opposition to the

euro is shallow and moveable.

Support for joining the euro among British business has risen dramatically

over the past few months. An HSBC survey of 14,000 companies, mostly small

and medium-sized, carried out after 1 January, showed that 61 percent now

believe that euro membership would benefit their company. The figure was only

percent in 1. The annual MORI Captains of Industry Survey of FTSE

500 senior board directors found that 5 percent would like Britain to join the

euro in the near future. The figure was 44 percent in 000.

Additionally, polls show rising public and business support for a sooner

rather than later referendum on the issue. A recent Institute of Management

survey found that 64 percent of managers think that 00 should be the year

the government makes clear its timetable for British entry. Significantly, a poll

of public opinion carried out in February 00 found that 67 percent of the

general public wanted the issue resolved soon by a referendum.

As a result of this dramatic shift in public opinion, and the momentum

that it has given to the pro-euro campaign, speculation is growing that the

government will call a referendum in the Spring of 00. Pressure from business

and political leaders for the government to announce its intentions has been

intense. The introduction of the euro has made people aware that there is a

political and economic price to be paid for Britain’s isolation from the new

currency.

The Price of Isolation

Isolation from the euro carries serious risks for Britain. As long as Britain’s

position remains uncertain, it risks losing trade, inward investment, and jobs.

And of course British consumers will continue to be burdened by the highest

price levels in Europe.

Britain has long been a trading nation. For the past 00 years our

economic success and the prosperity of our people have depended on our ability

to trade competitively with our partners in other countries. Today, Europe is

Britain’s most important trading partner. Over half of our trade is with the

countries of the European Union, and almost 60 percent of British exports go

to those countries. It is estimated that 750,000 British businesses are involved

in trade with Europe.

Britain’s trade with its European partners has expanded dramatically

since it joined the European Union in 17. At that time, only 5 percent of

British exports were destined for European markets. Over time, the European

Union has systematically removed tariff and non-tariff barriers to trade between

its members. This liberalization has been of enormous benefit to Britain. Indeed,

the United States is experiencing the same effect as NAFTA reduces barriers to

its trade with Canada and Mexico.

By creating a single currency, the European Union has removed the last

major barrier to trade between its members. This is a liberalizing step with

potentially enormous significance, the effects of which are already starting to

be felt in the euro-zone.

For example, in 18, prior to the creation of the euro, German imports

and exports to other euro-zone countries accounted for 7. percent of GDP.

By 001�even before the notes and coins had been introduced�that share

had risen to 1.4 percent. This phenomenal rise has been replicated in other

euro-zone countries. In France, the corresponding figures are 8 and percent.

In Italy, and 4.4 percent.

By contrast, Britain’s imports and exports to the EU have fallen slightly

as a share of GDP, from .4 to percent. Britain is already missing out on the

trade boost�and therefore to our national prosperity�that the euro is already

starting to deliver for its members.

In the long term, this effect could be enormous. One U.S. academic,

Professor Andrew Rose of the University of California, has predicted that

membership of a common currency could triple the amount of trade between

member countries over 0 years. Even if this proves to be an overestimate, the

fact that Canadian provinces do twenty times as much trade with each other as

they do with U.S. states an equal distance away, and with whom they share

culture, language, and a single market must tell us something about the importance

of a separate currency as a barrier to international trade.

Business in the UK has suffered a serious competitive disadvantage as a

result of the volatility of the pound sterling. The overvaluation of sterling, and

its frequent and unpredictable fluctuations on the foreign exchange markets,

makes it difficult for British exporters�and their customers in Europe�to plan

ahead with any degree of confidence.

The euro means that; for instance, a French firm selling to Italy no longer

has to worry about whether the currency will change in value. However, British

firms still do. Over time this uncertainty and the extra risk involved in buying

from a firm based in Britain could well erode the competitive position of Britain

in the European market.

Indeed, Britain is more exposed to currency fluctuations than either the

United States or the euro-zone. This fluctuation is caused by the fact that

manufacturing exports to countries with a different currency account for 7

percent of UK’s manufacturing output, compared to 1 percent of the euro-

zone’s, and 14 percent of the United States’. Joining the euro would reduce

these kinds of fluctuations and risks with Britain’s biggest trading partner.

In addition, every year British firms selling to Europe spend £4.5 billion

dealing with the costs of having a separate currency. That is a Sterling Business

Tax of £1 million every day that British businesses pay because we are isolated

from the euro. By eliminating these costs, Britain’s European competitors have

taken one step ahead, while we are left behind.

Up to .5 million British jobs depend on Britain’s exports to Europe.

Many of those jobs are at risk as a result of Britain’s isolation from the euro.

Since the start of the euro on 1 January 1, around ,500 job losses every

month have been blamed on Sterling’s volatility outside the euro. Exporters

that have lost orders, foreign firms that have cut back on investment, and the

small firms that supply them have all been affected.

The risks of long-term exclusion for Britain’s prosperity could be

profound. Indeed, if Britain does not decide to join the euro soon, the

consequences could be similar to those we experienced as a result of the disastrous

decision not to join the EEC at its inception in 158. By the time Britain became

a member in 17, its competitive position relative to its European partners

had already been seriously eroded.

While we were outside the EU, French and German economic growth

and increases in productivity far outstripped Great Britain’s. Between 150 and

17, Britain’s GDP per capita increased by .5 percent per year, while France

and Germany raced ahead

with figures of 4.1 and

5.0 percent, respectively.

By contrast, British,

French, and German

average growth rates have

been almost identical

since Britain joined the

EU in 17, at 1.7, 1.6,

and 1.8 percent. German annual productivity growth between 150 and 17

was more than double Britain’s, but the figures are virtually identical for 17

to 15.

Britain’s economic decline relative to its European neighbors was marked

in the period it spent outside the Common Market. Between 158 and 17,

Britain’s share of investment into Europe declined from around 40 to 15 percent.

Since joining, its share has risen to 8 percent in 000.

Membership in the European Union has helped Britain attract enormous

amounts of investment from foreign firms looking for a base to export into the

European market. Britain offers many attractions, but access to Europe is one

of the most important. Those foreign investors have created up to 1 million

jobs and the new expertise and investment that they have brought to Britain

have had much wider benefits for the competitiveness and productivity of the

British economy.

Ruling out membership of the euro would put this investment at risk.

The longer Britain stays out, the more likely it is that international companies

will think twice before they consider Britain as a viable proposition for inward

investment. U.S. and Japanese investors have made it clear that if Britain rejects

the euro, they would reject Britain and move to Europe.

Figures released by Ernst and Young show that Britain’s share of new

inward investment projects coming into Europe fell in the first half of 001.

The figures also showed that Britain attracted 1 percent of new European

investment projects. In 18, the year before the euro was launched, Britain

attracted 8 percent of such projects.

The decision by Nissan to continue producing cars at their Sunderland

plant was directly linked to the decision by the government not to rule out the

single currency. This has guaranteed thousands of jobs at the Nissan plant and

thousands more in the local economy. As Jac Nasser, former chief executive of

Ford Europe made clear “When we sit down and think about a major investment,

Over time this uncertainty and the

extra risk involved in buying from

a firm based in Britain could well

erode the competitive position of

Britain in the European market.our assumption is that the UK will be within the euro-zone at least at some time

during the lifetime of that investment.” Unless Britain decides to join the euro

in the relatively near future, more investors will begin to seriously question the

validity of this assumption. Prolonged delay will be seen as a de facto decision

to reject the euro.

Isolation from the euro is not only a macroeconomic issue, affecting

trade, inward investment, and national prosperity, but it also affects the price

British consumers pay. It is known from bitter experience that it is cheaper to

shop elsewhere in Europe than in Britain. A number of independent studies

confirm that Britain is more expensive than countries in the euro-zone for most

branded goods. A recent study by the Economist Intelligence Unit compared

prices between Britain and France. In France, the latest U CD was £ cheaper

than in Britain, Levi jeans were £5 cheaper; Reebok trainers were £11 less; and

a Panasonic TV cost £0 less. This is the Sterling Shopping Tax �and it is a tax

that British consumers would not be paying if Britain joined the euro.

Not only are prices in Britain higher than those elsewhere in the euro-

zone, but there is also evidence that sharing a currency is narrowing the disparity

between the countries of the euro-zone. A recent study by investment bank

Dresdner Kleinwort Wasserstein, has shown that the coming of euro cash is

already widening the gap between British prices and those in the euro-zone. In

Amsterdam, Frankfurt, Paris and Rome, prices have moved to within percent

of each other, but in London they are 16 percent above the euro-zone average.

As Leo Doyle, chief economist of DKW said, “Big brands are moving to euro-

wide prices on the Continent because they cannot get away with different prices

after January 00. In Britain costs cannot easily be compared.”

If Britain joined the euro, British consumers would benefit as price

transparency forced prices down here. This is because the euro promotes

competition, and competition brings prices down. It would be much easier for

shoppers to see price differences, and massive consumer pressure would push

prices down.

About 00 million consumers in the euro-zone can now compare prices

in the twelve countries that have adopted the euro. Every price is in the same

currency with no exchange rate movements to distort them. Retailers in Europe

now face the kinds of competition experienced by their U.S. counterparts those

with higher prices have nowhere to hide and so are forced to cut them.

If British shops did not cut their prices upon euro adoption, many of

their customers would shop overseas over the Internet or by mail order. With

easy price comparisons and no exchange rate movements, more people than

ever would do this. Thus, British shops would have to respond or risk losing

business. The people of the euro-zone are already benefiting from the spur to

competition that one common currency has brought. The extra competition

that Britain would enjoy would not only benefit British consumers, but

businesses as well. The extra consumer pressure would force British producers

to innovate, to improve productivity, in order to become more competitive and

benefit from the wider economy.

These are all serious economic concerns, which will weigh increasingly

heavily on the British debate over the coming months. They are concerns that

the government will have to take into account when they assess their five

economic tests by which they will judge whether entry is economically appropriate

for Britain.

Tony Blair has made clear that the result of the government’s assessment

of those tests will be made public no later than June 00. A positive assessment

will lead to the government recommending entry to the British people, who will

have the final say in a national referendum.

A further delay beyond this time frame would be equivalent to a firm

rejection of membership. Anti-Europeans�most of whom oppose British

membership of the euro on political and constitutional grounds�know that

prolonged delay is their best hope of keeping Britain out of the euro. Of course,

there would be political as well as economic costs to a decision not to join the

euro. The European Union has recently embarked upon a far-reaching discussion

of its future structure, responsibility, and objectives, as it prepares to welcome

up to twelve new member states from central and eastern Europe.

It is crucial that Britain’s influence in these discussions be maximized,

so that it can ensure that Europe develops in a way that serves Britain’s interests.

But we cannot really expect to shape these discussions if we decide to turn our

backs on Europe’s most important development�the euro.

The anti-Europeans who propose delaying a decision on euro membership

until we can see the outcome of these negotiations know perfectly well that

Britain’s clout will be less if it stays outside the euro. Many of them would

secretly welcome an outcome of the Inter-Governmental Conference that did

not serve Britain’s interests. Such an outcome would help to provoke a terminal

rupture in Britain’s relations with the rest of Europe, which is the ultimate

objective of isolationists and europhobes.

To say no to Europe and rule out the euro would be to give up on a

course that has yielded so much for so many over the past three decades. Politically

and economically, Britain has much to gain through membership, and much to

lose if it makes the wrong choice�or worse, if it does not have the confidence

to make a choice.

Recent events have reinforced the belief that the British people have

too much sense to reject increased prosperity in favor of isolationism. The Prime

Minister and the Chancellor of the Exchequer should have every confidence

that the British people would vote yes to the euro in a referendum. Britain

cannot afford not to.



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