Implications of the Euro
To date, critical analysis of the Economic and Monetary Union project has largely
been advanced from the centre-right spectrum of British politics. Comparable
questioning from the centre-left, whilst once a powerful phenomenon, has more
recently failed to find a coherent voice. Yet the European fault-line cannot be
characterised as a neat left–right issue. There are noticeable divisions in opinion
across British business, the trade union movement and within the Labour Party.
Implications of the Euro offers a unique insight into this key debate from the ‘centreleft’, eurosceptic viewpoint. This book provides a rigorous analysis of the salient
economic and political issues of concern, such as: the economics of a single
currency, employment and social implications, in addition to issues of sovereignty
and political determination. The arguments presented in this volume highlight the
emergence of a coherent alternative to deepening economic integration as a
platform to build a just and equitable society.
Contributions are drawn from leading academics, trade union leaders and
prominent politicians, both from the Labour Party and the wider progressive left in
British politics. This informative and thought provoking book will be indispensable
reading for students and practitioners in economics, politics and international
relations, as well as those interested in this highly contentious topic.
Philip Whyman is Reader in Economics at the University of Central Lancashire.
Mark Baimbridge and Brian Burkitt are Senior Lecturers in Economics at
the University of Bradford.
Also by Philip Whyman
The Impact of the Euro
Debating Britain’s future
(co-editor)
Economic and Monetary Union in Europe
Theory, evidence and practice
(co-editor)
Fiscal Federalism and European Economic Integration
(co-editor)
Sweden and the ‘Third Way’
A macroeconomic evaluation
An Analysis of the Economic Democracy Reforms in Sweden
Britain and the European Union
Alternative futures
(co-author)
Also by Mark Baimbridge
The Impact of the Euro
Debating Britain’s future
(co-editor)
Fiscal Federalism and European Economic Integration
(co-editor)
Economic and Monetary Union in Europe
Theory, evidence and practice
(co-editor)
Current Economic Issues in EU Integration
(co-author)
Britain and the European Union
Alternative futures
(co-author)
Also by Brian Burkitt
Trade Unions and Wages
Implications for economic theory
Trade Unions and the Economy
(co-author)
Radical Political Economy
The Political Economy of Social Credit and Guild Socialism
(co-author)
The Impact of the Euro
Debating Britain’s future
(co-editor)
Britain and the European Union
Alternative futures
(co-author)
Implications of the Euro
A critical perspective from the left
Edited by Philip Whyman,
Mark Baimbridge and Brian Burkitt
First published 2006
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
Simultaneously published in the USA and Canada
by Routledge
270 Madison Ave, New York, NY 10016
This edition published in the Taylor & Francis e-Library, 2006.
“To purchase your own copy of this or any of Taylor & Francis or Routledge’s
collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.”
Routledge is an imprint of the Taylor & Francis Group
© 2006 Philip Whyman, Mark Baimbridge and Brian Burkitt for editorial
matter and selection; the contributors for individual chapters
All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in
any information storage or retrieval system, without permission in writing
from the publishers.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data
A catalog record for this book has been requested
ISBN10: 0–415–34952–4 (hbk)
ISBN10: 0–415–38071–5 (pbk)
ISBN13: 9–78–0–415–34952–9 (hbk)
ISBN13: 9–78–0–415–38071–3 (pbk)
This book is dedicated by the editors to the memory of the
Rt Hon Lord Shore of Stepney PC (1924–2001). Throughout
British politics, whether his views were accepted or not,
he commanded respect as a man of principle.
Contents
List of illustrations
Notes on contributors
Foreword by David Owen
Preface by Bryan Gould
Acknowledgements
1 The left and the euro
x
xii
xix
xxv
xxviii
1
PHILIP WHYMAN, MARK BAIMBRIDGE AND BRIAN BURKITT
2 The great debate: the Labour Party and European
integration
12
ANDY MULLEN
PART I
The economics of a single currency
3 Economic consequences of EMU for Britain
37
39
JONATHAN MICHIE
4 What type of European monetary union?
52
MALCOLM SAWYER AND PHILIP ARESTIS
5 Economic performance and the euro
60
JANET BUSH
6 The euro: an outsider’s perspective
71
PAUL ORMEROD
7 The ECB in theory and practice
MARK BAIMBRIDGE
77
viii Contents
8 The left must wake up – Europe isn’t working
85
LARRY ELLIOTT
9 A post-Keynesian strategy for the UK economy
91
PHILIP WHYMAN, BRIAN BURKITT AND MARK BAIMBRIDGE
PART II
Employment and social aspects of EMU
103
10 The European social model: myth or reality?
105
BRIAN BURKITT
11 Voting no – the euro and Labour voters
111
MATTHEW MCGREGOR
12 What future in the European Union?
118
JOE MARINO
13 Hooked to the falling stars
124
DOUG NICHOLLS
14 A safe European home?
132
BILLY HAYES
15 British trade unions and EMU: natural supporters or
conflicting interests?
137
PHILIP WHYMAN
16 The European social model: between a rock and a
hard place?
145
MATTHEW WATSON
PART III
Sovereignty and political determination
155
17 How the euro threatens the well-being of the planet
and its people
157
MOLLY SCOTT CATO
18 EMU and British sovereignty
BRIAN BURKITT
168
Contents ix
19 Euro versus the people
175
AUSTIN MITCHELL MP
20 The establishment of a Commonwealth of Europe
186
THE RT HON TONY BENN
21 Fighting against federalism
196
RT HON THE LORD SHORE OF STEPNEY PC
22 Rediscovering progressive economic policy outside EMU
202
PHILIP WHYMAN, BRIAN BURKITT AND MARK BAIMBRIDGE
Glossary
Bibliography
Index
212
218
230
Illustrations
Figures
5.1
5.2
5.3
5.4
5.5
6.1
17.1
17.2
17.3
German unemployment, January 2001–October 2002
French unemployment, January 2001–October 2002
UK unemployment, January 2001–October 2002
Growth rates in the United Kingdom, Germany, France and
Italy, 1982–2002 (HM Treasury)
UK and eurozone members’ inflation, harmonised index of
consumer prices (HM Treasury)
Inflation and real GDP growth in the EU15
Example of token from an Argentinian barter club
Relationship between increase in world trade and global carbon
dioxide emission
External debt of developing countries (1971–97)
62
63
63
64
67
75
162
163
165
Tables
2.1 The European policy of the Labour Party and the Foreign Office
(1945–2004)
2.2 Number of resolutions and amendments on the EU submitted by
affiliates to the Labour Party Annual Conference (1947–97)
2.3 Number of speakers and their stance on the EU during Labour’s
Annual Conference debates (1947–2000)
2.4 Pro-EU arguments during Labour’s Annual Conference debates
(1947–87)
2.5 Anti-EU arguments during Labour’s Annual Conference debates
(1947–87)
2.6 Pro-EU arguments during Labour’s Annual Conference debates
(1988–2000)
2.7 Anti-EU arguments during Labour’s Annual Conference debates
(1988–2000)
6.1 Per capita GDP relative to the EU core
13–16
26
26
27
27–8
29
29
71
Illustrations
7.1 Comparison of central bank independence of EU member states and
the ECB
9.1 A comparison between features of post-Keynesianism and EMU
17.1 ERT sets the agenda for the EU
17.2 Comparison of size of external debt and size of GDP for a range of
countries
xi
78
95
158
164
Contributors
Philip Arestis is Professor of Economics at the University of Cambridge where
he is Director of Research at the Cambridge Centre for Economic and Public
Policy. He is also University Director of Research and Institute Professor (Levy
Economics Institute, New York); Visiting Professor, University of Leeds and
School of Oriental and African Studies (SOAS), University of London; ViceChair of the Macroeconomics, Money and Finance (MMF) Research Group.
Most recently his work has concentrated on various aspects of the European
Union related to monetary union, such as the historical and institutional framework of the EMU, the shaping of new institutions such as a European central
bank, deflationary consequences of the EMU and the type of institutional
framework necessary to generate higher levels of employment. He has published numerous books including Introducing Macroeconomic Modelling (Macmillan,
1982), An Alternative Analysis of Economic Theory and Policy (Edward Elgar, 1992),
Money, Pricing Distribution and Economic Integration (Macmillan, 1997), The Euro:
Evolution and Prospects (Edward Elgar, 2001), Economic of the Third Way (Edward
Elgar, 2001), What Global Crisis? (Palgrave, 2001), Re-Examining Monetary and
Fiscal Policies in the Twenty First Century (Edward Elgar, 2004) and The Post-Bubble
US Economy (Palgrave, 2004).
Mark Baimbridge is a Senior Lecturer in Economics at the University of
Bradford. He is also the author/editor of The Impact of the Euro (Macmillan,
2000), Economic and Monetary Union in Europe (Edward Elgar, 2003 and 2005) and
Fiscal Federalism and European Economic Integration (Routledge, 2004), Current
Economic Issues in EU Integration (Palgrave, 2004), together with a number of
forthcoming texts: Britain, the Euro and Beyond (Ashgate), A Modern Guide to
European Integration (Edward Elgar) and a three-volume series analysing The EU
at 50 (Palgrave). In addition to the economics of European integration (EMU,
central bank independence, enlargement, UK–EU relations), his research
interests include elections/referendums, trade unions, higher education and the
economics of professional sports.
Tony Benn is the son, grandson and father of MPs. The longest serving Labour
MP in the history of the party, which he joined in 1942, he retired from the
House of Commons in May 2001, after 50 years in Parliament, to ‘devote more
Contributors xiii
time to politics’. From 1964 to 1979 he was a Cabinet minister in both the
Wilson and Callaghan governments, as Minister of Technology, Secretary of
State for both Industry and Energy, and President of the Council of European
Energy Ministers in 1977. An elected member of the National Executive
Committee of the Labour Party (1959–94), he was Chairman of the Party in
1971–2. His published Diaries, in eight volumes, cover the period from 1940 to
2002. He has also written seven other books, including Free Radical (Continuum,
2004), Dare to be Daniel (Hutchinson, 2004) and many pamphlets and made
several videos and audiotapes. He is the holder of seven honorary doctorates
from British and American universities, a Visiting Professor at the London
School of Economics and a regular broadcaster.
Brian Burkitt is a Senior Lecturer in Economics at the University of Bradford.
He wrote two widely quoted reports, Britain and the European Economic Community:
An Economic Re-appraisal, and Britain and the European Economic Community: A
Political Re-appraisal, at the time of the 1975 referendum on EEC membership.
He is also author/editor of Trade Unions and Wages (Crosby Lockwood Staples,
1975 and 1980), Trade Unions and the Economy (Macmillan, 1979), Radical Political
Economy (Harvester Wheatsheaf, 1984), The Political Economy of Social Credit and
Guild Socialism (Routledge, 1997) and The Impact of the Euro (Macmillan, 2000).
He is a frequent contributor to, and commentator on, economic issues to
television and radio programmes, including Newsnight and A Week in Politics. In
addition to the economics of European integration, his research interests
include unemployment and crimes of racial violence, the relative cost of
unemployment and inflation, and disequilibrium economics and time.
Janet Bush was until recently Director of New Europe. Following education at
Somerville College, Oxford and the Centre for Journalism Studies, Cardiff, she
joined Reuters in 1982 as a correspondent in Frankfurt (1983–4) and then
joined the Financial Times in 1986 as deputy economics correspondent before
becoming their New York correspondent (1987–90). In 1990 she joined BBC
Television as a presenter of economic documentaries for BBC 2’s The Money
Programme. She joined The Times in 1992 as economics correspondent and was
made economics editor in January 1997. In February 1999 she took a leave of
absence from The Times to serve as Director of New Europe, the cross-party
campaign against UK membership of the euro. Having launched ‘No’, a joint
campaign between New Europe and Business for Sterling, she returned to The
Times in August 2000 as economics editor and leader writer. In 2002 she was coauthor of In or Out? Labour and the Euro (Fabian Society).
Larry Elliott is Economics Editor at the Guardian. He is an influential critic of the
democratic left which associates itself with the present monetarist European
economic framework with particular reference to EMU. He has written extensively on the development of progressive economic thought, the intellectual
deficiencies of neo-liberal economics and applied aspects of contemporary
economic policy. He has co-authored In or Out? Labour and the Euro (Fabian
Society, 2002) and The Age of Insecurity (Verso Books, 1999).
xiv Contributors
Bryan Gould was a Rhodes Scholar attending Balliol College, Oxford. He served
as Labour MP for Southampton Test (1974–9) and Dagenham (1983–94). He
was a prominent member of Neil Kinnock’s Shadow Cabinet, serving as
Shadow Trade and Industry Secretary. He contested the 1992 Labour leadership election and subsequently formed the Full Employment Forum to promote
Keynesian economic ideas within the labour market. He resigned from John
Smith’s Shadow Cabinet, in a dispute about Europe, and left British politics in
July 1994. He returned to his native New Zealand and took on the role of ViceChancellor of the University of Waikato, where he served until his retirement in
2004. His books include Goodbye to All That (Macmillan, 1995), Monetarism or
Prosperity? (Macmillan, 1981), A Future for Socialism (Jonathan Cape, 1989) and
Socialism and Freedom (Macmillan, 1985). He is a committed anti-federalist and
was a consistent critic of Labour’s embrace of monetarism under Jim Callaghan
and Dennis Healey.
Billy Hayes is General Secretary of the Communication Workers Union (CWU).
Prior to this, he had spent nine years as the National Officer representing the
union’s outdoor postal members. He joined the Post Office, and the union, in
1974 and took on a number of local responsibilities, including magazine editor,
TUC youth conference delegate, trades council nominee, union conference
delegate and finally Branch Secretary. In 1992, four months after being voted
onto the National Executive, he was elected a National Officer. Billy has been
active in the Labour Party for many years and held a range of positions from
Young Socialist secretary to GMC member. He supports the Labour government, but not unreservedly. ‘There are issues where we cannot be afraid of
criticising the government’, he says, citing as examples index linking of pensions
and the repeal of anti-trade union laws. Billy has always advocated less
centralisation of union structures. ‘We need to lecture less and hear more about
the real impact of management’s policies’, he says. ‘Stirring up apathy is not a
solution.’
Matthew McGregor is Director of the Centre for a Social Europe, a centre-left
think-tank. He was formerly Campaign Manager of the ‘No’ campaign against
the euro, a position he held until the campaign’s mothballing following the
government’s decision to rule out euro membership until 2008 at the earliest.
He is also a lay activist in the Transport and General Workers Union and is
chair of the TUC Young Members’ committee.
Joe Marino is General Secretary of the Bakers, Food & Allied Workers Union
(BFAWU). He was elected a Shop Steward of the BFAWU in 1968 and was
active in the Shop Stewards and Trades Council movements of that period. He
was elected on to the Union’s National Executive Council (1971–79) and
became a member of the baking industry National Negotiating Committee in
1973, serving on that body until the move to local negotiations in 1983. In 1979
he was elected General Secretary of BFAWU, taking office in November of that
year, and in 1998 he was elected a member of the General Federation of Trade
Unions National Executive Committee. As a member of the Labour Party, and
Contributors xv
in line with the policy of his Union, he campaigned for a ‘No’ vote in the 1975
referendum on Common Market membership under the Wilson Government
and has since been active in this area. Disillusionment with the drift of ‘New
Labour’ led to his leaving the New Labour Party after almost 30 years of
membership and he is now a member of the Socialist Labour Party.
Jonathan Michie is Professor of Management and Head of the Business School,
University of Birmingham, UK. Previous appointments include Head of the
School of Management and Organizational Psychology at Birkbeck College
where he also held the Sainsbury Chair of Management; together with senior
academic posts at the Universities of Cambridge and London and as an Expert
to the European Commission in Brussels and in the Economic Department
of the Trades Union Congress. His recent books include The Handbook of
Globalisation (Edward Elgar, 2003), Systems of Production (Routledge, 2002), A
Reader’s Guide to Social Science (Fitzroy Dearborn, 2001), The Changing Face of
Football (Frank Cass, 2001), Football in the Digital Age (Mainstream, 2000), The
Political Economy of Competitiveness (Routledge, 2000), Innovation Systems in a Global
Economy (Cambridge University Press, 1999) and A Game of Two Halves? The
Business of Football (Mainstream, 1999).
Austin Mitchell has been the Labour MP for Grimsby since 1977. Previously he
was an academic at Nuffield College Oxford and at several New Zealand
universities, and then a television journalist (BBC and Yorkshire Television).
A former Parliamentary Private Secretary, Opposition Whip, Member of the
Treasury and of the Civil Service Select Committee and Front Bench
Spokesperson on Trade and Industry, he currently sits on the Agriculture Select
Committee. He presented Target with Norman Tebbit on SKY from 1989 to
1998. His books include Back to the Future Collectivism in the Twenty-First
Century (Catalyst Press, 2002), Federal Britain in Federal Europe? Enlightening the
Debate on Good Governance (Kogan Page, 2001), The English Question (Fabian
Society, 2000), Farewell My Lords (Politicos, 1999) and Last Time: Labour’s Lessons
from the Sixties (Bellew Publishing, 1997).
Andy Mullen is a Lecturer in Politics at Northumbria University. His research
focuses upon the response of the British Left to European integration from 1945
to 2002. He has focused on the European policies of the Labour Party, the
Trade Union Congress and the wider trade union movement, the Co-operative
Party, the Green parties, the Independent Labour Party, the Social Democratic
Party, the Anarchists, the Communists, the nationalists, socialist parties, and
left-wing pressure groups and think-tanks. He is the co-author of ‘European
integration and the battle for hearts and minds: New Labour and the euro’
(Political Quarterly, 2003) and ‘Spinning Europe: pro-European Union propaganda campaigns in Britain, 1962–1975’ (Political Quarterly, 2005).
Doug Nicholls is General Secretary of the Community and Youth Workers
Union (CYWU). He has held this position since 1987 and is one of the two
longest serving General Secretaries in Britain. Since the mid-seventies he has
xvi Contributors
opposed the expansion of the European Union into a single superstate. He was
the founding Secretary of Trade Unions Against the Single Currency and EU
Constitution. He has written widely on all matters to do with the European
Union, particularly from a workers’ and trade union perspective. Through his
union work he was able to ensure a much more sceptical and critical attitude
was developed throughout the British trade unions and particularly the TUC.
He is a member of the Agenda Committee of the cross-party Congress for
Democracy and a member of the Campaign Against Euro Federalism and
Labour Euro Safeguards. Unusually, perhaps, for a trade union General
Secretary, he is a published poet and literary critic.
Paul Ormerod is one of the founding directors of Volterra Consulting. He
previously worked as an economic modeller and forecaster at the National
Institute of Economic and Social Research, London (1973–80). He subsequently left to be Head of Economic Assessment Unit at The Economist
newspaper group (1980–2). For the period 1982 to 1992 he was Director of
Economics and Deputy MD of Henley Centre for Forecasting. He was Visiting
Professor of Economics at the Universities of London and Manchester (1983–
97). He is the author of best-sellers Death of Economics (Faber and Faber, 1994)
and Butterfly Economics (Faber and Faber, 1998) and also of the forthcoming Why
Most Things Fail (Faber and Faber).
David Owen trained as a doctor before becoming Labour MP for various
Plymouth constituencies between 1966 and 1992. He was appointed Minister
for the Navy (1968) before resigning from the Shadow Cabinet in 1972 over the
Labour Party’s refusal to support British entry to the EEC. Subsequently, he
was appointed Minister of Health (1974) and Secretary for Foreign and
Commonwealth Affairs (1977–9). In 1981 he was one of the founders of the
Social Democratic Party, served as Deputy Leader (1982–3) and Party Leader
(1983–7). The continuing SDP was re-established under his leadership in 1988,
but was finally wound down as a national party in 1990. He was created a life
peer in 1992. He went on to become joint author of the Vance–Owen Peace
Plan to settle the conflict in Bosnia in the 1990s. He was until recently leader of
the ‘No Campaign’ against British membership of the euro. His books include
Face the Future (Cape, 1981), A Future that will Work (Penguin, 1987), A United
Kingdom (Penguin, 1986), Human Rights (Cape, 1978), In Sickness and in Health: The
Politics of Medicine (Quartet Books, 1976), Negotiate and Survive (CLV Publications,
1988), Our NHS (Pan, 1988) and Politics of Defence (Cape, 1972).
Malcolm Sawyer is Professor of Economics at the University of Leeds Business
School, UK and Visiting Senior Scholar at the Levy Economics Institute, New
York. His main research interests include: aspects of the European Union
related to monetary union, such as the historical and institutional framework of
the EMU, the shaping of new institutions like a European central bank, the
deflationary consequences of the EMU and the type of institutional framework
necessary to generate higher levels of employment. He is Managing Editor of
Contributors xvii
International Review of Applied Economics and joint editor of International Papers in
Political Economy. His books include The Euro: Evolution and Prospects (Edward
Elgar, 2001), A Future for Public Ownership (Lawrence and Wishart, 1999), The UK
Economy (Oxford University Press, 2001), Money, Finance and Capitalist Development
(Edward Elgar, 2001), The Economics of the Third Way (Edward Elgar, 2001),
A Biographical Dictionary of Dissenting Economists (Edward Elgar, 2000), The Legacy
of Michal Kalecki (Edward Elgar, 1999), The Political Economy of Central Banking
(Edward Elgar, 1998) and The Political Economy of Economic Policies (Macmillan,
1998).
Molly Scott Cato is a Lecturer in Social Economy at the Welsh Institute for
Research into Cooperatives within the Business School at the University of
Wales Institute Cardiff. She was educated at the universities of Oxford (Politics,
Philosophy and Economics), Open (MSc in Social Research Methods) and
Aberystwyth (PhD in Economics). She is also the Green Party’s Economics
Speaker, the Euro Campaign Coordinator for the Green Party and a member
of the No Campaign Steering Group. She wrote Seven Myths About Work (Green
Audit, 1996) and co-edited Green Economics: Beyond Supply and Demand to Meeting
People’s Needs (Green Audit, 1999). In 2002 she wrote a report for the Association
of Green Councillors on ‘Using Best Value to Encourage Green Procurement
in Local Authorities’. She is also researching the impact of carbon dioxide
emissions reduction on the national economies of rich and poor countries.
Peter Shore was educated at King’s College, Cambridge, graduating in history,
but later specialised in political economy. He joined the Labour Party in 1948
and became head of the Research Department in 1959, being elected to
Parliament for the London borough of Stepney in 1964. In 1967 he became the
youngest member of the Cabinet, just three years after entering the Commons.
He later became a Cabinet minister without Portfolio and Deputy Leader of the
Commons. When Labour returned to power in 1974, he was Secretary for
Trade and in 1976 Environment Secretary. When Labour lost the 1979 election, he was appointed Shadow Foreign Secretary. Peter Shore twice contested
the Labour Party leadership, but was defeated and re-dedicated himself to his
mission of curbing Britain’s growing involvement in Europe. He became Lord
Shore of Stepney when he retired from the Commons in 1997. He summarised
his beliefs on European integration in Separate Ways: Britain and Europe (Gerald
Duckworth, 2000). He died in 2001 during the preparation of this collection,
which is dedicated to his memory.
Matthew Watson is a Senior Lecturer in International Political Economy and
Director of the Political Economy Research Group at the University of
Birmingham, UK. He has degrees in economics from the University of Wales
College of Cardiff, the University of Strathclyde and the University of
Birmingham. His research interests are concentrated in the broad area of
political economy. Conceptually, these include classical political economy and
the history of economic thought; the genealogy of macroeconomic theory;
xviii Contributors
general equilibrium economics; the political effects of international financial
market restructuring; the sociology of speculative market bubbles; the political
discourse and economic practice of globalisation and the disciplinary parameters of contemporary international political economy. He has published PostWar British Politics in Perspective (Polity Press, 1999) and Foundations of International
Political Economy (Palgrave, 2004).
Philip Whyman is a Reader in Economics at the University of Central Lancashire. He is the author/editor of The Impact of the Euro (Macmillan, 2000),
Economic and Monetary Union in Europe (Elgar, 2003), Sweden and the ‘Third Way’
(Ashgate, 2003) and Fiscal Federalism and European Economic Integration (Routledge,
2004), An Analysis of the Economic Democracy Reforms in Sweden (Mellen Press, 2004),
and also of the forthcoming texts: Britain, the Euro and Beyond (Ashgate), and ‘Third
Way’ Economics (Palgrave Macmillan). He has published widely in learned
journals and written a number of policy papers, including submissions to the
House of Lords Select Committee on The European Communities (1996) and
the House of Commons Treasury Select Committee (1998). His research
interests include the impact of European integration upon labour markets, fiscal
federalism, international monetary developments and the United Kingdom’s
future relationship with the European Union. In addition, he has written
extensively on the development of progressive political economy, the evaluation
of the Third Way and the evolution of the ‘Swedish Model’.
Foreword
Rt Hon the Lord Owen
It is peculiar to Labour governments that they have been bedevilled by mistaken
decisions over the handling of monetary policy. Ramsay Macdonald, as Prime
Minister, and Philip Snowden, as Chancellor of the Exchequer, from 1929 to
1931, should have left the gold standard much earlier and devalued. Similarly,
Hugh Dalton and Stafford Cripps as Chancellors of the Exchequer, in Clement
Atlee’s post-war government, were too slow to devalue. The delayed devaluation
also damaged Harold Wilson’s period as Prime Minister from 1964–70.
Fixed exchange rate controls have been one of the dominant issues of my 40
years in politics. I entered Parliament in the March 1966 General Election full of
idealism and hope that a majority Labour government would end Britain’s postwar economic decline. Yet by 20 July, in a mood of utter disillusionment in the
House of Commons, we were told about a deflationary package which meant
Labour was back in the same stop–go economic cycle which we had so often
attacked the Conservatives for inflicting. The decision not to devalue after the 1964
General Election, something clearly envisaged by the outgoing Conservative
Chancellor, Reginald Maulding, was politically understandable. In office after 13
years of opposition and facing the necessity of an early election since Labour only
had a majority of five, it was quite widely felt that to devalue would be politically
hazardous. But in 1966 with a large parliamentary majority there were no credible
excuses. It was a lamentable failure of the government not to devalue in order to
pursue economic growth. To oppose the government’s refusal to devalue was to be
labelled unpatriotic. Before the 1967 Labour Party Conference I and two other
Labour MPs, John Mackintosh and David Marquand, publicly advocated
devaluation in a pamphlet called Change Gear. We were considered then on the
centre right of the party, and we joined with Eric Heffer and other MPs clearly on
the left to form a so-called ‘Snakes and Alligators’ grouping to campaign for the
devaluation that was later forced on the government in November of that year.
Exchange rate policy should not be a left–right issue in the party, nor should
priority to be given to the pursuit of economic growth. It is ridiculous to see today’s
Labour Front Bench demanding that all Labour MPs have a political duty to go
along with early membership of the eurozone, and once again we hear the
argument of patriotism being used against the doubters.
Ever since my experience in the 1960s I have been very dubious about exchange
xx Foreword
rate control systems, for even when they are technically capable of being adjusted
and are not a fixed system, experience shows that politicians tend to shrink from
making any downward adjustment, for fear of being depicted weak and a failure.
In 1972 Edward Heath’s Conservative Government was unable to live with the
disciplines of the Snake for longer than six weeks.
In 1978 Prime Minister Jim Callaghan was determined to keep our options open
over joining the European Monetary System. As Foreign Secretary, with Denis
Healey as Chancellor, I helped negotiate the dual role of being members of the
European Monetary System and being free to decide later if we wanted to join
the actual Exchange Rate Mechanism (ERM). This was the forerunner of the
Maastricht Treaty compromise over the euro.
In 1987, after the Louvre Accord, Nigel Lawson, as Chancellor of the Exchequer,
intervened by buying Deutchmarks to hold sterling below DM3. It was a largely
undeclared policy of shadowing the Deutchmark, which was eventually uncapped
in March 1988. Its main purpose was to arrest the fall in sterling but it was also
hoped by some that it would demonstrate that sterling was ready to join the ERM,
which Lawson had wanted to do since 1985. Entry was refused by Margaret
Thatcher then, and again when he tried after the 1987 Election. What shadowing
demonstrated was not so much that intervention was inflationary but that the
overall policy, taking the exchange rate and interest rates at the time into account,
was not tight enough. Any government within a floating system of exchange rates is
wise to reserve to itself the option of intervening. But it should be rarely used. It is
very difficult to flatten out irrational currency moments while respecting the reality
that any intervention cannot hold out against determined market pressures.
As Leader of the SDP I had advocated joining the ERM in the mid-1980s and
thought the rules over adjustment would be sufficient when we joined in 1990. The
inability to adjust within the Economic and Monetary Union (EMU), however,
meant that I and many other MPs would never have supported John Major’s
Maastricht Treaty negotiation without the British opt-out from the euro. I have yet
to be convinced that the UK can achieve sustained economic growth within a
permanently fixed exchange rate system.
It needs to be remembered that John Major, and subsequently Tony Blair, only
very reluctantly accepted that a decision to join the euro had to be one for the
British people in a referendum. They were forced into this concession by public
opinion. The United Kingdom’s failure to achieve a revaluation inside the ERM in
1992 created much hardship, and it demonstrated to me that the design of the
mechanism was flawed. For the United Kingdom it had systemic failings, with
speculation being a one-way bet from which many speculators safely made
substantial sums of money. The United Kingdom would risk much by re-joining
the ERM, even for the EMU qualifying period, without special safeguards being
introduced into the mechanisms. It is very noticeable that Labour Ministers, when
advocating early entry into the eurozone, evade the question of the ERM
qualifying period. They believe that it will be waived – but that may be too
optimistic given the rule that other EU nations aspiring to join must demonstrate
the stability of their currencies within the ERM.
Foreword
xxi
When it became clear that Prime Minister Tony Blair was only waiting for a
change in the opinion polls to join the euro, I made public in a speech in
Manchester in January 1999 my intention to campaign for staying out of the single
currency. This was despite considering myself no longer a party politician, being a
cross-bencher in the House of Lords. That decision was, however, always
conditional on any campaign being fully committed to continuing membership of
the European Union. Later I went on to help create New Europe (whose publications can be accessed through www.no-euro.com including the most recent
pamphlet by Geoffrey Fitchew entitled Economic and Monetary Union and the European
Constitution). Without the ‘Yes to Europe, no to the euro’ campaign, I believe Tony
Blair, after the 2001 General Election, might well have been able to swing public
opinion and to hold and win a referendum on joining the euro – with very adverse
consequences to the UK economy. It is particularly important that if a somewhat
similar campaign were ever needed to be revived in the future it should have an
even stronger Labour Party element within its cross-party mix. The torch must
now pass on this issue from my generation to a new wave of politicians whose
political future will be made in the years after the 2005 General Election.
Publication of this book at this time seems to me, therefore, very timely in that it
starts to build the broad base of an economic astringency about the eurozone. I
deliberately do not use the word scepticism because that has come to be understood
as embracing hostility to our membership of the European Union. I note with
interest, and pleasure too, that at last a significant number of Liberal Democrat
MPs are speaking out about the euro and do not share the enthusiasm of their
leaders, who like many New Labour leaders want quick entry on political grounds
as soon as public opinion allows after the next election and have no qualms about
the economic consequences of entry.
One of the major successes of Labour in government since 1997 has been its
record of sustaining the economic growth which it inherited and which restarted so
quickly after Norman Lamont, as Chancellor, dug out enough space for export-led
growth following the debacle of our forced exit from the ERM. In part, that growth
record has stemmed from the ability of the government to set the inflation target
while the Bank of England’s Monetary Committee sets the interest rates. I have
never excluded joining the euro at some stage in the future, but it should only be
contemplated if the eurozone economies have come very close to converging and
there is convincing evidence that all the nations within the eurozone are
irrevocably committed to policies that will allow any such convergence to be
maintained. Hopefully the eurozone countries will improve their economic growth
record, and there is already some sign of improved economic activity in France,
Spain and Italy. But there is a long way to travel before the eurozone economies
converge.
The July 2004 Report of the European Commission, The Euro Five Years On, says:
‘The available evidence is in line with a positive impact of monetary union on
cyclical convergences.’ That is a conclusion based on little evidence. It was
rubbished only a few weeks later by a Deutsche Bank research note – ‘Contrary to
what the European Commission says, we do not see that the euro economies have
xxii Foreword
converged’ – and the note went on to say, ‘there are currently no signs that growth
differences across the region are narrowing’ and that in fact ‘there have even been
signs of greater divergence’. It goes on to question implicitly the very concept of the
eurozone by saying, ‘economic instability in the euro area is likely to be higher and
trend growth lower than it would have been without monetary union’.
The German Bundesbank cut interest rates in five periods, responding to
recession in 1967, 1975, 1982–3, 1987 and 1994–6. It is only because the European Central Bank (ECB) has to target inflation in countries in very different stages
in the economic cycle that interest rates have not been lower in the eurozone, and
this inability to have lower interest rates in Germany has been very damaging.
Some have calculated that to help the German economy grow faster over the last
five years, the interest rate should have been nearer 1 per cent than 2 per cent.
Five years ago I used to argue that though the United Kingdom should stay out
of the eurozone there was too much political capital invested in it by other
eurozone countries for there ever to be any question of some members withdrawing from the zone. I am no longer so sure of that. I can imagine the eurozone
collapsing under the weight of its own economic contradictions. I am strengthened
in that view by an article in the Financial Times by Wolfgang Munchau (6 September
2004), which warned that even ‘with the reformed stability pact, EMU will be more
like an eccentric club than an economic union’. He goes on to say that:
No matter whether the trigger is high inflation, a banking crisis or some other
channel, one common cause underlies the failure of all monetary unions: the
lack of a political union with the authority to enforce economic and financial
policy among its members.
I doubt that the eurozone countries can agree to a far tougher regime to increase its
effectiveness, but if they wish to do it they are free to do so as long as they do not try
to impose that regime on other non-eurozone EU nations. On 13 September 2004
the ECB’s Chief Economist, Otmar Issing, commenting on the Commission’s
attempt to relax the existing rules, said: ‘Without the existence of a credible threat
of sanctions, the pact is losing its bite. As a result the current situation is
intolerable.’
The British public have no wish to embrace full political union and refuse,
rightly, to believe political leaders’ reassurances that the two issues – political union
and the eurozone – are unconnected. So far, those reservations, both political and
economic, have forestalled any attempt to take the United Kingdom into the euro.
The public suspect, correctly, albeit in a vague way, that to make EMU work
political union is necessary. They suspect also that the same politicians are
misleading them when they pretend that this new European Constitution, on
which again the politicians have been forced to concede a referendum, does not
carry within it some paving techniques to bring about political union. The public
are right to be suspicious.
On the face of it euro membership and the new Constitution are different issues
on which it is possible to take different positions. This is why New Europe, while
Foreword xxiii
commenting on the Constitution, has kept to the euro as the core campaigning
issue and not embraced the campaign against the Constitution. But if we are to
avoid full political union it is vitally important that we retain the independent
conduct of foreign policy as a means of determining sovereign status. In that
context it is relevant to economic arguments, too, to consider the proposed new
Constitution. In my judgement the Constitution fails to fully protect our ability to
conduct an independent foreign policy over the next few decades. The
establishment of a new post of EU Minister for Foreign Affairs will probably pave
the way for eventually establishing an EU Minister for Economic Affairs. The
Constitution fails to make clear a precise delimitation of competence between the
member states and the European Union over foreign policy, and that is also the
case for economic policy. There will be renewed attempts to give the European
Union power over social security and tax policy, not helped by the acceptance of
wide-ranging constraints by the European Union – through the language of
coordination in the Treaty – over employment policies and social policies. The risk
– by a qualified majority vote on the Council – that the President of the European
Council could be double-hatted with the role of the President of the Commission is
the single most dangerous potential power in the new Constitution. The
government assert in their White Paper that this could not happen, but this is not
the view of others; for example, the Dutch government has specifically told their
parliament that it is both desirable and legally possible to double-hat the two posts.
If it is done this would in effect create, by the backdoor, a political union.
Ensuring that the British public view remains ‘Yes to the EU, no to the euro’ will
be greatly helped if the left keeps the maintenance of economic growth as high on
its political agenda as it has in the past. I do not pretend that having our own
currency is the only factor in a growth agenda for Britain, but it remains as far as
the eye can see a vital ingredient. I also believe that the social Europe, which the
right – particularly in the United Kingdom – dislikes, can, if well judged, reinforce
industrial stability and competitiveness. I hope that the new Commission under the
former Portuguese Prime Minister, José Manuel Barroso, will demonstrate the
inner coherence and the confidence to concentrate on the all-important Lisbon
agenda for economic and market reform that does aim for the right balance
between social and competitive agendas. There is no urgent need for a new
Constitution.
The Treaty of Nice did all that was vital to handle the greatly-to-be-welcomed
enlargement. The weighted voting formula agreed then is now to be changed by
the new Constitution, and this we are cynically told by Giscard d’Estaing was done
in part to make it less likely that other countries would vote for Turkey to enter the
European Union in view of its large and growing population. The Euro Group did
not wait for the Constitution but in September 2004 appointed one of their
number, the Luxembourg Prime Minister, to chair the Euro Group for two years.
This immediately provoked the French Chairman of the ECB to hit back saying, ‘I
am evidently Mr Euro’. If the European Council really does want to give up the sixmonth rotating presidency of the Council, it can appoint one of its own members to
chair the Council for two years along with the grouping of countries holding the
xxiv Foreword
Presidency. There is also little to stop the new Commission starting to give back
powers to the member states under the existing Treaties. Sadly, in practice, there is
no real simplification in this Treaty for those who will have to work it, and it has not
achieved the clarity that the Laeken Declaration hoped for. It also remains very
likely that the abolition of the separate intergovernmental pillars established at
Maastricht will over time erode the intergovernmental nature of most foreign and
economic policy decisions, which is the intention of many of those who champion
the Constitution. The Constitutional referendum in the United Kingdom may
come only after 24 other countries have ratified the Treaty. Hopefully before then
one or more country that has to hold a referendum will have voted no, making it far
less disruptive for the United Kingdom to do the same.1 When our referendum
comes one can best make a judgement as to exactly how a British ‘no’ vote might
impact inside the European Union, but provided it is not a vote taken as a first step
to leaving the European Union there will be many European citizens who will be
glad to see this unfortunate Treaty blocked.
At a time when 25 European nations have still to develop their working relationships and are facing the political imperative of further enlargement to include
Romania, Bulgaria and, hopefully, Turkey, it would be better to concentrate on
making the existing Treaties, which the new countries have spent some years
getting to know, work more effectively. The eurozone countries should also
develop their own budgetary disciplines and monitor their own tax and spending
policies, while letting those outside the eurozone grow and compete without the
necessary constraints of EMU. The way forward for the European Union is to
allow the pattern of working together in the Union on foreign, defence and
economic policy gradually build its own pragmatic consensus from the ground up.
Instead, we are being urged to accept a new, more highly centralised and uncertain
constitutional model for an already strained and unsettled Union in which many of
its citizens are already showing their political discontent.
Note
1 Foreword written prior to EU Constitution referendums in France and the Netherlands.
Preface
Bryan Gould
This book is long overdue. The debate about Britain and the euro – so far as there
has been a debate at all – has been largely the preserve of the right, and has been
pretty much dominated by simplistic posturing. On the one hand, those in favour
of British adoption of the euro have stressed the lower transaction costs and the
convenience to travellers, and – if they are a little more knowledgeable – the
familiar argument that to stay out would be to threaten trade and investment.
The opponents, on the other hand, go for the nationalistic pitch, stressing the
importance of national symbols like the pound and the Queen’s head on our
currency. Neither side seems greatly interested in exploring the fundamental issues
of economic and political significance that could help shape both Britain’s and
Europe’s future.
The left has hardly entered the debate, reflecting an unwillingness to be
identified with either position adopted by the right, a broad but rather fuzzy
commitment to internationalism, and an unthinking suspicion that exchange rates
and currencies are properly the concerns of right-wing businessmen and
technicians. Some – like the commentators – prefer to see the issues in terms of
domestic and, especially, personality politics. Could Tony win a referendum? Or
will Gordon use opposition to the euro to open the door to Number Ten?
All of this misses the point – or rather several points. As a policy issue, the euro
poses real challenges, and real opportunities, to the left. The careful exploration
and successful resolution of these issues could determine the prospects of Labour
governments for years to come.
The economic consequences of embracing the euro can hardly be overstated. A
single currency inevitably requires and dictates a single set of monetary conditions
brought about by a single monetary policy. In an economic zone as large as the
current European Union, it is inherently unlikely that a single monetary policy
could conceivably meet the interests of all the diverse parts of that economic zone.
A monetary policy that suits the stronger countries (who have the major say in
what that policy should be) will harm the interests of the weaker, reinforcing the
natural tendency in any economy for productive capacity to concentrate in the
stronger parts.
A single currency means the renunciation of one of the major (and potentially
beneficial) instruments for dealing with this misalignment. Correctly aligned
xxvi Preface
exchange rates allow differently developed economies to interact with each other to
mutual advantage, encouraging each to move resources to the potential growth
points where they enjoy a comparative advantage. With a correctly aligned
exchange rate, a weaker economy can trade productively with a stronger one, with
both concentrating on the things they do best.
In the absence of that possibility of adjustment, inequalities do not disappear.
They simply re-emerge in other forms. Those parts of the wider economy that find
the going tough will experience a further loss of economic activity, investment and
employment. The consequent fall in demand will in turn depress the wider
economy, affecting even the stronger parts who were the initial beneficiaries of the
single monetary policy.
It is for these reasons that the United Kingdom’s decision on the euro is
important for Europe as well as for the United Kingdom. A decision to stay out of
the eurozone could be argued not only to be in the United Kingdom’s interests but
also to point the way to a better economic future for the European Union as a
whole. The European economy would function better if component parts had the
freedom to set their own monetary conditions and exchange rates so that they can
trade with each other in optimal conditions.
These arguments are not purely theoretical. The experience of European
countries over the last 20 years (bearing in mind that the Exchange Rate
Mechanism gave us an early test of the economic consequences of currency union)
testifies to the damaging effects of compressing diverse economies into a single
monetary and currency zone. It is no accident that the European Union continues
to struggle while the United Kingdom has, by comparison and since leaving the
ERM, prospered.
In the absence of any possibility of exchange rate adjustment, there are only two
escape routes for depressed parts of a wider currency zone. First, they can wait until
a lower level of economic activity so depresses comparative living standards and
wage rates that investment is attracted by those lower labour costs. The problem
with this is that it takes a long time and that the loss of output while this slow and
painful adjustment takes place will harm both the particular component part and
the wider economy. This is, nevertheless, where the eurozone now is.
Second, the depressed area can throw itself on the mercy of the wider entity,
arguing that it is making a sacrifice of its own economic prospects for the sake of
some wider goal, and that it is therefore entitled to all the benefits (such as they are)
of the wider entity’s regional policy and, ultimately, social security largesse, in
order to offset the loss of economic welfare.
The wider goal for which this sacrifice is made is presumably a degree of political
integration which is also the necessary precondition for the assumption of regional
policy and social security responsibilities by the wider entity. It is only in a political
union (and even then the strains are immense) that the parties recognise such a
community of interest as to make possible both the sacrifice on the one hand and
the assumption of responsibility on the other.
The economic aspects of a single currency, in other words, inevitably elide into
the political aspects. The deleterious economic effects of an inappropriately wide
Preface xxvii
currency union can only be made tolerable – so it is calculated – if the parties agree
to throw in their lots with each other to the point where the value they place on
their common political identity outweighs the economic sacrifice. Those who do
not dare propose such a step in its own right calculate that it can be achieved by
a detour.
Such a step remains, however, fraught with difficulty. We know from our own
experience in the United Kingdom that even a long-established political union
suffers huge strains that are only exacerbated by economic divergence. Major
questions of concern to any democrat arise – issues of self-determination and
accountability, representation and identity. Democracy is, after all, about more
than voting. It means being governed by those by whom we choose to be governed.
The price we are asked to pay for a less than optimal economic performance is,
in other words, a political step which we might be prepared to take one day, but
which even its proponents do not dare to describe openly right now. This should be
of real concern to the left – indeed, to any democrat – and this book is a valuable
step towards a proper exploration of that concern.
Acknowledgements
There are many people to thank for their input into making this book possible.
Most obviously, we must thank all the contributors for their enthusiasm and
commitment for this project and all their work in completing their chapters to a
universally high standard; second, our Commissioning Editor at Routledge, Rob
Langham, for his support for this project and patience over the duration of the
development of this edited collection; third, our colleagues at the universities of
Bradford and Central Lancashire for their comradeship and general support for
our research on European economic integration. Finally, we owe a deep sense of
gratitude to our families and partners for their forbearance during the preparation
of this book. It is to them that this book is dedicated: MB: Mary, Ken and Beibei;
PW: Barbara, Boyd and Claire; BB: Beryl, Ivan and Marvin.
Any remaining errors and omissions we gladly attribute to each other.
Haworth, Heaton Norris and Guiseley
March 2005
1
The left and the euro
Philip Whyman, Mark Baimbridge and Brian Burkitt
Introduction
Britain’s relationship with the European Union (EU) has long been the focus of
conflict, as advocates of further economic and political integration clash with those
who are sceptical about the rationality of the process and who prefer a looser,
national-orientated approach. The issue of ‘Europe’ has generated passions in
Britain’s political system, resulted in disagreements and even threatened splits
within unusual political parties and interest-representation organisations. The
tensions caused within the Conservative Party – caused by conflicting attitudes
towards European integration, in particular whether Britain should join the
European Exchange Rate Mechanism (ERM) – have been well documented.
These led to the dramatic deposing of Margaret Thatcher by her own MPs after a
decade as Prime Minister, and subsequently the events of the 1992 currency crisis
fatally undermined the administration of John Major. Furthermore, policy
towards European integration continues to be a significant barrier to the
realisation of the ambitions of various prominent Conservative MPs to lead their
party, whilst the remarkable success of the UK Independence Party (UKIP) in the
2004 European Elections has been interpreted as a direct challenge to the
Conservative strategy of combining a eurosceptical stance with determination to
retain EU membership. Thus, with the Blair–Brown leadership of the Labour
Party committed to playing a role ‘at the heart of Europe’, and indeed advocating
membership of the single European currency subject only to five ‘tests’ of Britain’s
compatibility with the eurozone economy, observers might be forgiven for
concluding that euroscepticism in Britain is restricted to the political right.
This would be a false conclusion, because the European fault-line cannot be
characterised as a neat left–right issue. There are noticeable divisions in opinion
across British business, the trade union movement and within the Labour Party.
Recent events even indicate the beginnings of an internal debate within the Liberal
Democratic Party on the issue, whilst the UK Green Party advances a distinctive
critique of the orthodox economic case presented in favour of further European
integration. Moreover, as contributions to this volume attest, these divisions over
the future relationship between the United Kingdom and Europe are recurring
themes throughout the entire post-Second World War period, with the balance of
opinion oscillating over time. Indeed, Conservative opinion was overwhelmingly
2 Philip Whyman, Mark Baimbridge and Brian Burkitt
pro-European at the time of the 1975 Referendum on continued membership,
whilst leading members of the Labour Party campaigned on both the ‘Yes’ and
‘No’ sides, with many of the contributors to this book taking different viewpoints.
Moreover, as recently as 1987, the official policy of both wings of the British labour
movement supported withdrawal from the European Union. Thus, a historical
review of the post-war period demonstrates that there has been a consistent
‘progressive’ left critique of Britain’s role within European integration.
This book focuses upon one manifestation of this ‘progressive euroscepticism’,
namely the attitudes of the left towards the current project to create an Economic
and Monetary Union (EMU) among participatory member states of the European
Union. Quite simply, EMU is one of the most far-reaching economic reforms of
the current generation, and one that the British electorate will have the opportunity
to endorse or reject through a national referendum, if the government of the day
wanted to apply for membership.
In addition to the psychological impact of the introduction of a new common
eurozone currency this initiative would have a dramatic impact upon the lives of
British citizens. Advocates claim that it would enhance competition, through price
transparency and completing the European Single Internal Market (SIM), thereby
reducing prices for consumers and ensuring a superior allocation of resources as
corporate restructuring facilitated a renewed global competitiveness. The
economic infrastructure, moreover, has been established to focus upon the delivery
of low inflation, and it is claimed that this will result in a superior economic
performance for the UK economy.
Critics of UK participation in EMU, in contrast, point to the combination of
substantial initial transfer costs and the danger of being trapped within a
permanently fixed exchange rate system, magnified by the potentially deflationary
impact of the monetarist-inspired institutional and policy framework within which
the single currency has been introduced. The transfer of significant economic
policy instruments to the European Central Bank (ECB), designed to operate
independently of all democratic influence, has weakened the potential for national
economic self-governance, whilst the target of price stability without reference to
all other macroeconomic goals is likely to undermine progressive goals of full
employment, social solidarity and the promotion of economic growth. Keynesian
measures are further constrained by the Stability and Growth Pact (SGP), which
places firm limits upon budget deficits and thereby restricts the ability of countercyclical economic strategy. This is quite intentional, based upon monetarist
assertions that Keynesian economics no longer works, if indeed it ever did.
However, progressive eurosceptics argue that the loss of national economic
autonomy, combined with the multiple restrictions that EMU participation places
upon the pursuit of macroeconomic policy, reduces the scope for achieving
traditional democratic socialist–social democratic objectives. In short, EMU
membership, under its current rules and institutional framework, would be an
economic disaster for the UK economy, whilst undermining the democratic
sovereignty of the British people.
The left and the euro 3
The progressive eurosceptical case rests, therefore, largely upon Keynesian
rather than monetarist-neoclassical assumptions, so that the market economy is
perceived as experiencing significant cases of market failure and of cumulative
causation. Consequently, government intervention has the potential, if properly
directed and accurately timed, of improving economic performance. Progressive
eurosceptical economics therefore rejects the new classical assumption of time
inconsistency, which implies that all government intervention worsens those
circumstances it is intended to improve, together with the monetarist belief in a
long-term equilibrium rate of unemployment determined solely by labour market
factors. Moreover, it rejects the viewpoint that globalisation and the international
free flow of capital has rendered national economic policy instruments impotent,
so that it is difficult (if not impossible) to maintain a distinctive monetary policy and
pursue exchange rate management. If this were true, tying economic policy within
the monetarist EMU framework would make little difference, since government
autonomy would have already been effectively eroded by the external economic
environment. The contributors to this book clearly reject this viewpoint and base
their alternative vision upon active government macroeconomic policy, whether
within a national or reformed supra-national framework.
In terms of the political vision expressed by the progressive eurosceptics featured
in this volume, the predominant arguments focus upon the importance of
democracy and sovereignty. The nation state is seen as the best available means
of empowering British citizens to determine their own social and economic
development. The EU is criticised as exhibiting a democratic deficit, whilst the
status of its legitimacy, being based upon international treaty, claims predominance over national self-determination in those areas that have been ceded to
supranational competence. The tendency for the EU Commission to criticise
Gordon Brown’s current spending plans, despite Britain’s opt-out from full
membership of EMU, demonstrates the dilemma neatly: whether the democratic
left should prioritise the regeneration of public services or submit to the budget
restraints imposed as an integral feature of participation in EMU.
This book contains contributions from leading academics, trade union leaders
and prominent politicians both from the Labour Party and the wider progressive
left in British politics. The advantage provided by featuring direct contributions
from the selected group of individuals arises from the opportunity to compare and
contrast their arguments, assumptions and proffered alternatives. However,
interesting though the (sometimes subtle) differences in emphasis prove to be, the
significant feature that arises from reading this volume is the degree to which the
contributors share a common perspective relating to the importance of democratic
self-determination, a preference for national economic management, or at least the
importance of securing substantial reform of EMU’s policy and institutional
framework before supranational collaboration becomes compatible with progressive democratic socialist–social democratic objectives.
4 Philip Whyman, Mark Baimbridge and Brian Burkitt
Book outline
The book is (loosely) divided into three thematic sections: first, contributions
primarily concerning the economics of a single currency; second, employment and
social aspects; and, finally, issues of sovereignty and political determination.
In the foreword, David Owen provides a unique personal insight into the
development of the British left’s attitude towards European monetary integration.
He commences by reviewing the relationship between administrations since the
1920s and various exchange rate mechanisms, evaluates the operation of EMU to
date and concludes that ‘there is a long way to travel before the eurozone economies converge’. When analysing the future developments within the European
Union he notes, first, the importance of separating the politically focused Constitution from the economics of the eurozone; second, that the agenda of ‘social
Europe’ is essential to reinforce economic stability and competitiveness. Finally, he
welcomes the widening of EU membership to 25 countries. Owen’s overall conclusion is that ‘it would be better to concentrate on making the existing treaties . . .
work more effectively’. This would permit the EU to ‘gradually build its own
pragmatic consensus from the ground’ rather than ‘accept a new, more highly
centralised and uncertain constitutional model for an already strained and
unsettled Union in which many of its citizens are already showing their political
discontent’.
Bryan Gould, who has observed the debate within the British left from both near
and far, contributes the preface for this edited collection. Gould clearly states his
view that ‘as a policy issue, the euro poses real challenges, and real opportunities, to
the left’. He then outlines the key arguments regarding the difficulties of adopting
the euro, together with the wider implication ‘that the United Kingdom’s decision
on the euro is important for Europe’ since it could ‘point the way to a better
economic future for the European Union as a whole’. In particular, Gould
emphasises the very real implications for economic management and the
inevitable pressures of political union.
The chapter by Andy Mullen, provides an informative background to the later
contributions through its historical summary of the changing attitudes and policy
positions within the British Labour movement. Any study of contemporary
reactions to European integration can only satisfactorily seek to analyse this
phenomenon if placed into a historical context, whereby labour movement
attitudes have oscillated sharply from fundamental support for EU membership to
outright opposition and subsequently to renewed, albeit hesitant, enthusiasm.
Thus, the Labour Party opposed EU membership between 1971 and 1974, and
again between 1980 and 1987, although, with the exception of Michael Foot, the
party leadership remained supportive of continued EU membership throughout
most of this period. The trade union movement, however, remained largely critical
towards EU membership throughout this entire period, until the famous 1988
speech by Jacques Delors to the TUC Congress provoked a complete reversal.
Subsequently the TUC, together with a number of leading individual unions, have
been at the forefront of advocating support for European integration.
The left and the euro 5
The second feature arising from Mullen’s chapter relates to the nature of the
many arguments forged during the European debate 30 years ago and their
continued relevance for the contemporary debate over Britain’s future relationship
with Europe. Mullen states that ‘the fundamental issue is whether the ongoing
process of European integration [towards the objectives of ever-closer union]
assists or hinders the advance of socialism’. In other words, the questions that
require an answer are fundamental. Should progressive movements in Britain
favour a national or supranational economic and political strategy? Is European
integration the necessary prerequisite for the creation of a progressive European
strategy capable of regulating globalisation in such a way as to promote the
interests of working people and their families? Or is the entire project designed
according to pro-market, monetarist principles, and therefore inconsistent with
traditional progressive-left objectives, such as full employment, economic democratisation and developing a welfare state designed to decommodify citizens and
protect the vulnerable from the worse excesses of market determination? Many of
these themes are explored in greater detail in the subsequent chapters.
The first section of the book seeks to provide a broad overview of the key issues
considered significant in terms of those progressive economists who exhibit
scepticism towards the benefits of British participation in EMU. Attitudes vary
between those who consider that membership of the euro can be compatible with
progressive objectives if necessary structural and policy reforms are completed,
and those whose analysis leads them to conclude that pursuit of a national,
progressive strategy would produce superior results.
Jonathan Michie highlights the monetarist nature of the Maastricht superstructure designed as a fundamental feature of EMU, intended to empower capital
at the expense of national government. EMU therefore represents one element of a
neo-liberal strategy to ‘roll back’ the state. It has caused participatory member
states to pursue deflationary policies for more than a decade, with the resulting
high unemployment and rising inequality reminiscent of the disastrous return to
the Gold Standard in the 1920s and the resulting Great Depression. Rigidity in
economic rules creates divergence in the real economy, which generates social
tensions and raises further questions that democrats cannot ignore. Hence, Michie
concludes that:
Unless current European economic policy is reorientated towards the
objective of full employment . . . rather than being stuck on the myopic
concern with zero inflation, the route forward must once again be based on
independent national growth strategies which would not only allow countries
to help themselves, but by doing so would help each other.
Philip Arestis and Malcolm Sawyer join Michie in providing a detailed critique
of the Maastricht version of EMU. They argue that the existing monetarist version
of monetary union is far from an inevitable consequence of establishing a common
currency. Therefore the European system could have been designed quite
differently. In particular, they highlight the undemocratic ECB with its too limited
6 Philip Whyman, Mark Baimbridge and Brian Burkitt
policy remit and inadequate (sole) policy instrument of interest rates. Consequently, Arestis and Sawyer emphasise the ‘woeful lack of institutions and policies
operating at European level to support the development of a successful European
economy’. Without significant reform, the authors consider that participation in
EMU is unacceptable since it mitigates against the maintenance of full employment and the achievement of progressive economic objectives.
Janet Bush concurs with the analysis provided in the previous chapters through
her identification of the monetarist orthodoxy that has dominated Europe as the
main cause of the sluggish growth and high unemployment that has plagued many
continental European economies for more than a decade. Moreover, Bush views
EMU as representing ‘a battering ram towards free market economics’, and points
to international precedents, most notably in Scandinavia, where it is the
progressive forces who oppose membership of EMU on the basis that it threatens
traditions of generous social welfare and labour market protection. Bush concludes
that there is ‘no prospect’ of successful reform of the SGP and the creation of an
active federal fiscal policy. Therefore, for progressive economists, Bush argues that
EMU is fatally flawed and the combination of ‘continued low growth, economic
instability and political tensions will wreck the system in the years ahead’.
Paul Ormerod adopts a different perspective, seeking to examine EMU from the
position of a prospective member of the eurozone; with particular emphasis placed
upon less developed nations from eastern Europe, who have struggled to complete
the transition from quasi-command to market economy. According to Ormerod’s
analysis, EMU reinforces centralising tendencies within the EU, thereby exacerbating the lack of democratic validation; many of the key economic decisions are
taken by political elites, central bankers insulated from democratic influence and
senior managers of large corporations. Each of these groups has benefited from the
EMU process, yet discontent with the remoteness of decision-making processes
continues to increase, as measured by the electoral performance of a number of
political parties across the EU member states. Ormerod singles out the ECB for
particular criticism, suggesting that the sole economic institution established to
sustain the eurozone has been ‘designed to fight yesterday’s battles’, due to its
obsession with inflation and neglect of all other economic objectives.
The chapter by Mark Baimbridge builds upon this critique by providing a
detailed analysis of the ECB, in terms of its objectives, institutional structure and
policy effectiveness. Having noted that the European Union deliberately set out to
create the most independent central bank in the world – no doubt influenced by the
literature claiming that central bank independence from political influence
facilitates its anti-inflationary policy – Baimbridge develops a detailed critique of
this approach, listing inconsistencies in the literature and the likely hindrance of
wider macroeconomic policy coordination. Thus, in conclusion, Baimbridge
suggests that the continued existence of an independent ECB would hamper the
realisation of a progressive economic strategy, since it would ‘ensure that
monetarists remained in power if not in office, because it would steer the economy
by financial indicators to the detriment of the real economy’.
The Guardian’s Economics Editor, Larry Elliott, provides a short, pithy
The left and the euro 7
commentary upon the inadequacies of the current EMU design and the need for
the progressive left to pursue an alternative approach. Scepticism, argues Elliott, is
‘the beating heart of democracy’, and therefore the left should rediscover its
natural tendency to mistrust the agenda set by political and economic elites by
developing a radical alternative to the monetarist-dominated EU economic
framework. Elliott argues that those on the left who offer their support to EMU, on
the basis that it is part of a package leading towards a ‘social Europe’, are ‘living in
cloud-cuckoo-land’, since the ECB and EU Commission have, for a number of
years, consistently rejected an expansionary macroeconomic platform for one
based upon labour market flexibility and supply-side reform. Ultimately, Elliott
suggests that the real choice lies between a progressive-left critique of contemporary European economic policy, based upon the importance of active industrial
policy and macroeconomic management, and a right-of-centre alternative,
focused upon extending Thatcherism across the EU.
The final paper in the first section concludes with a chapter by the editors, which
seeks to develop a post-Keynesian analysis of the EMU. Whyman et al. argue
that membership of the euro
requires the separate formulation of money policy from nationally determined
fiscal policy, leading to a resultant lack of policy coordination. . . . The resultant
slow-growth, high-unemployment outcome will be further exacerbated by the
transfer of monetary policy to a European Central Bank.
In particular, they note the ‘incompatibility between the monetarist model,
upon which EMU is constructed, and the possibility of creating an alternative
economic strategy grounded in post-Keynesian tradition’. A post-Keynesian
framework is developed through discussion of disequilibrium and cumulative
causation; increasing returns to scale and economic growth; aggregate demand,
full employment and output capacity; socialisation of investment, together with the
interrelationship between demand and supply side. From this standpoint ‘in order
to implement post-Keynesian economic policies, the United Kingdom needs to
avoid the uniform monetary policy and the constraints upon budgetary measures
imposed by the adoption of a single EU currency’.
The second section of the book is concerned with the impact of EMU upon
employment and industrial relations. The first contribution, made by Brian
Burkitt, examines the widely held perception that the euro should be embraced
because it would enable the United Kingdom to enjoy the benefits of participating
in the European Social Model (ESM). However, Burkitt argues that the weight of
evidence from social policy research is that such an assumption is problematic.
Four different kinds of welfare state have been identified within the European
Union; to which of these models, does the ESM relate? The traditional ESM
requires large welfare expenditure backed by public support for a positive state
presence in social policy, but tensions exist within the model from a democratic
socialist perspective. These are sufficiently serious to undermine centre-left
arguments for UK membership of the euro. At best the ESM provides a number of
8 Philip Whyman, Mark Baimbridge and Brian Burkitt
minor micro pension and workplace benefits, but from within a failing macro
framework. Aggregate demand management, rather than supply-side ‘reforms’
that impose the costs of structural adjustment upon the most disadvantaged
citizens is the key to creating a future socially inclusive community.
The chapter by Matthew McGregor reviews the potential impact upon the
welfare state from euro membership, focusing upon the major serious flaw: the
voters. Labour voters have consistently opposed the United Kingdom’s membership of the euro and show no sign of changing that stance. The answer relates to
working-class voters understanding that the economic effects of joining the euro far
outweigh any political considerations. The flexibility that economies need has, in
Europe at least, been based on regional and national planning accompanied by
fiscal and monetary policy. In the euro, these levers are taken away and governments are unable to react quickly and effectively. It is jobs, public services and
welfare that Labour voters are interested in, and it is the jobs, public services and
welfare policy spheres that offer the most convincing case for staying out of the euro.
Voting ‘yes’ would lead to high unemployment and low growth, whilst voting ‘no’
would protect the advances the Labour government has won and keep our ability to
continue building our corner of social Europe secure. Labour voters are against
joining the euro because it is not in the economic interests of people in this country.
The next contributions come from industrial relations practitioners. Firstly, Joe
Marino, the General Secretary of the Bakers, Food & Allied Workers Union
(BFAWU) notes that trade union support for European integration is based largely
upon the perception that it was preferable to the Thatcherism of the late 1980s.
However, Marino points to the fact that many of the anticipated advantages are
susceptible to shifts in key personnel in the EU Commission and the balance of
political power across the EU member states. Thus, such social gains as have
actually been made are being watered down by recent initiatives championed,
among others, by New Labour. Rather like the ‘irreversible’ gains trumpeted by
the 1974 Labour Party manifesto, a neo-liberal drift in economic approach
threatens the modest social advances secured by the European Union. Marino
further suggests that the European Union favours the interests of capital at the
expense of workers, and this is likely to become more apparent with the establishment of EMU and as employment protection is gradually dismantled in favour of
flexible labour markets.
This chapter is complimented by that of Doug Nicholls, General Secretary of the
Community and Youth Workers Union (CYWU) who argues that it is time for
trade unions to reconnect with their roots in the democratic struggle and reject the
EU altogether. The drive towards one legal and political entity under one currency
and constitution has reached a crossroads. These developments are not socialist,
nor can they be subject to a programme of reform from within by socialists. Whilst
trade unionists have always supported others in their struggles for national
independence, we have been slow to apply this principle to ourselves. It therefore
comes as a shock to recognise that we are now being taken over, with an external
power seeking to remove our national powers and democratic structures. Much of
the slovenly thinking in the trade unions relates to the seductive illusions
of European legislation. The general pragmatism of trade unionists, born of
The left and the euro 9
continually negotiating between a rock and a hard place, has dulled the sense of
what could really be achieved: huge capital reserves to re-invest in manufacturing
renewal and public services; the ability to plan our economy for ourselves; an
independent energy policy; government procurement that is exclusively British
based; employment laws that are regulated to fit our circumstances; taxes and
interest rates levied to suit our pace of change.
A third trade union General Secretary, Billy Hayes of the Communication
Workers Union (CWU), argues for the development of a left strategy in Europe
comparable to the type of hegemony that the neo-liberals have gained in the
United States of America. The practical question is how to secure the most
favourable development of the EU in the context of contending international
forces. Unfortunately, the left critique of the single currency has yet to suggest an
alternative in which extended capital reproduction can be demonstrated. Whilst
defending the ‘social gains’ of the EU the left has yet to demonstrate what panEuropean economic policy can deliver the material basis for sustaining these gains.
A left strategy would start from the needs of hundreds of millions of people in
Europe and billions across the planet; first, to outline an alternative economic
policy to neo-liberalism; second, a large expansionary economic block is an
essential precondition for a ‘social Europe’; third, to be a defender in Europe of
developing countries against the United States; and, finally, to seek greater
integration and coordination to assist the struggle and needs of the workers and
oppressed.
Philip Whyman documents the shift in British trade union policy from opposing
many aspects of European integration towards enthusiastic support for a ‘social
Europe’ and subsequent acceptance of EMU. Whyman’s evaluation of this shift
suggests the existence of a basic contradiction between the reality of EMU, its
monetarist framework and the progressive objectives that the trade union movement believes can be advanced by support for EMU. Whyman points towards the
net cost of EMU membership, due to its deflationary infrastructure and restrictions
upon counter-cyclical policy, together with restrictions upon public sector
expenditure and the likely deterioration in public sector provision and relative
public sector pay. Moreover, he notes the determination of leading figures in the
ECB, EU Commission and, not least, the current British Labour government, who
have rejected the ‘old social model’, to achieve labour market flexibility. Whyman
concludes that the trade union case for supporting EMU is ‘fatally flawed’, and that
the British trade union movement should develop an alternative strategy to secure
its goals – either through bargaining with the European Union to facilitate
necessary structural reforms or via the emphasis upon a national basis for social
and economic policy.
This section concludes with a chapter by Matthew Watson, who notes the
tendency for the left to desire the creation of a ‘social Europe’ to counter the free
market globalisation of the American variety. However, Watson suggests that, in
practice, it is more important to defend national models and that a simple ‘Europe
versus globalisation’ dichotomy is based upon the unjustifiable assumption that
most aspects of European integration are progressive in nature, whereas in reality
they have tended to bind the ability of nation states to regulate capital. Moreover,
10 Philip Whyman, Mark Baimbridge and Brian Burkitt
Watson argues that EMU will cause a shift in the governance of European firms,
increasing the importance of capital markets and diminishing the influence of
banks as the main source of investment finance. This, Watson claims, will
encourage the growth of short-termism and thereby undermine the ability of firms
to sustain their element of the European social market approach, whilst the SGP
squeeze upon public spending means that the state will be unable to compensate
for this reduction in social protection.
The final section of the book is concerned with political issues of democratic
determination and sovereignty. Here, a variety of academics and prominent
politicians discuss the likely impact of EMU upon the goals pursued by progressiveleft political movements. For example the European Policy of the Green Party has
changed significantly over time. The short-term objective of the Ecology Party
(1975–85) was withdrawal, whilst its long-term objective was the creation of a
federal ‘Europe of Regions’. In 1988 the Green Party reversed its withdrawal
policy to one of ‘reform from within’, that is, maintaining membership while
seeking to fundamentally reform the EU.
In light of this, Scott Cato develops a ‘Green’ critique of EMU, which focuses
primarily upon its origins as a result of pressure from ‘big business’ – intended to
reinforce trends towards globalisation, the expansion of free trade and promote the
free movement of capital. The result is that transnational corporations are capable
of ‘bargaining’ with trade unions and governments to lower taxes (hence public
spending) and labour standards. Instead of pursuing this line, Cato outlines an
alternative vision, based upon ‘localisation’ and utilising multiple time-based local
currencies to keep liquidity and purchasing power within deprived communities.
Cato rejects EMU on the basis of its association with efforts to support globalisation and increasing international trade, since these do not help the poorest
nations, whilst being linked with over-consumption, obesity and the destruction of
the environment.
Brian Burkitt advances this debate through combining the issue of EMU
membership with British democracy and sovereignty. He argues that federalists
are seeking to ‘build a United States of Europe from the top down’, but that ‘such a
process of building a federal union is the opposite of how every other nation has
been created’. In relation to the impact upon democracy, Burkitt argues that ‘the
parliamentary democracy developed and established in Britain is based upon the
sovereignty of the people’ from which ‘five basic democratic rights emerge . . . each
of which is fundamentally diminished by British membership of the European
Union’. This process has commenced with powers ‘substantially ceded to the
European Union, whose Commission and Council of Ministers are neither
collectively elected nor collectively dismissed by the British people, or by the
peoples of the EU countries put together’. In relation to sovereignty, Burkitt
comments: ‘such a major change in the operation of the UK constitution carries
profound implications for the exercise of national sovereignty’. For example, the
notion that sovereignty ‘can be “pooled” is an evident absurdity. Power can be
pooled, but authority cannot. “Pooling” is a dangerous concept, because it falsely
implies that authority can both be retained and given away simultaneously.’
The left and the euro 11
The following chapter, written by Austin Mitchell MP, claims that EMU
represents the largest ‘assault’ upon national democratic sovereignty that European integration has thus far introduced. Claiming that sovereignty is a zero-sum
game, and that ‘pooling’ simply results in the loss of influence over key issues of
national importance, Mitchell argues that EMU takes away the most important
economic tools from the control of British parliament and people, whilst the fact
that it is based upon international treaty means that membership binds future
governments to abide by policies over which they have only minority impact.
Tony Benn’s contribution to this book centres upon a Bill he presented before
the House of Commons, intended to establish a progressive ‘Commonwealth of
Europe’. The proposal was designed as a clear contrast to the monetarist
institutional and policy structure contained in the Maastricht Treaty, which would
undermine democratic accountability. The ‘Commonwealth’ alternative demonstrates the fact that progressive-left euroscepticism can be compatible with a strong
support for internationalism. Rather than Benn’s proposals representing a narrow
nationalism, they would have established a cooperative relationship between
neighbouring countries that would be both outward looking and facilitate (rather
than, like EMU, constrain) progressive economic policy.
The final contributed chapter to the book comes from the late Peter Shore, who
highlights what he describes as New Labour’s strategy of downplaying the
significance of EMU, even though it is, and always was, meant to be part of a
transition towards a United (Federal) Europe. Moreover, Shore concurs with
Mitchell that EMU destroys the capacity of future UK governments to use the
power of the state to influence and control the UK economy. Instead, these powers
have been transferred to unelected European institutions, located in Brussels and
Frankfurt. In addition, referring to the loss of monetary and exchange rate policy,
Shore concludes that progressive-left policy requires control over the policy tolls
that EMU takes away.
The book concludes with a chapter by the editors that seeks to advance the
overall argument and debate contained within the contributed chapters. Whyman
et al. argue that ‘the national interest of the United Kingdom requires the
implementation of a long-run opt-out from EMU, given that its participation is
neither inevitable nor desirable’. In particular, ‘a decision to reject participation in
the single currency would restore to national government those economic
instruments essential to the management of its economy’ such that they ‘will be
able to pursue a more balanced economic programme’. The first policy outlined
concerns ‘national monetary authorities seek[ing] a higher long-term growth rate
by providing a favourable climate for industrial expansion through low inflation.
. . . Fiscal policy is used to support the more dominant monetary policy by
restraining inflationary pressures.’ A second policy involves the ‘active use of fiscal
as well as monetary policy’ whereby ‘an approach of this nature would probably be
accompanied by an industrial policy’. Finally, Whyman et al. advocate the
retention of a national exchange rate policy since, ‘over a period the desired
objectives of exchange rate policy are short-term stability and long-term flexibility.
The dangers to avoid are long-term fixity and short-term volatility.’
2
The great debate1
The Labour Party and European
integration
Andy Mullen
Introduction
Following two failed applications to join the European Union (EU) in 1961 and
1967, Britain’s accession in 1973 was preceded by a national debate, which Nairn
(1973) parodied as the ‘great debate’. More than 30 years later, however, the
relationship between Britain and the European Union continues to be a
controversial issue in British politics. The focus of this chapter is the historical and
contemporary division of the Labour Party over European integration. It analyses
how Labour’s European policy has changed over the post-war period, suggests a
number of factors to explain these changes and concludes by advancing four main
reasons why a Labour Party which seeks the socialist transformation of Britain
should oppose the European Union.
The process of European integration presents the Labour Party with the
particular puzzle of how to respond to the paradox that is the European Union. On
the one hand, the progressive environmental and social policies of the Union, plus
the rhetoric that European integration is internationalism in action, delivers peace
in Europe and constitutes the only immediate way to contain the forces of
globalisation, hold a logical appeal. On the other hand, the evidence that it is
expanding its power over EU member states, whilst enforcing pro-market and
monetarist doctrines without a democratic mandate to do so, leads to the
conclusion that the European Union is a threat to democracy and a socialist
economic and social programme. The fundamental issue is whether the ongoing
process of European integration assists or hinders the advance of socialism. The
competing answers to this question determine whether the Labour Party has
pursued, and should pursue, a predominantly national or European economic and
political strategy.
The European policy of the Labour Party
The official European policy of the Labour Party between 1945 and 2004, as
agreed by the Annual Conference, together with the policy pursued by the party
leadership and by the Foreign Office, is summarised in Table 2.1.
Table 2.1 The European policy of the Labour Party and the Foreign Office (1945–2004)
Year
Annual Conference policy
1945 (G)
1946 (G)
1947 (G) Support for European
integration
1948 (G) Socialist third force*
1949 (G) ▼
1950 (G) Intergovernmental
European cooperation
1951 (G)
1952 (O)
1953 (O)
1954 (O)
1955 (O)
1956 (O)
1957 (O)
1958 (O)
1959 (O)
Party leadership policy
Foreign Office **
Imperial third force
Imperial third force
Intergovernmental
European cooperation
▼
Limited liability
▼
Support for the F TA
▼
Partial engagement
▼
Conditional support for
the EFTA
▼
Near identification
1960 (O) ▼
1961 (O) Opposition to entry
without safeguards*
1962 (O) Conditional support
for entry
Opposition to entry
without safeguards
Conditional support
for entry
Pro-entry
1963 (O)
1964 (G)
1965 (G)
1966 (G)
1967 (G)
1968 (G) ▼
1969 (G) Conditional support
for entry*
1970 (O) ▼
1971 (O) Opposition to entry on
Conservative terms
1972 (O) Renegotiate the terms,
hold a general election
or referendum and
boycott EU institutions
1973 (O)
▼
1974 (G) Renegotiate the terms
and hold a referendum
1975 (G) No vote in the 1975
Referendum
1976 (G) Withdrawal, plus
opposition to Direct
Elections
1977 (G) Reform of the EU
1978 (G) Reform of the EU, plus
opposition to EMU
▼
Opposition to entry on
Conservative terms
Renegotiate the terms,
hold general election
or referendum and
boycott EU institutions
Renegotiate the terms
and hold a referendum
Renegotiate the terms
and hold a referendum
Yes vote in the 1975
Referendum
Pro-membership, plus
support for Direct
Elections
Reform of the EU
Reform of the EU, plus
opposition to the ERM
▼
Pro-membership
Pro-membership
Table 2.1 Continued
Year
Annual Conference policy
1979 (O) Reform of the EU, plus
withdrawal from the
CAP
1980 (O) Withdrawal commitment
in the manifesto
1981 (O)
1982 (O)
1983 (O)
1984 (O)
1985 (O)
1986 (O)
1987 (O) ▼
1988 (O) Pro-membership
1989 (O) Support for enlargement,
foreign policy
coordination, EU
institutional reform
and the Single Market
1990 (O) Support for EMU,
enlargement, the ERM
and EU institutional
reform
1991 (O) Support for CAP reform,
EMU, enlargement,
the ERM and the
Social Charter
1992 (O) Support for CAP reform,
enlargement, EU
institutional reform
and Maastricht Treaty
ratification with the
Social Chapter
1993 (O) Support for CAP reform,
the CFSP, a coordinated
employment and growth
strategy, EMU, enlargement, a European
Environment Agency, a
European Investment
Bank, EU institutional
reform, JHA, the Social
Chapter and EU-wide
workers’ rights
1994 (O) Support for a coordinated
employment and growth
strategy, EU institutional
reform, Maastricht
Treaty revision, the
Social Chapter and
EU-wide workers’ rights
Party leadership policy
Foreign Office **
Reform of the EU, plus
support for
enlargement
Withdrawal commitment
in the manifesto
Pro-membership
▼
Support for coordinated
European reflation
Opposition to the
Single Market
Pro-membership
Support for enlargement,
the ERM, foreign
policy coordination,
EU institutional reform
and the Single Market
Support for EMU,
enlargement, the ERM
and EU institutional
reform
Support for CAP reform,
EMU, enlargement,
the ERM and the
Social Charter
Support for CAP reform,
enlargement, EU
institutional reform
and Maastricht Treaty
ratification with the
Social Chapter
Support for CAP reform,
the CFSP, a coordinated
employment and growth
strategy, EMU, enlargement, a European
Environment Agency, a
European Investment
Bank, EU institutional
reform, JHA, the Social
Chapter and EU-wide
workers’ rights
Support for a coordinated
employment and growth
strategy, EU institutional
reform, Maastricht
Treaty revision, the
Social Chapter and
EU-wide workers’ rights
▼
Table 2.1 Continued
Year
Annual Conference policy
Party leadership policy
Foreign Office **
1995 (O) Support for the reform of
Support for the reform of
Pro-membership
the EU Budget, CAP
the EU Budget, CAP
and CFP, the CFSP,
and CFP, the CFSP,
EMU, a co-ordinated
EMU, a co-ordinated
employment and growth
employment and growth
strategy, enlargement, an strategy, enlargement, an
EU industrial policy, EU
EU industrial policy, EU
institutional reform, JHA, institutional reform, JHA,
the revision of the
the revision of the
Maastricht Treaty, plus
Maastricht Treaty, plus
the Social Chapter
the Social Chapter
1996 (O) Support for CAP reform,
Support for CAP reform,
the CFSP, economic
the CFSP, economic
policy coordination,
policy coordination,
EMU, enlargement, EU
EMU, enlargement, EU
institutional reform and
institutional reform and
a revised treaty with an
a revised treaty with an
employment chapter,
employment chapter,
plus the Social Chapter
plus the Social Chapter
1997 (G) Support for the Amsterdam Support for the Amsterdam
Treaty, CAP reform, the
Treaty, CAP reform, the
European Employment
European Employment
Strategy, enlargement,
Strategy, enlargement,
plus conditional support
plus conditional support
for euro entry
for euro entry
1998 (G) Support for EU budget,
Support for EU budget,
CAP and CFP reform,
CAP and CFP reform,
the CFSP, economic
the CFSP, economic
reform across the EU,
reform across the EU,
enlargement,
enlargement,
environmental
environmental
cooperation, the
cooperation, the
European Employment
European Employment
Strategy, EU institutional Strategy, EU institutional
reform, JHA, Social
reform, JHA, Social
Dialogue, plus conditional Dialogue, plus conditional
support for euro entry
support for euro entry
1999 (G) Support for the CFSP,
Support for the CFSP,
enlargement, plus
enlargement, plus
conditional support for
conditional support for
euro entry
euro entry
2000 (G) Support for the CFSP,
Support for the CFSP,
enlargement, plus
enlargement, plus
conditional support for
conditional support for
euro entry
euro entry
2001 (G) Support for the CFSP,
Support for the CFSP,
economic reform across
economic reform across
the EU, enlargement,
the EU, enlargement,
the Nice Treaty, plus
the Nice Treaty, plus
conditional support for
conditional support for
euro entry
euro entry
▼
16 Andy Mullen
Table 2.1 Continued
Year
Annual Conference policy
Party leadership policy
Foreign Office **
2002 (G) Support for the CFSP,
Support for the CFSP,
Pro-membership
economic reform across
the Convention on the
the EU, enlargement,
Future of Europe,
EU institutional reform,
economic reform across
plus conditional support
the EU, enlargement,
for euro entry
EU institutional reform,
plus conditional support
for euro entry
2003 (G) Support for the CFSP, the Support for CFSP, a
Convention on the
European Constitution,
Future of Europe,
economic reform across
economic reform across
the EU, enlargement,
the EU, enlargement,
plus conditional support
plus conditional support
for the euro
for the euro
2004 (G) Support for economic
Support for a European
reform across the EU,
Constitution, holding a
plus conditional support
referendum on the treaty,
for euro entry
economic reform across
the EU, plus conditional
support for euro entry
▼
Notes
G = Labour in government; O = Labour in opposition.
* ‘Qualified acceptance’ was a procedural device used by the party leadership to neuter Annual
Conference decisions.
** Historically, the Foreign Office tended to dominate the formulation of the British State’s
European policy.
There are three notable features about Labour’s European policy. The first is
the propensity of the party leadership to follow the generally pro-EU policy of the
Foreign Office when in power. The second is the emergence of policy discord
between the Annual Conference and the party leadership during the 1946–50,
1975–9 and 1984–7 periods. The third is the seven significant shifts in policy that
have occurred over the post-war period.
Support for European integration (1946–60)
Although Labour’s manifesto for the 1945 General Election contained no reference to European integration, it featured significantly as a foreign policy objective
of the 1945–51 Labour governments. The post-war aim of the Foreign Office was
to maintain an independent foreign policy to safeguard Britain’s Great Power
status. A restoration of Empire strategy was deemed unrealistic, whilst the feasibility of an imperial third force strategy was explored by the Foreign Office and
Labour’s Foreign Secretary, Ernest Bevin. It was envisaged that the latter would
involve some form of European union, and three schemes were devised: Anglo–
French economic coordination, the ‘Euro-Africa’, plan based on the common
The Labour Party and European integration 17
exploitation of Europe’s colonies, and a European customs union. However, the
party leadership’s imperial third force policy, which was not debated or ratified by the
Annual Conference, was abandoned in 1948.
The 1947 Conference adopted a resolution in favour of European integration,
whilst the 1948 Conference adopted a resolution in favour of a federal United
States of Europe as a socialist third force. However, the socialist third force policy was
limited in its impact, for two reasons. First, the resolution received only conditional
support from the National Executive Committee (NEC), which deployed the
procedural device of ‘qualified acceptance’ to neutralise it. Second, although there
was a long history of support for federalism within the Labour Party,2 it had no
Cabinet-level champions.
The party leadership ignored the 1948 Conference decision, opting for a policy
of intergovernmental European cooperation. It insisted that the Organisation of European
Economic Co-operation and the Council of Europe should operate on an
intergovernmental basis, refused to participate in the Schuman Plan negotiations,
opposed British participation in the proposed European Defence Community and
opted out of two articles of the European Convention on Human Rights. The NEC
subsequently formalised the party leadership’s position by publishing a policy
statement. Endorsed by the 1950 Conference, the document opposed any moves
towards federalism, arguing that European cooperation should not prevent the
Labour government from implementing its national Keynesian programme.
Following the creation of the European Union on a supranational basis in April
1951, the Conservatives promoted the concept of a Free Trade Area (FTA) in an
attempt to supplant the Six and reinstate the principle of intergovernmentalism.
However, France and the United States of America rejected the FTA proposal.
Nevertheless, the Conservatives and six other European governments established
the European Free Trade Association (EFTA) in November 1959. The Labour
leadership supported the original FTA proposals and offered conditional support
to the EFTA. However, neither the EFTA nor the principle of free trade was
debated or ratified by the Annual Conference.
In October 1961 the Conservatives initiated entry negotiations with the Six,
having submitted a formal application in August. During this period, pro-EU
forces began to promote entry within the Labour Party, through the cross-party
Common Market Campaign and the Labour Common Market Committee. In the
late 1960s anti-EU forces, such as the Forward Britain Movement and individuals
such as Michael Barratt Brown, Douglas Jay and Peter Shore promoted a number
of alternatives to the European Union. These included a trading bloc centred on
the Commonwealth and the EFTA, a North Atlantic Free Trade Area and an
economic and political alliance with non-aligned countries.
Opposition to entry without safeguards (1961)
At the 1961 Conference the party united to support a policy of opposition to entry
without safeguards, specifically safeguards regarding the protection of British agriculture, Commonwealth and EFTA interests, and the right to pursue economic
18 Andy Mullen
planning and public ownership. However, as George Brown, the pro-EU Deputy
Leader, explained, NEC support for the resolution was based on the understanding that if such guarantees were obtained, the party would consider joining the
European Union. Once again, the party leadership used the procedural device of
‘qualified acceptance’ to weaken an Annual Conference decision and to maintain
the option of entry.
Conditional support for entry (1962–70)
The 1962 Conference agreed five conditions that would have to be satisfied before
Labour would support entry: safeguarding Britain’s Commonwealth trade, freedom to pursue an independent foreign policy, obligations to the EFTA, ability to
plan the economy and commitment to British agriculture. However, the NEC
policy statement declared that, if the five conditions were satisfied, Britain should
join. During the Annual Conference debate, Party Leader Hugh Gaitskell stated
that entry would result in the loss of Commonwealth markets and that food prices
would rise. Politically, he warned that the European Union was not merely a
customs union and that political integration would mean the end of 1,000 years of
history. However, Brown argued that, on balance, the economic advantages of
entry outweighed the costs, asserting that this view infused the NEC policy
statement. The policy of conditional support for entry was therefore biased in favour
of entry. Indeed, the party leadership tabled an amendment in the House of
Commons in November 1962 stating that it would support entry, subject to the five
conditions. However, French President Charles de Gaulle vetoed Britain’s first
application in January 1963.
At the 1963 Conference, in an attempt to avoid party division before the general
election, the party leadership instituted the ‘three-year rule’ so as to prevent any
debate on the European Union. Consequently it was not debated again until the
1967 Conference.
The 1964 General Election manifesto stated that although Labour would seek
closer relations with the European Union, its primary responsibility was to the
Commonwealth. Back in power, Prime Minister Harold Wilson reaffirmed the
commitment to the five conditions. However, under the influence of pro-EU civil
servants, Wilson began to shift in favour of entry. In December 1965 he accepted
Articles 25 and 46 of the European Convention on Human Rights, reversing the
opt-outs negotiated in 1950. Taken as an executive decision using the Royal
Prerogative, neither the Cabinet nor Parliament discussed the change, despite its
constitutional significance.
The 1966 General Election manifesto declared that Labour would join the
European Union, provided essential British and Commonwealth interests were
safeguarded. In November 1966 Wilson announced to the House of Commons
that Labour, having reviewed its European policy, had decided to explore the
potential for further negotiations. Between January and March 1967 Brown and
Wilson toured the European Union to meet representatives of the Six.
The European Commission Vice-President, Robert Marjolin, published the EU
The Labour Party and European integration 19
Medium Term Economic Policy (MTEP) in March 1966. Its objective was to
coordinate member states’ policies so as to tackle the regional, social and structural
inequalities caused by integration. Stuart Holland, economic assistant at the
Cabinet Office, sent a memorandum to Wilson arguing that the MTEP was
Marjolin’s attempt to ‘get the French planning model adopted by the EU’. Wilson
was delighted, ‘because it meant that Labour’s National Plan was not only
compatible with EU membership, but could be reinforced by the MTEP’ (Holland
1997: 2–3).
A further indication of Wilson’s shift was the European Technology Community (ETC) proposal. In March 1967 Holland suggested that Labour should
revise its negotiating strategy, recommending that it should support intergovernmentalism, endorse the MTEP and cooperate with the Six on advanced
technology. Wilson subsequently sent Holland on a secret mission to sound out de
Gaulle, who was amenable. In the meetings that followed, Wilson argued that an
ETC treaty should be signed before any detailed programme of cooperation was
agreed, whilst de Gaulle insisted that it should be created on the basis of specific
projects. However, Wilson refused to make such a commitment. Reflecting on this
episode, Holland (1997: 10) concluded that Wilson’s agenda was ‘classic Wilsonian
short-termism. He appeased the right by applying, and pleased the left by failing in
the attempt.’
In April 1967 the Cabinet voted 13 to 8 to reopen negotiations. Labour subsequently published a White Paper setting out its terms. These included transition
arrangements for the implementation of the Common Agricultural Policy (CAP),
plus safeguards on the balance of payments, Commonwealth trade and regional
policy. In the House of Commons debate that followed, Wilson argued that,
economically, industry would probably benefit from entry. However, he
acknowledged the problems posed by the CAP and the end of Commonwealth
Preference. It was estimated that the cost of living would increase between 2.5 and
3.5 per cent, that food prices would increase between 10 and 14 per cent, and that
the net cost to the balance of payments would be between £175 and £250 million
per year. Politically, he dismissed the idea of a federal Europe, whilst, constitutionally, he stated that EU law would only take precedence in certain areas,
claiming that most domestic law would remain unchanged. However, he conceded
that entry would involve the surrender of sovereignty, and that, in future, Britain
would have to refrain from enacting legislation inconsistent with EU law.
During the debate 37 Labour MPs tabled an amendment opposing the White
Paper, arguing that it failed to uphold the conditions laid down by the Annual
Conference. Despite a three-line whip, 35 Labour MPs voted against and 51
abstained. However, due to Conservative support, the Labour motion was
approved by 488 to 62. Britain’s second application was formally submitted in
May, without a mandate from the Annual Conference. During this period anti-EU
forces established the Labour Committee for the Five Safeguards on the Common
Market.
Brown set out Labour’s case for entry before EU representatives at a meeting of
the Western European Union (WEU) in July 1967. He attempted to reassure the
20 Andy Mullen
Six that the fundamental features of the European Union would remain
unchanged if Britain joined by declaring that Labour was willing to accept the EU
objectives of economic and political union. Critically, only the problematic issue of
agriculture was reserved for future negotiations.
The NEC presented a revised policy statement to the 1967 Conference, stating
that the party’s concerns about entry had been allayed. The Annual Conference
endorsed the policy statement by 4.1 million votes to 2 million, whilst a resolution
opposed to entry was defeated by 997,000 votes out of 6 million, as was a federalist
resolution. However, de Gaulle vetoed Britain’s second application in November
1967.
The 1969 Conference endorsed a Parliamentary Report declaring that Labour
was committed to entry and was eager to engage in further negotiations. It adopted
an NEC policy statement declaring that the result of any negotiations, and the final
decision, would be subject to a parliamentary vote. The Annual Conference also
carried a resolution containing additional safeguards, on foreign policy, health and
the welfare state, which opposed the development of a nuclear-armed federal
European Union. Facing the possibility of defeat, Brown accepted the resolution,
subject to qualification. He stated that the NEC would accept the resolution on the
understanding that the safeguards set out in his WEU speech in July 1967 were
included in the resolution. Critically, it should be recalled that the only issue
reserved for negotiation in this speech was agriculture; there was no mention of any
other safeguards.
Labour published another White Paper in 1970, conceding that the consequences of entry would be even more adverse than the 1967 calculations. Food
prices, for example, were expected to rise between 18 and 26 per cent cumulatively
over any negotiated transition period, compared to the estimate of 10 to 14 per
cent in 1967. Nevertheless, the second leg of Britain’s negotiations opened in April,
just two months before Labour lost the 1970 General Election. Labour’s manifesto
declared that it would negotiate from a position of economic strength. However,
the manifesto contained the reassurance that if satisfactory terms could not be
secured, then Britain could prosper outside the European Union.
The NEC urged the 1970 Conference not to change party policy just because it
was in opposition. It subsequently reaffirmed the decision of the 1969 Conference,
and rejected a resolution that was opposed to entry by 140,000 votes out of 6
million.
Opposition to entry on Conservative terms (1971)
The Conservatives’ principal objective upon gaining office in 1970 was to secure
British entry. It published a White Paper in 1971 conceding that food prices would
rise and that Britain’s contribution to the EU budget would become a burden unless
the CAP was reformed. However, it neglected to mention Economic and Monetary
Union (EMU), even though the Six had already pledged to create a single currency
by 1980. On the issue of sovereignty there was deliberate obfuscation; the White
Paper stated that there would be no erosion of national sovereignty.
The Labour Party and European integration 21
Labour held a Special Conference on the European Union in July 1971. A
resolution pledging that the NEC would produce a definitive resolution on entry,
which the party could vote upon at the Annual Conference in October, was
carried, whilst an attempt to hold an immediate vote was defeated. Although the
Special Conference agreed the suggested procedure and timetable, the NEC preempted the Annual Conference by launching a ‘no to entry on Tory terms’
campaign.
The 1971 Conference endorsed the policy recommended by the NEC, namely
opposition to entry on Conservative terms, by 5 million votes to 1 million. An amendment
in favour of holding a referendum before joining was defeated by 4.2 million votes
to 1.9 million, whilst a resolution advocating a United States of Europe was
defeated by 3 million votes to 2 million. James Callaghan concluded the debate on
behalf of the NEC and pledged that, when elected, Labour would renegotiate the
terms. The Parliamentary Labour Party (PLP) followed the Annual Conference by
voting to oppose the terms by 159 to 89.
The House of Commons debated a Conservative motion in favour of entry in
October 1971. As a result of a secret alliance between the Conservatives and the
69-strong pro-EU wing of the PLP, 356 MPs voted for entry with 244 against in the
final division on 28 October. In January 1972 the government signed the Treaty of
Accession and published the European Communities Bill. There were 104
divisions during the Bill’s passage and, although government majorities fell to
single figures several times, not one vote was lost. Using the guillotine measure to
expedite its passage, the Bill was passed on 17 October 1972. Britain joined the
European Union on 1 January 1973.
Renegotiating the terms (1972–74)
Labour’s attacks on the Conservative government following accession focused on
the fact that it possessed no mandate for entry, as the British people had not been
consulted. During this period Tony Benn launched his campaign for a referendum
on entry. In March 1972, following the French decision to hold a referendum, the
Shadow Cabinet accepted Benn’s proposal by 13 votes to 11. In April the PLP
voted 129 to 96 in favour, prompting pro-EU Cabinet members, including Roy
Jenkins, to resign.
The 1972 Conference reaffirmed the party’s opposition to entry, whilst agreeing
a new policy of renegotiating the terms. The NEC policy statement listed the six issues
upon which Labour would renegotiate: the CAP, the EU budget, powers over fiscal,
industrial and regional policy, capital controls, the protection of Commonwealth
interests and value-added tax (VAT). The document stated that if renegotiations
were successful Labour would put the decision to the people at a general election or
referendum. The policy statement was adopted by 3.4 million votes to 1.8 million.
A resolution supporting a boycott of EU institutions was carried by 3.3 million
votes to 2.8 million, whilst a resolution calling for a future Labour government to
withdraw was defeated by only 118,000 votes out of 6 million.
Given the scale of opposition to the European Union within the party, Wilson
22 Andy Mullen
was concerned that the 1973 Conference would vote in favour of withdrawal. He
wrote in his memoirs: ‘I had to lay my leadership on the line, and made it clear that
I would resign and face the Party with the election of a new Leader if the NEC
recommended Conference to bind us to a policy of withdrawal’ (Wilson 1979: 51).
His threat was effective. The NEC supported a resolution in favour of a boycott
and the holding of a referendum, which was carried by 5.2 million votes to
945,000. However, a resolution advocating withdrawal, followed by the
construction of a socialist united Europe, was defeated by 516,000 votes out of 6
million. In December the PLP voted to boycott EU institutions by 140 to 55.
The February 1974 General Election manifesto set out Labour’s objectives for
the renegotiations: reform of the CAP and EU budget, opposition to EMU, the
retention of powers over the British economy, the protection of Commonwealth
interests and opposition to VAT harmonisation. Callaghan launched the
renegotiations in April. The October 1974 General Election manifesto stated that,
within 12 months, a Labour government would give the people the choice, through
the ballot box, on whether to retain membership or withdraw.
The NEC supported a resolution at the 1974 Conference insisting upon balance
in a future referendum, in terms of finance and media support, between the antiand pro-EU campaigns. The resolution was carried. However, a second resolution
advocating additional safeguards on capital controls, Commonwealth trade,
defence, food subsidies, labour movements, parliamentary sovereignty, public
ownership, taxation and state aid was also carried, by a majority of 158,000 votes
out of nearly 6 million.
Withdrawal (1975)
Following the conclusion of the renegotiations in March 1975 the Cabinet voted by
16 to 7 to accept the revised terms of membership. In Wilson’s absence, the Cabinet
also agreed to allow ministers to vote against the government. The NEC voted 18
to 11 against the outcome of the renegotiations, prompting Wilson (1979: 106) to
threaten resignation again. Policy-wise, the party leadership and the NEC were
opposed, whilst the PLP was split. In April a House of Commons motion in favour
of staying in the European Union was carried by 396 to 170, mainly due to Conservative support. On the Labour side, 145 MPs voted against, 137 voted for and 33
abstained. The party held another Special Conference in April, where the NEC
document in favour of withdrawal was adopted by 3.7 million votes to 1.9 million.
During the 1975 Referendum, Britain in Europe led the Yes campaign, while the
National Referendum Campaign united opponents of the European Union. The
Yes campaign enjoyed a number of critical advantages. It was supported by the
government, was backed by most of the business sector, the civil service and the
media, and received more money. Labour granted the Yes and No campaigns a
total of £125,000 for publicity. However, the Yes campaign managed to raise an
additional £1.8 million, whereas the No campaign merely secured an extra £8,610.
On 25 June, 67.2 per cent voted Yes and 32.8 per cent voted No. Following the vote
the PLP reversed its boycott and sent representatives to the EU institutions.
The Labour Party and European integration 23
Reform of the EU (1976–79)
The 1976 Conference debated the NEC policy statement on direct elections to the
European Parliament. The document insisted that there was no mandate for direct
elections, as it had not been mentioned during the 1975 Referendum. It further
argued that the party should oppose such elections because the European
Parliament constituted a threat to Westminster. It was carried by a majority of
4 million votes to 2.2 million. The 1976 Conference also endorsed a radical
Keynesian programme, termed the Alternative Economic Strategy (AES).
In April 1977 Labour issued a White Paper on alternative electoral systems for
European elections. It made no recommendation and agreed to hold a free House
of Commons vote. Following a series of divisions, MPs voted by 321 to 222 to reject
proportional representation in favour of 78 single-member constituencies. The
Cabinet met in July to discuss a policy paper produced by David Owen, which
accepted membership, rejected a European federation and supported enlargement. The paper was supported by a majority of the Cabinet.
The 1977 Conference adopted the NEC policy statement, which reaffirmed the
party’s opposition to supranationalism and re-emphasised the threat posed by the
European Union to its industrial strategy. The policy statement reiterated the 1976
Conference decision to seek specific derogations from EU law on energy, regional
and social policies, and transport. It pledged to reform the EU aid policy, the CAP
and the CFP. It also pledged to oppose direct elections, the EMS, EMU and tax
harmonisation, including VAT. A resolution calling for the fundamental reform of
the CAP was carried. However, following a plea to maintain party unity, the 1977
Conference rejected two amendments, one of which called for Britain’s withdrawal
from the CAP. It also rejected a resolution calling for another referendum on
membership, and remitted a resolution in favour of amending the 1972 European
Communities Act to restore parliamentary supremacy.
In 1978 the European Council reaffirmed its commitment to EMU, launching a
new system of monetary coordination: the European Monetary System (EMS) and
its Exchange Rate Mechanism (ERM). Callaghan (1987: 493) declared that he
‘favoured the general idea as likely to bring more order into the currency markets
of Europe and the world’. However, he complained that: ‘many people in the
Labour Party remained suspicious of what they thought was too close an entanglement with Europe, and this, coupled with my own and the Treasury’s belief that
sterling was too high to make our entry advantageous’ led him to reject ERM entry.
In October the NEC rejected the EMS by 16 to 9.
The 1978 Conference rejected withdrawal in favour of a policy of reform of the
European Union. The Annual Conference carried a resolution calling for the next
Labour manifesto to include a commitment to amend the 1972 European Communities Act so as to restore parliamentary sovereignty. The resolution rejected
EMU and supported the reform of the European Union. It was carried by 4.85
million votes to 1.64 million.
Callaghan used the leadership veto over policy, so often used by Wilson, to
emasculate the policy decisions of the 1978 Conference when drafting the
24 Andy Mullen
manifesto for the 1979 General Election. It declared that Labour would seek the
fundamental reform of the European Union. It supported enlargement, pledged to
reform the CAP and the EU budget, and promised to amend, if necessary, the 1972
European Communities Act so as to safeguard parliamentary sovereignty.
Under Benn’s leadership the NEC drafted the manifesto for the 1979 European
election. Carried by 19 votes to 4, it warned that, in the absence of fundamental EU
reform, the party would adopt a policy of withdrawal. In the first direct elections to
the European Parliament, three weeks after Labour’s general election defeat,
Labour gained 17 Members of the European Parliament (MEPs), compared to the
Conservatives’ 60 MEPs.
Withdrawal (1980–87)
The European policies of the Annual Conference and the party leadership
converged under Michael Foot. The 1980 Conference supported a resolution
declaring that there had been no progress in reforming the European Union and
that Labour should include a policy of withdrawal in its next manifesto. The
resolution was carried by 5 million votes to 2 million. At the 1981 Conference an
attempt to introduce a commitment to hold a referendum before withdrawing was
defeated by 5.8 million votes to 1 million. The 1983 General Election manifesto
duly included the pledge to withdraw, within the lifetime of one parliament.
The manifesto for the 1984 European election acknowledged that Britain would
remain a member of the European Union for the term of the next European
Parliament, but pledged that Labour would fight to get the best deal for Britain
within it. It called for the fundamental reform of the European Union, opposed the
ceding of any additional powers to the European Parliament, rejected the EMS
and reserved the option of withdrawal. However, it also included a 10-point action
plan that recognised the potential contribution of the European Union to Labour’s
programme. In the second direct election to the European Parliament, Labour
gained 32 MEPs compared to the Conservatives’ 45 MEPs.
The European Commission’s plan to create a European single market by 1992
served to accelerate the process of European integration. Conservative Prime
Minister Margaret Thatcher supported the creation of a single market, believing it
would lead to a free market and a free trade area. With Labour opposed, the House
of Commons voted by 270 to 153 to incorporate the EU Single European Act into
British law.
Labour’s 1987 General Election manifesto contained no reference to withdrawal,
although it remained official party policy. Instead, it stated that Labour’s aim was
to work constructively with the European Union to promote economic expansion
and combat unemployment.
Pro-membership (1988–)
The attempt to change the party’s withdrawal policy began in 1983, following
Labour’s general election defeat. Once again, Holland was instrumental in
The Labour Party and European integration 25
changing the party leadership’s position. The Out of Crisis Project, composed of
economists and European socialist party representatives, was founded in 1981.
The resulting Euro-Keynesian programme, known as the European AES,
recommended that member states should pursue a policy of coordinated reflation.
Party Leader Neil Kinnock wished to support the project as means of changing the
party’s perception of the European Union. Holland agreed to help Kinnock by
promoting the European AES. He wrote an article for Kinnock, publish in New
Socialist, the party’s journal, briefed the Socialist Campaign Group and the
Tribune Group of Labour MPs, obtained the support of John Prescott, ex-leader of
the European Parliamentary Labour Group, and joined the NEC International
Sub-Committee.
Kinnock was also influenced by John Eatwell, his economic advisor, and by John
Smith, the pro-EU Shadow Chancellor. Eatwell believed that ‘the collapse of the
Bretton Woods System had led to a deflationary bias’ and that ‘an exchange rate
system in Europe was the means of mitigating these deflationary effects’. He also
believed that ‘the larger scale and scope of European markets could provide a
stimulating environment for British industry, particularly the financial services’,
that is the City of London.3
Kinnock later declared that ‘the rejection of the withdrawal policy by the voters
was clear and absolute’. However, ‘because anti-Europeanism was quite deeply
rooted in parts of the movement, particularly the trade unions, the change had to
be achieved by degrees rather than by a sudden shift’. This was because ‘as Labour
had already demonstrated, parties were seriously in danger of cracking and then
crumbling over the issue of Europe if the matter was not handled with care as well
as determination’.4
Kinnock’s chosen vehicle for changing party policy was the Policy Review,
established following Labour’s 1987 General Election defeat. Seven policy
committees were created, including the Modern World Committee, which was
responsible for European policy. Committee member Regan Scott revealed that
Kinnock ‘packed the committee with pro-Europeans’ to achieve his ‘new policy of
conditional engagement’.5 The macroeconomic committee considered the
economic aspects of Labour’s European policy and was chaired by Bryan Gould.
He was critical of the City’s influence over economic policy, an opponent of the
ERM and an ardent defender of the use of the exchange rate as an instrument of
policy. However, outmanoeuvred by pro-EU members such as Gordon Brown,
John Eatwell and John Edmonds, Gould and his reports were sidelined.
Pro-EU forces, having secured Kinnock’s U-turn and marginalised potential
opponents, were ready to change party policy. Their opportunity came in 1988
when the European Commission President, Jacques Delors, addressed the Trades
Union Congress (TUC). The big trade unions, commanding a majority of
Congress votes and attracted to the promise of a ‘social Europe’, reversed the
withdrawal policy of the TUC. Three weeks later they voted to change Labour’s
policy. The 1988 Conference endorsed the first Policy Review report, which
supported EU-wide employment standards plus the coordination of member
states’ foreign, industrial, regional and social policies. It also carried a resolution
26 Andy Mullen
stating that Labour, in conjunction with other parties, should use the European
Union to promote democratic socialism. A second resolution calling for a future
Labour government to amend the 1972 European Communities Act was remitted.
It had taken several years, but the party leadership had finally secured a promembership policy.
In the post-1988 period, judged in terms of European policy, the Annual
Conference has been particularly compliant, consistently supporting the pro-EU
position of the party leadership, as shown in Table 2.1. The trend is reflected in the
dramatic fall in the number of critical resolutions and amendments submitted to
the Annual Conference in the post-1988 period (13) compared to the 1947–87
period (187) (see Table 2.2). It is manifest in the dearth of critical speakers during
Annual Conference debates on the European Union: just 10 in the post-1988
period compared to 199 in the 1947–87 period (see Table 2.3). It is also evident in
the contrast between the two periods in terms of the party’s discourse on European
integration, illustrated by Tables 2.4, 2.5, 2.6 and 2.7.The latter point is discussed
in more detail below.
Labour entered the 1989 European election on a pro-EU platform, gaining 45
MEPs compared to the Conservatives’ 32 MEPs. The 1989 Conference endorsed
Table 2.2 Number of resolutions and amendments on the EU submitted by affiliates to
the Labour Party Annual Conference (1947–97)*
Years
With- Anti- Opposition without
Neutral
drawal EU safeguards, or opposition to
from
(a) EU treaties
EU
(b) Terms of entry/membership
(c) Specific EU policies
1947–87** 30
1988–97
0
66
0
91
13
19
4
Conditional Prosupport for EU
EU
Reform Federalof EU ist
14
5
2
9
29
37
36
0
Source: Labour Party Annual Conference Agenda.
Notes
** Affiliated organisations include constituency Labour parties, socialist societies and trade unions.
** Does not include data for the 1962 Conference, which is not available.
Table 2.3 Number of speakers and their stance on the EU during Labour’s Annual
Conference debates (1947–2000)
Years
With- Anti- Opposition without
Neutral
drawal EU safeguards, or opposition to
from
(a) EU treaties
EU
(b) Terms of entry/membership
(c) Specific EU policies
1947–87
53
1988–2000 0
59
3
87
7
Source: Labour Party Annual Conference Report.
14
1
Conditional Prosupport for EU
EU
Reform Federalof EU ist
26
1
2
2
80
93
23
0
Table 2.4 Pro-EU arguments during Labour’s Annual Conference debates (1947–87)
Arguments
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
EU provided Britain with a bigger home market
Socialists and trade unionists in the EU wanted Britain to join/stay in
EU was internationalism in action
Entry/membership would raise the British standard of living
EU was a means to control multinational companies
‘Socialism in one country’ was impossible
Withdrawal was a dangerous policy (risking the loss of jobs and trade)
Entry/membership would increase economic growth rate in Britain
Britain would lose influence outside the EU
EU enjoyed better wages and working conditions than Britain
EU represented Britain’s destiny/future
There was no alternative to the EU; it was inevitable
EU presented an opportunity for socialism
Britain would benefit from EU regional and structural funds
EU provided more aid to developing countries than Britain
EU ensured peace in Europe
EU member states enjoyed higher welfare benefits
Britain was already part of Europe; the key question was what sort of
Europe
Treaty of Rome was not opposed to economic planning, nationalisation
and state aid
EU helped to contain British nationalism and xenophobia
National sovereignty was an outmoded concept
EU was a fact that needed to be accepted
Commonwealth countries wanted Britain to join the EU/stay in
Markets of the Commonwealth and European Free Trade Association
were not sufficient
British home market was not sufficient
EU was not a threat to national sovereignty
EU would enable Britain to gain independence from the United States
EU member states had higher levels of public ownership than Britain
Britain would be poorer outside the EU
Entry/membership would lead to an increase in British exports
Entry membership would benefit the British working class
Frequency
21
14
12
10
9
8
7
7
7
6
6
4
4
4
4
5
5
4
4
4
3
3
3
3
2
2
2
2
2
2
1
Source: Labour Party Annual Conference Report.
Table 2.5 Anti-EU arguments during Labour’s Annual Conference debates (1947–87)
Arguments
●
●
●
●
●
●
Entry/membership resulted in higher food prices
Common Agricultural Policy was damaging for Britain
Entry/membership worsened Britain’s balance of payments and trade
deficit problems
EU was capitalist
Pro-EU forces resorted to deceit/propaganda
EU undermined parliamentary democracy
Frequency
34
33
33
28
27
25
Table 2.5 Continued
Arguments
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
EU threatened jobs and policy of full employment
Entry/membership led to an increased in the cost of living/lowered the
standard of living
Opponents/sceptics of the EU were not isolationist or ‘little Englanders’
British public opinion opposed to entry/membership
Conservative Government had no mandate for entry
Entry/membership resulted in a loss of control/independence
Entry/membership would not benefit the working class
Treaty of Rome provisions for the free movement of capital led to capital
flight from Britain following entry
EU membership was a barrier to implementing socialism
Imposition of value-added tax was regressive
EU was opposed to public ownership/state aid
EU membership threatened British agriculture
Britain contributions to the EU Budget were too high
EU would develop into a militaristic/nuclear-armed bloc
Objective of the EU was political union
EU was undemocratic
EU membership damaged Commonwealth trade
Economic and Monetary Union policy was damaging/threatening
Rule by Brussels bureaucrats should be opposed
EU was opposed to economic planning
EU was threat to Britain’s regional policy
EU membership contributed to rising inflation in Britain
Treaty of Rome was not negotiable
Common Fisheries Policy was damaging
Treaty of Rome outlawed import and export controls
Entry/membership damaged British industry
EU damaged relations with the European Free Trade Association
EU membership was incompatible with the Alternative Economic
Strategy
EU membership would limit a future Labour government’s freedom of
action
Entry/membership would result in lower economic growth
Britain could stand on its own outside the EU
Europe was wider than the EU
Entry to the EU was irreversible
EU was dominated by cartels/multinational companies
EU was part of the Cold War system
EU was a ‘rich man’s club’
EU contributed to the post-war division of Europe
Pro-EU case for entry/membership was defeatist
EU was a threat to neutrality
EU was a threat to Britain’s foreign policy
Source: Labour Party Annual Conference Report.
Frequency
23
21
17
17
16
15
15
14
14
14
13
12
12
12
11
11
10
10
9
9
9
7
7
7
6
6
6
5
5
4
4
4
4
3
3
3
3
3
2
2
Table 2.6 Pro-EU arguments during Labour’s Annual Conference debates (1988–2000)
Arguments
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
Social Chapter would benefit British workers
EU was essential for tackling unemployment across Europe
There was a need to democratise the EU
Enlargement would bring benefits for Britain (including bigger home
market)
Economic and Monetary Union would benefit Britain
There was a need to reform the Common Agricultural Policy
Labour had put Britain at the centre/heart of Europe
EU ensured peace in Europe
EU was internationalism in action
EU was important to British exports, jobs and investment
There was a need for a ‘People’s Europe’
There was a need to strengthen the powers of the European Parliament
EU was an effective means of tackling environmental issues
There was a need for a stronger ‘social Europe’
EU was essential for tackling racism and fascism across Europe
Single Market would provide new opportunities for British industry and
workers
‘European social model’ was preferable to the US model
Globalisation meant that there was no alternative to the EU
Britain would lose influence outside the EU
‘Social dialogue’ would help to transform industrial relations in Britain
Labour’s debate about Europe was over
Labour was the party of Europe
EU was a means to control transnational corporations
Withdrawal was a dangerous policy (risking the loss of jobs and trade)
Involvement in further European integration was Britain’s destiny/future
Britain is part of Europe
Frequency
35
24
23
22
22
15
12
12
11
9
8
8
7
7
6
6
5
5
5
4
3
3
2
2
2
2
Source: Labour Party Annual Conference Report.
Table 2.7 Anti-EU arguments during Labour’s Annual Conference debates (1988–2000)
Arguments
●
●
●
●
●
●
●
Maastricht Convergence Criteria threatened jobs
European Central Bank is undemocratic, deflationary and monetarist
Membership of Economic and Monetary Union involved surrendering
power to unelected central bankers
EU needed to solve its democratic deficit
Britain’s membership of the Exchange Rate Mechanism was a disaster
Economic and Monetary Union would limit freedom of action for future
Labour government
EU membership undermined parliamentary democracy
Source: Labour Party Annual Conference Report.
Frequency
5
4
4
4
4
3
3
30 Andy Mullen
the second Policy Review report, which advocated the democratisation of EU
decision making whilst supporting enlargement, foreign policy coordination and
the Single Market.
The European Commission’s three-stage EMU project, agreed in June 1989,
was translated into the 1991 Maastricht Treaty. It was originally envisaged that the
treaty would include a social chapter. However, the British refused to accept it,
leading the other 11 member states to adopt a separate Social Charter. Britain
negotiated an opt-out from stage 3 of EMU – membership of a single currency –
but participated in the first two stages. Britain duly joined the ERM in October
1990, supported by the Labour leadership and the TUC General Council, plus the
Bank of England, the Foreign Office, the Treasury and much of the media.
The 1990 Conference endorsed the third Policy Review report, which supported
enlargement and institutional reform. It also carried a resolution recommending
membership of EMU and the EMS. The 1991 Conference adopted the final Policy
Review report, which highlighted the need to strengthen the supply side of Britain’s
economy to meet the challenge of the Single Market. It claimed that EMU would
reduce business costs and eliminate currency speculation, and suggested that
monetary policy cooperation, manifest in the ERM, was both inevitable and
desirable. It favoured a London-based European central bank and supported the
Social Charter. The Annual Conference also carried a resolution in favour of
British membership of the single currency.
The Bill incorporating the Maastricht Treaty into British law was presented to
the House of Commons in May 1992. Although MPs were not given the full text of
the treaty, only 72 MPs voted against the Bill. However, the Danish No vote in
June and the ejection of sterling from the ERM in September represented major
setbacks for pro-EU forces, encouraging opponents to embark upon a protracted
parliamentary war to stop the Bill. During this period Benn presented his Treaty of
Maastricht (Referendum) Bill plus his Commonwealth of Europe Bill as an
alternative to the European Union. The Maastricht Bill’s parliamentary journey
witnessed several rebellions. During the second reading in April 1993 Labour
helped the Conservatives to defeat an amendment demanding a referendum on the
treaty. The battle culminated in the final reading in May in which the Conservatives secured a 292 to 112 victory, with Labour officially abstaining. However, 65
Labour MPs voted against the treaty and four voted in favour. A further division in
July on Labour’s amendment to incorporate the Social Chapter produced a 317
draw, with the Speaker casting her vote in favour. The Conservatives then
presented a motion to accept the Bill and lost by eight votes. The following day
John Major held a confidence vote to overturn the vote of the previous day and the
Bill was passed by 39 votes.
Holland resigned from the House of Commons in 1989, followed by Gould in
1992. The former went to work for Delors, whilst the latter, disillusioned with
Labour’s ‘modernisation’, retired. Holland produced two reports for Delors which
highlighted the need for economic and social cohesion to counterbalance the
Single Market and set out the case for a new EU public borrowing instrument to
finance the necessary investment. Several European socialist parties supported
The Labour Party and European integration 31
Holland’s proposals. However, at a European Council meeting in 1996 Prime
Minister John Major and German Chancellor Helmut Kohl voted against the
principle of EU bonds. When the proposal was tabled again one year later Prime
Minister Tony Blair was also opposed, later revealing that he ‘had been briefed to
argue against any new European financial instruments’ (Holland 1997: 26). In
1997 the European Council extended the remit of the European Investment Bank
to facilitate the introduction of EU bonds. However, the volume of bonds issued
has been lower than Holland recommended; consequently, its macroeconomic
impact has been limited.
Between 1990 and 1996 the Annual Conference followed the party leadership
line on the European Union. It endorsed NEC policy statements and carried
resolutions and amendments which supported the reform of the EU budget, CAP
and Common Fisheries Policy, the Single Market, a London-based European
central bank, EMU, the ERM and the ratification of the Maastricht Treaty with
the Social Chapter. It also supported common policies on defence, foreign affairs,
justice and home affairs, enlargement, institutional reform and EU-wide workers’
rights. Dissent from this consensus emerged on only two occasions. At the
1992 Conference Benn submitted a resolution demanding a referendum on the
Maastricht Treaty. It was defeated, as was a resolution calling for the fundamental
revision of the treaty. Opponents of these resolutions insisted that if the treaty fell,
Labour would lose the option of reversing the opt-out from the Social Chapter. At
the 1995 Conference Austin Mitchell delivered a speech attacking EMU and the
European Union more generally.
New Labour’s 1997 General Election victory heralded a sea change in Britain’s
relationship with the European Union, both rhetorically and in terms of policy.
Rhetorically, Blair promised to put Britain at the heart of Europe. Policy-wise,
where previous governments exercised caution and introduced a measure of reluctance and scepticism in the relationship with the European Union, New Labour
pursued an overtly pro-EU agenda.
One of New Labour’s first acts was to grant independence to the Bank of
England, as required by stage 2 of the Maastricht Treaty. Stage 1 requires member
states to abide by the EMU convergence criteria/Stability and Growth Pact (SGP);
hence New Labour’s decision to freeze public spending in its first two years in
office, Chancellor Gordon Brown’s ‘golden rule’ governing public finance and the
expansion of the Private Finance Initiative. However, Britain has been repeatedly
chastised for breaching, or threatening to breach, the euro rules even though it is
not a member of the single currency. New Labour signed the Social Chapter.
However, it has delayed or blocked the implementation of several EU directives,
including the working time directive, despite the fact that Britons work the longest
hours in the European Union.
New Labour supported the 1997 Amsterdam Treaty. In November the House of
Commons voted by 392 to 162 to incorporate the treaty into British law, with 31
Labour MPs abstaining. It also supported the 2001 Nice Treaty. A Conservative
amendment in the House of Commons in June 2001, calling for a referendum on
the Nice Treaty, was defeated by 403 to 150, with 29 Labour MPs abstaining. The
32 Andy Mullen
following month the Bill incorporating the treaty into British law was carried by
388 to 151, with 29 Labour MPs abstaining and one MP voting against.
New Labour actively supported the development of the CFSP and secured its
objective of EU enlargement in 2004. However, the policy where New Labour’s
enthusiasm is most evident is that concerning the euro. New Labour’s 1997
manifesto set out three preconditions that would have to be satisfied before Britain
could join the euro: the Cabinet would have to agree, Parliament would have to
vote in favour and the British people would have to say yes in a referendum. In its
first term, New Labour’s euro policy was ostensibly one of wait and see. It decided
against joining the first wave of euro members in 1999, and it opted to delay
membership until a number of conditions, set out by Brown in October 1997, were
met. Five economic tests would have to be passed before any decision was taken:
whether there is sustainable convergence between Britain and the eurozone,
whether there is sufficient flexibility to cope with economic change, the effect of
membership on investment and on the financial services industry, and whether it is
good for employment.
Although the official policy in its first term was one of wait and see, New Labour’s
unofficial policy was euro entry. However, the main obstacle to its strategy was
public opinion, with a consistent majority opposed to the euro. Consequently, New
Labour adopted a policy of prepare and persuade, as evidenced by a number of
institutional and legislative initiatives, two ‘low-intensity’ propaganda campaigns
aimed at the business sector and the public, and successive interventions by
business leaders and EU bureaucrats to augment these campaigns (Mullen and
Burkitt 2003). Another obstacle was Rupert Murdoch. Peter Mandelson revealed
that New Labour did not attempt a referendum during its first term because Murdoch’s media empire would have campaigned against euro entry. Importantly,
Mandelson revealed that ‘the Cabinet was never consulted; the decision involved
only Tony Blair, Gordon Brown, Robin Cook and John Prescott’ (Rawnsley 1998).
In June 2003 the Treasury published its assessment of the five economic tests,
together with 18 additional documents, and concluded that only one test, the
impact on financial services, had been passed. New Labour subsequently set out a
road map to euro entry, concluding that several reforms would have to be instituted before Britain could join. These include transforming Britain’s fiscal policy,
restructuring its housing market and introducing a new inflation index. Other
reforms include changing the statute of the ECB, introducing a Bank of Englandstyle symmetrical inflation target, transforming the SGP and increasing labour
market flexibility across the European Union. Unofficially, EU reform constitutes
the sixth euro test.
There is opposition within the party to the euro. Labour against the Euro was
formed in 2002, gaining the support of 37 MPs and 62 councillors, whilst a 2002
survey for ITV found that 27 per cent of Labour MPs were opposed to euro entry.
There is also opposition amongst Labour’s supporters. An ICM poll in 2002 found
that a substantial majority of Labour voters were opposed to euro entry.
New Labour supported the 2002 Convention on the Future of Europe and the
resulting European Constitution, which was agreed in June 2004. A Conservative
The Labour Party and European integration 33
motion in the House of Commons in March 2004, demanding a referendum on a
future European constitution, was defeated by 328 to 212, with 36 Labour MPs
abstaining. New Labour argued that there was no need for a referendum; indeed,
one minister described the restructuring of the EU treaties as a mere ‘tidying up’
exercise. However, one month later, following a campaign by the Murdoch press,
and another by Vote 2004, which gained the support of 60 Labour MPs, Blair
performed a U-turn and agreed to hold a referendum. He also hinted that a second
referendum would be held if the first one produced a No vote. It has been alleged
that Blair’s U-turn, which was not discussed by the Cabinet, was also influenced by
Murdoch’s threat to withdraw his support from New Labour at the next general
election unless he changed his policy.
In April 2004 Labour against a Superstate was formed and claimed the support
of over 80 MPs. In June a YouGov poll found that 49 per cent of voters were
opposed to the European Constitution, whilst an ICM poll found that almost half
of Labour voters would vote against it. Two months later Mandelson was
appointed as a European Commissioner, a prime position from which to sell the
euro and the European Constitution to a sceptical British public whilst promoting
the EU reform agenda. However, despite New Labour’s enthusiasm for the euro
and the European Constitution, the anti- and pro-EU forces are more evenly
balanced, in terms of funds and media support than at the time of the 1975
Referendum. Victory in future referenda is therefore far from assured.
Why did these policy changes occur?
Broadly speaking, Labour’s European policy has shifted three times over the postwar period. During the early post-war period Labour was in favour of some form of
European integration. It was viewed as a way of avoiding future wars and as a
potential vehicle for creating an independent third force between the two Cold
War superpowers.
Following the formation of the European Union – on the basis of the 1957
Treaty of Rome which prioritised the free movement of capital and placed
restrictions on state aid – many in the Labour Party began to view the European
Union as a barrier to the implementation of socialism. Indeed, an analysis of the
discourse of Labour Party debates on the European Union between 1947 and 1987
clearly reveals a widespread belief in a national socialist strategy (Table 2.5), or at
least a critical engagement with it (Table 2.4). Whether it was centre-left support
for Keynesian macroeconomics, hard left support for radical Keynesianism in the
form of the AES or far left support for the British road to socialism, the left
generally believed in the efficacy of national state power to advance socialism. The
arguments and language deployed in Labour Party policy documents, resolutions
and amendments during this period add further weight to this view.
Following the end of the Cold War and the emergence of the ‘globalisation’
thesis, whereby nation-states are perceived to be powerless, some sections of the
Labour Party have shifted to a pro-EU position. It was argued that national
Keynesianism was redundant and that the left faced a stark choice between the
34 Andy Mullen
European and US models of capitalism. Those sections have therefore returned to
a position of supporting a European socialist strategy, as revealed in the radically
altered discourse of Labour Party debates on the European Union from 1988
(Tables 2.6 and 2.7).
In addition to these generalisations, a number of specific factors can be
advanced to explain the ‘tectonic’ shift from a pro-European integration position
to an anti-EU stance in the 1960s and 1970s:
●
●
●
the growing influence of the anti-EU Communist Party within the Labour
Party;
the shifting balance of power within the party in favour of the anti-EU left;
the role of influential individuals such as Tony Benn, the leader of the left who
was pro-EU in the mid-1960s and anti-EU from the 1970s, and Stuart
Holland, co-architect of the AES.
Similarly, a number of specific factors can be advanced to explain the ‘tectonic’
shift from an anti-EU position to a pro-EU stance in the 1980s:
●
●
●
●
●
●
●
●
●
●
●
●
●
the defeat of anti-EU forces in the 1975 Referendum;
the shifting position of the party leadership in favour of the European Union –
Harold Wilson from 1965 and Neil Kinnock from 1983;
the subverting of official policy, using procedural devices at the Annual
Conference (‘qualified acceptance’ and the ‘three-year rule’), the powers of
patronage (Policy Review committee membership) and party loyalty (Harold
Wilson’s threats of resignation and James Callaghan’s veto over the manifesto)
to secure a pro-EU policy;
the defeat of the anti-EU left in the 1983 General Election;
the perceived redundancy of national Keynesianism, following the 1981–3
‘Mitterand experiment’ in France and the subsequent demise of the AES;
the association of Labour Party ‘modernisation’, under Neil Kinnock, John
Smith and Tony Blair, with ‘Europeanisation’;
the allure of the ‘European social model’;
the ‘contamination thesis’, whereby the left fears the label of ‘little Englander’
and thus association with the anti-EU position of the right (Ramsay 1997);
the end of the Cold War and the perceived defeat of socialism;
the retreat from Marxist/class analysis of the EU;
the changes in public opinion, and Labour Party opinion, brought about by
pro-EU propaganda campaigns (Mullen and Burkitt 2003, 2005);
the influence of the United States of America, which supported European
integration and British participation in the European Union during the Cold
War, and which exerted its influence by covertly supporting elements of the
pro-EU left (Wilford 2003);
the low salience of the European Union as an issue for the general public,
which made it easier to change policy.
The Labour Party and European integration 35
Conclusion
It is clear that European integration has been contentious for the Labour Party and
that the party remains divided on the issue. However, the balance of argument
favours those who are sceptical of and/or opposed to the European Union. The
socialist case against the European Union, and British participation in further
European integration, rests on four principal arguments.
The first argument is the economic and political cost of British membership of
the European Union, both historically and in contemporary terms. Although no
government has conducted a review of the costs and benefits of membership,
Barratt Brown (1974), Burkitt (1974), Holland (1975), Benn (1980), Burkitt et al.
(1992, 1996, 1997) and Elliott and Atkinson (1998) assessed the economic costs.
These included EU budget contributions, the costs of the CAP, the Common
Fisheries Policy (CFP) and ERM membership, import penetration and the
subsequent loss of manufacturing jobs, the loss of overseas markets and the
cumulative trade deficit. Two studies tried to put a figure to these costs. The first,
by Jay (1968), estimated the probable economic cost at between £600 and £1,000
million per year. The second, by Podmore and Katz (1998), estimated the
combined cost of EU budget contributions, EMU and ERM membership, and the
cumulative trade deficit between 1973 and 1997 at £255 billion. This total did not
include the costs of the CAP, the CFP, import penetration and subsequent loss of
manufacturing jobs, or the loss of markets in the rest of the world. Burkitt (1975),
Benn (1980, 1982), Burkitt et al. (1992) and Benn and Hood (1993) reviewed the
political costs and concluded that the European Union undermined democracy,
national sovereignty and Britain’s capacity for self-government. More recently,
Milne (2004) estimated the current recurring annual net direct cost of membership
at 3–5 per cent of gross domestic product.
The second argument is the illusion of the ‘European social model’ and the false
choice between this and the US model of capitalism. Across the European Union,
public sectors and welfare systems are being systematically privatised and dismantled
by member states as a result of the Single Market, euro and enlargement projects.
In short, the European Union is pursuing a neo-liberal rather than a Keynesian
project, under which multinational companies (MNCs) are the driving force.
Balanyá et al. (2000), for example, found a significant relationship between the
recommendations of reports produced by European Round Table of Industrialists
(ERT), composed of captains of industry from EU-based MNCs, and the policy
and treaty output of the European Union. Similarly, Lucas and Hines (2000)
highlighted the role of the ERT in the enlargement process. At best, the European
Union places considerable constraints on governmental freedom of action,
manifest in the euro (SGP) rules for example. At worst, the European Union could
overrule and block the implementation of a socialist programme mandated by the
British electorate.
The third argument is the difficulty, if not impossibility, of constructing a
democratic United States of Europe, modelled on the United States of America,
with a supreme parliament, senate, court of justice and federal bank. The
36 Andy Mullen
European Union lacks a common culture and language, whilst there is insufficient
population movement to create a single, truly European, polity. Furthermore,
European parliamentary constituencies are large and therefore remote from
voters. Consequently, the public is unlikely to pay the additional, and substantial,
EU-wide taxes necessary to fund a federal government. Furthermore, coalition
politics and majority voting in an all-powerful parliament could subvert the will of
the British people. If the United States of Europe model was a real possibility, a
powerful case could be made for the formation of a Europe-wide socialist party to
pursue a European socialist strategy. However, this is not the model that is on offer.
The European Union is a hybrid of federal and intergovernmental forms that aims
to elevate power and decision making away from ordinary people, thus insulating it
from democracy. Crucially, the choice of a European Union run by unelected
bankers and bureaucrats, or a democratically elected federal European government, has never been offered to the British people.
The fourth, and possibly most compelling, argument is the undemocratic nature
of the European Union. Britain’s accession to the Treaty of Rome, participation in
the Single Market and possible adoption of the euro and European Constitution all
involve the surrender of democratic control to the unaccountable Council of
Ministers and the unelected European Commission and European Central Bank.
As noted by Carey (1995: 18):
The twentieth century has been characterised by three developments of great
political importance: the growth of democracy, the growth of corporate
power, and the growth of corporate propaganda as a means of protecting
corporate power against democracy.
The historic objective of the Labour Party, however, is to extend democracy at the
local, national, European and global levels, not to participate in curtailing it.
The socialist project requires the fundamental reform of the European Union
and/or the withdrawal of Britain and others in order to construct a system of
voluntary cooperation amongst democratic, independent nation-states. Whether
this objective can be achieved is a matter for debate. What is clear, however, is that
the long-standing division of the Labour Party over European integration will
continue.
Notes
1 An extended version of this chapter, which evaluates the European policies of the Trades
Union Congress and the wider British left, can be found at www.andymullen.com.
2 Federalist supporters included Clement Attlee, Fenner Brockway, G.D.H. Cole,
Richard Crossman, Michael Foot, Lord Philip Lothian, R.W.G. Mackay, Ian Mikardo,
R.H. Tawney and Harold Wilson.
3 Correspondence from John Eatwell, 20 November 2003.
4 Correspondence from Neil Kinnock, 29 January 2003.
5 Interview with Regan Scott on 8 October 2002.
Part I
The economics of a single
currency
3
Economic consequences for
Britain
Jonathan Michie
Introduction
Europe seems stuck with high levels of unemployment as we enter the twenty-first
century, with all the economic and social misery which goes with that. The blame is
put alternatively on ‘rigid labour markets’, a ‘too costly welfare state’, or new
technology – almost anywhere except on government economic policy. Yet the
governments of the European Union have been deliberately pursuing deflationary,
low-growth, high-unemployment policies, first under the auspices of the Maastricht
convergence criteria and now under the post-Single Currency ‘Stability Pact’.
The resulting unemployment should come as no surprise. Similar policies were
pursued in Britain under the gold standard1 of the 1920s, with parallel results in
terms of deflationary government economic policies and the creation of mass
unemployment (Kitson and Michie 1994). It seems that nothing has been learned.
The world economy only managed to pull itself out of the Great Depression2 in the
1930s by abandoning fixed exchange rates, cutting interest rates and boosting
growth. Yet when similar policies were advocated prior to 16 September 1992,
when Britain was forced out of the ERM against its will by the currency
speculators, such policies were denounced as ‘anti-European’. But it does our
European partners no favours to have our economy in recession, any more than we
are currently being helped by our EU partners pursuing restrictive policies.
Unless current European economic policy is reorientated towards the objective
of full employment, embracing an active industrial and regional policy, rather than
being stuck on the myopic concern with zero inflation, the route forward must once
again be based on independent national growth strategies which would not only
allow countries to help themselves, but by doing so would help each other.
Competitive deflation, not competitive devaluation, was the real ‘beggar my
neighbour’ policy of the 1990s. As the economist Joan Robinson put it: ‘Of all badneighbourly conduct among trading nations, the worst is to go into a slump’
(Robinson 1966).
The ERM
The Exchange Rate Mechanism (ERM) of the European Monetary System (EMS)
tried to bring national currencies more or less into line. Britain joined the ERM in
40 Jonathan Michie
October 1990. The pound was pegged at 2.95 Deutschmarks. This was too high a
rate, making goods produced in Britain relatively expensive compared to goods
produced elsewhere. This means that market share is lost abroad, but also at home
as imports become more competitive against domestically produced goods. The
overvalued rate at which the pound was pegged in the ERM therefore caused
markets to be lost and production to be cut back, with firms going to the wall and
workers being sacked.
Why then was an overvalued exchange rate chosen by the government when
they entered the ERM? In part it was for the stated objective of squeezing inflation;
what was not stated is the route by which it was hoped it would work, by
deliberately making things hard for British firms, thereby forcing them to try to cut
costs by turning on their workers, cutting wages and forcing increased work
pressures. This is not the first time that governments have allowed the currency to
be overvalued in this way. Winston Churchill as Chancellor took Britain back onto
the gold standard in the 1920s at an overvalued rate, with Keynes warning at the
time, in his pamphlet The Economic Consequences of Mr Churchill, of the disastrous
likely consequences of this policy, consequences which were to include the General
Strike of 1926 (Keynes 1925). Similarly, the first Thatcher recession of 1979–81
was exacerbated by the high exchange rate caused not only by the coming on
stream of North Sea oil, increasing the demand from overseas for sterling with
which to buy that oil, but also by the high interest rates which followed from the
government’s monetarist policies. Thatcher’s attempts to reduce money supply
growth were pursued through increasing interest rates, aimed at reducing the
amount people would then want, or be able, to borrow. But the high interest rates
also attracted money into the country, pushing up the exchange rate (Michie 1992).
In the inter-war period Britain was indeed forced to abandon the gold standard.
And the exchange rate similarly fell after 1981, depreciating nearly 30 per cent by
1986 and helping to fuel the recovery. Likewise, the overvalued rate at which
Chancellor Major entered the ERM meant that our membership was always
doomed to failure. Yet those who pointed this out at the time were dismissed out of
hand. It was said amongst other things that if sterling left the ERM then interest
rates would have to rise; this proved false. The leadership of all three major
political parties supported continued membership at the overvalued rate. Even if
this had been a genuine option, it would have been a disastrous one. But in reality it
was not even an option. It was unsustainable. As Bryan Gould has argued, Britain’s
ERM membership was vitiated by at least three policy mistakes:
First, we chose a plainly overvalued parity. This was not an accident, but a
deliberate attempt to use overvaluation as a means of bearing down on costs
and imposing a counter-inflationary discipline. The result, of course, was so to
enfeeble our productive economy that the gap between the exchange rate
decreed by the ERM and the rate that could be justified by the performance of
the real economy widened inexorably and eventually became unsustainable.
Second, the obligations imposed by ERM membership were asymmetrical.
The whole burden of staying within the parity bands fell upon the weaker
Economic consequences for Britain
41
economies, who found that, in a vain attempt to maintain short-term
competitiveness and to shore up their currencies, they were obliged to try to
cut costs through deflationary measures like high interest rates and cuts in
public investment. The Germans, on the other hand, whose appreciating DMark put constant pressure on the parity bands, recognised no obligation to
bring their currency back into line by reflating and cutting interest rates. It was
for this reason that the ERM became a deflationary engine. It was no accident
that western Europe became the world’s unemployment black spot.
Third, the ERM itself changed in nature. It ceased to be a ‘crawling peg’
arrangement – a sensible means of securing greater exchange rate stability by
damping down excessive market volatility. It became instead the essential
precondition for and means of the transition to a single currency. As a result,
no adjustments could be permitted. The parities had to be set in concrete.
Such inflexibility was inevitably shattered into fragments by the sheer force of
economic realities and market pressures.
(Gould 1993)
So the problems of the ERM lay deeper than just having joined at the wrong
rate. It was a high-unemployment mechanism, because all the pressure was on the
weak economies to take action, rather than on the strong ones.3 And worse, that
action was designed more to prop up the currencies of the weak economies than to
strengthen those economies’ productive potential, which is the only sustainable
basis for maintaining a healthy currency. Increased interest rates were ordered.
These depress investment plans and leave the economy in question further
weakened. Yet it is most likely the weakness of the economy that underlay the
weakness of the currency in the first place. So a weak economy produces a
weak currency; the ERM then requires the government in question to raise interest
rates; and increased interest rates squeeze the country’s economy, leaving it still
weaker.4
The Maastricht Treaty
The three key points of the Maastricht Treaty were as follows:
All power to the central bankers
The Central Bank would be independent,5 that is independent of any democratic
influence, control or accountability. The electorate of Britain and of the European
Union would no longer be able to decide on, or even influence, monetary policy.
Indeed, such influence would be outlawed. This is fundamentally undemocratic.
It is true that the Bank of England was made independent by the Labour
Government elected in 1997, but the Chancellor Gordon Brown at least pledged
that new mechanisms would ensure that the Bank would nevertheless be
accountable (although it is true that at the time of writing the proof of this is yet
to be seen).
42 Jonathan Michie
Price stability
Not only would the central bankers be independent of the electorate, they would be
constitutionally prevented from prioritising full employment; their one primary
objective would be to achieve and maintain ‘price stability’ (this is referred to
several times; see, for example. Article 3a). Everything else would have to be
secondary, ‘without prejudice to this objective’ (of price stability – same Article).
Why, then, did the Treaty’s drafters have such a mania for price stability? And
should we object to this? The idea of price stability is often presented as preferable
to inflation because it would be more stable, in the sense that it would be easier to
hold inflation at that zero (or low) rate than it would be to hold inflation stable
around a higher rate. But there is no reason why this should be so. The inflation
rate is the average of thousands of price movements, some falling, like the price for
personal computers at the moment, some stable and some rising. If zero inflation is
achieved it would not be because prices were stable, but because these movements
happened to cancel each other out on average. And there is no reason why that
average rate of inflation should remain static just because it was previously
averaging at a value of zero or 1 per cent, rather than say 7 or 8 per cent. At a more
practical level, the reason for the Maastricht Treaty’s preoccupation with the rate
of inflation is because it arose from the deliberations of the Delors Committee
(composed largely of bankers) before the European Union’s economy slumped into
its early 1990s recession. In part, then, Maastricht was just yesteryear’s Treaty,
focusing on issues of the 1980s when what is needed are policies for expansion and
employment. The other problem with the Treaty – and now with the post-Single
Currency ‘Stability Pact’ – is that the goal of stable prices is not to be pursued
through positive interventionist measures, such as price controls or the
rejuvenating of industry, which might allow cost increases to be absorbed by
productivity increases rather than being passed on in higher prices. The way that
progressive economic policies can help tackle inflation are set out in detail by
Deakin et al. (1992), but the key point is that low inflation should be pursued on the
basis of a strong economy which can absorb cost increases (see also Michie and
Wilkinson 1992, 1993). The Treaty instead limits the economic policy options to
the free market pursuit of monetarism, plus rate capping.
National rate capping
Government borrowing in member states is capped at 3 per cent of national
income (GDP). Similarly, government debt must be kept below 60 per cent of
GDP. If GDP falls – as it did in Britain throughout 1991 and 1992 – this could
require debt to be cut in line, which could exacerbate the decline in national
income itself. Also, the Maastricht Treaty sets the debt criterion in terms of gross
rather than net debt – that is, totally ignoring all assets. This is a very narrow view
of the government’s balance sheet. In effect, it forbids governments to take account
of even their most liquid assets in setting fiscal policy. Selling assets to pay debt (for
example, through privatisation) – which in reality leaves the government no better
Economic consequences for Britain
43
off, since their assets will have fallen – is seen as an improvement. Indeed, the
situation is even worse than this, because under the Maastricht conditions the
government’s performance is thought to have improved even if it sells off assets for
less than they are worth. The amount of money brought in from the sale, however
low, is seen as pure gain in reducing gross debt, while the loss of the asset is totally
ignored.
Maastricht and the alternatives
On alternatives, first, there is no reason to have any such rules; the United States of
America does not put any such rules on its states, and the British Government
never used to put such rules on its local authorities until the Conservative governments of the 1980s introduced rate capping. Second, on fiscal redistribution, the
MacDougall Report (Commission of the European Communities 1977) suggested
that a Community budget equivalent to 7 per cent of GDP would be necessary just
to tackle 40 per cent of existing inequalities, yet the budget at present is set at 1.27
per cent; the more ambitious proposal rejected at the 1992 Edinburgh summit was
for this to rise to only 1.38 per cent.
There would be something to be said for creating a new superstate, with a single
government, fiscal policy, industrial policy and so on. One attraction would be the
power to intervene in the economy to force through socially beneficial outcomes.
But it is quite dishonest (or else naive) to present Maastricht or the Single Currency
as representing anything along these lines. It represents the precise opposite: an
attempt to roll back the state on a European scale, to give capital free reign.
It is sometimes argued that the power of the international markets to dictate to
nationally elected governments is such that no one country can any longer defend
its currency. But this is hardly new. It is true that this power has been boosted in
recent years by the free-market, deregulatory policies pursued by governments.
But probably the clearest example of such a process, designed to increase the power
of multinational capital and financial markets, has been the programme of
increased European Community/Union integration. It is quite wrong to interpret
this process as a reaction to the increased power of multinational capital. On the
contrary, the Single European Market programme6 and the single currency have
shifted the balance away from governments and in favour of private capital.
To respond effectively to the challenges of growth and employment will require
the exact opposite of everything that the single currency process represents. The
single currency increases the leverage of international markets to behave exactly as
they wish, and prevents elected governments from pursuing the policies on which
they were elected – unless of course these happen to coincide with the interests of
those financial markets. And this is therefore likely to happen: the policies of
political parties will become determined less and less in response to people’s
aspirations and more and more by what is deemed acceptable to the continued
undisturbed operation of international financial markets and multinational
corporations.
44 Jonathan Michie
Background to Maastricht
The ‘1992’ process required all member states to abolish exchange controls, thus
allowing capital to flow freely across borders. (The Thatcher Government had of
course already abolished Britain’s exchange controls in 1979.) This, the Commission argued, would increase economic welfare, since the money would be able
to travel across frontiers in order to be put to more productive use. Instead the
money went into speculation. Only 5 per cent of all capital flows now relates to
trade in goods and services, or to money spent on holidays or to any other real
activity. The remaining 95 per cent is conducted by foreign exchange dealers
trying to second-guess each other to make a speculative profit.
Having proposed and successfully implemented this financial free-for-all, on
quite spurious grounds, the European Commission then went on to argue that it
was contradictory to maintain separate national currencies – the pound sterling,
the franc, the D-Mark and so on. If there were no longer any restrictions on capital
moving from one of those countries to the other, it was argued, then individual
member states would no longer be able to pursue independent monetary policies; if
they lowered interest rates below those operating in the other countries, money
would just flow out. So since abolishing exchange controls had removed the
member states’ ability to pursue their own independent monetary policies, they
might as well recognise the fact and go the whole way: abandon their separate
currencies and hand monetary and interest rate policy over to a central bank (and
thereby also give up any exchange rate policy, since the countries would no longer
have separate exchange rates to adjust). An alternative would have been to reintroduce exchange controls.
Instead we got Maastricht, which stipulates that exchange controls be outlawed
forever and that a single currency be adopted. Maastricht, by removing any
possibility for currency realignment between member states, and by removing any
possibility for lowering interest rates below those in other EU countries, would
make the ERM permanent and compulsory. It is true that, with no separate
currencies, the weakness of one economy would no longer be signalled by a weak
currency, yet the lack of a signal would not abolish the structural problem. Instead,
the lack of industrial competitiveness of that geographical area would lead to a loss
of industry and jobs, leading to a downward slide into relative economic decline. As
Wynne Godley has argued:
It is thus an extraordinary fact about Maastricht that the only new institution
to be created is a new independent central bank to run monetary policy. How
is the rest of economic policy supposed to be run? How in particular is fiscal
policy supposed to be determined? The authors of the Treaty appear to think
that provided you have a central bank to conduct monetary policy, fiscal
policy and every other aspect of economic policy can be resolved by laying
down one or two simple rules, for instance that countries should normally
balance their budget. Now I think this is a very impoverished and inadequate
proposal, and I am forced to the conclusion that it could only have been made
Economic consequences for Britain
45
by people who think that nothing more is needed. That is, people who follow
the new consensus and are prepared to base all their recommendations on the
idea that economies are basically self-righting systems. It should be remembered that the Delors Committee, which was the forerunner of Maastricht,
was predominantly composed of central bankers; the proposal to place all
power in the hands of the central bank should perhaps not be so surprising. . . .
we have been down this road before. The need for active fiscal and exchange
rate policies in the 1920s came up against the orthodoxy of the day, that public
spending would crowd out private investment and that currency adjustments
could be effected with a fixed exchange rate system by forcing down domestic
wages and prices. Those truths were wrong then and they are wrong today.
(Godley 1993)
The economics of a single currency
There are obvious attractions to having a single currency across countries that
have high levels of trade with each other. Equally, even the most ardent supporters
of the single currency proposals would admit that there are potential problems;
indeed, if it were not the case that there were real difficulties, then surely more
countries would by now have tried to tap the benefits by merging their currencies?
The more rational supporters of Maastricht will agree that there are costs and
potential dangers, but argue that these need not be overwhelming. Thus, for
example, individual countries at the moment have single currencies without their
weak regions spiralling into decline. So surely a single currency area covering all 25
member states could operate in the same way as individual countries do at present?
There are two key reasons why this is not the case. First, the Maastricht Treaty
could have been quite different. It could, for example, have proposed a single
currency alongside a democratically accountable central bank (a bank committed
to the pursuit of economic development) and allowed national governments to
tackle unemployment, and expand public services through government borrowing. Instead of this, Maastricht lays down that the single currency will be
administered by central bankers who are accountable to no one and who are
committed to trying to reduce inflation to achieve ‘stable prices’ and to imposing
rate capping on EU governments through restrictions in the form of rigid limits on
national public expenditure.
The second problem is that the Maastricht Treaty would not provide the sort of
economic mechanisms that limit the decline of weak areas within existing ‘single
currency areas’. Within a single country such as Britain, the government’s revenue
– in the form of income tax, VAT, company taxes and the like – is collected from all
areas of the country. Similarly, the money is spent on health, education,
unemployment pay, housing and other welfare benefits and so on in all areas of the
country. Now, if one area in particular suffers bad times there is an automatic
transfer of resources from all the other areas of the country to that area. This helps
prevent the depressed area from falling into a spiral of decline. If this one area hits
hard times, then the profits of the companies operating in that area will fall, so they
46 Jonathan Michie
will pay less profits tax to the central government. If people are made unemployed
they will pay no income tax. And those who remain in work may, for example, earn
less overtime pay, and so they may also pay less income tax than before. The result
is that less money flows from that particular area of the country into the Treasury
coffers. And the same process works on the spending side. More people in that area
will receive unemployment pay from central government. More money will go to
that area in the form of housing benefit, social security and other transfers. So a
higher share of national government spending will go to that area of the country.
All this happens automatically without the government actively doing anything. It
involves no decision making.
This process is referred to as ‘fiscal transfers’, since it refers to government
spending (fiscal policy) and it results in money being transferred automatically
from areas that are prospering to areas in economic difficulty. It operates through
the tax and benefit system affecting the whole country (the single currency area).
No equivalent process would be in operation in Maastricht’s new single currency
area because the vast bulk of taxation revenue and public spending would remain
locked within the existing nation states – the new regions of the European superstate. So the automatic transfer between regions would not take place. The poor
would just get poorer. And this in turn would undermine the revenue base from
which benefits are funded.
If a country’s currency is overvalued and its goods are uncompetitive, both at
home and abroad, this will tend to cause bankruptcies and unemployment. This in
turn usually forces a devaluation (or depreciation of the currency) to remove the
specific problem. With a single currency that possibility will be removed as far as,
say, the British economy goes in relation to all the other countries within the single
currency, and also possibly with the rest of the world. There is the additional
problem that even if the rate we join a single currency at is appropriate, it is likely –
assuming Britain’s continued relative economic decline (see Kitson and Michie
1996a) – that after a few years a depreciation of Britain’s currency against Germany’s
would be required. But this would no longer be possible. Kaldor (1978) always
warned that, in the Common Market, Britain risked becoming the ‘Northern
Ireland of Europe’. There is no guaranteed ‘European’ fate which all will enjoy
equally, regardless of policies, exchange rates and so on. It is quite possible to
become a declining region, locked into a vicious cycle of decline.
Would a single currency avoid balance of payments deficits?
One argument which is sometimes put in favour of a single currency, and which is
simply wrong, is that if we had the same currency as France, Germany and the
other EU countries, then we would no longer have a balance of payments deficit
with them. In fact, however, the deficit would still be there. More money would still
be going out of Britain than was coming in. What would change is that this deficit,
and this drain, would no longer be recorded. And it would no longer be seen as the
duty of the government to do anything about it. So to that extent, the underlying
Economic consequences for Britain
47
problem would actually be made worse. This real imbalance in economic activity
would have to be balanced by falling relative income and wealth in Britain, a
process that would continue until we could no longer afford the imports which
were causing the problem. People would be made poorer; jobs would be lost.
However, as the economy becomes impoverished, less would be bought from
domestic firms as well, so some of these would be forced out of business. We
thereby lose any exports those firms may have had, and some of their custom will
go not to other domestic firms but to imports. Hence the slide into poverty does not
just restrict imports, it also damages exports. And the actual shortfall of exports
from imports will not necessarily be made good. It could even deteriorate. In that
situation there remains little to prevent the declining region of the single currency
area from sliding further into poverty. The one lifeline would be the fiscal transfers
that would be missing in this single currency area. Emigration is then all that is left,
although even that does not necessarily improve the well-being of those left behind,
particularly if it is the well trained who get the job offers elsewhere.7
A similar process would operate with what is at present Britain’s balance of
payments deficit with non-EU states, which would likewise be apparently abolished
and become one component of the European Union’s balance of payments with
the rest of the world, in the same way as, say, Yorkshire’s trade is at present
subsumed within Britain’s balance. This bookkeeping transfer would simply
disguise the fact that there was a net outflow of money from what would by then be
the British component of the greater Single Currency Area.
Monetary and political union
If the monetary integration of several countries into one is thought desirable, then
it should be seen as the final act of economic, industrial, social and political
integration. Putting it first threatens to undermine the whole process. Above all, if
monetary policy is to be centralised, then so must all the other aspects of government economic policy. Maastricht would in effect do away with all these other
aspects, such as any scope for active taxation and public spending policies, leaving
the European Union’s economy engineless and rudderless.
A single currency could only be considered acceptable within an EU-wide
taxation and benefit system, with massively expanded regional transfers from rich
to poor parts of the Union to ensure real economic convergence, and with living
standards and employment levels moving closer together throughout the Union
rather than further apart. The sort of substantial increase in regional policy
spending required was ruled out by the December 1992 Edinburgh summit, and
any suggestions that there should be an EU-wide tax and benefits system has been
totally rejected whenever the subject has been raised. There seems no prospect that
the richer countries are prepared to see very substantial income transfers to poorer
regions, either in the form of regional policy or through the automatic transfers of a
tax and benefit system.
48 Jonathan Michie
EU policies for jobs
The European Union’s December 1993 biannual summit was billed as the one that
was to tackle unemployment. Indeed, Delors warned that the Union’s
unemployment total could be heading for 30 million by the late 1990s if the policies
in his December 1993 White Paper were not adopted. Similar sentiments were
articulated by the Union’s (then) social affairs commissioner, Padraig Flynn, who
described the White Paper as a plan for creating 20 million jobs by the end of the
decade. At the same time, Mitterrand was calling for a doubling of the Union’s
spending on infrastructure and growth projects – as was Delors, who was
proposing in particular a widening of the programme to include investment in
labour-intensive sectors such as housing, as well as the subsidising of borrowing for
small and medium-sized enterprises. Even these rather modest proposals were
scorned by the German and British governments. Indeed, less than half the £5.6
billion earmarked for recovery projects by the European Investment Bank had
been committed by the end of October 1993, with Commission officials blaming
the low take-up on the lack of commercially viable investment projects – hardly
surprising in a recession – and because companies were failing to provide the
matching finance required from the private sector.
While the Delors White Paper (Commission of the European Communities
1993b) was therefore welcome insofar as it went some way towards shifting the
focus of policy onto the problem of unemployment, it remained hopelessly
compromised by its failure to break from the policy straitjacket within which the
Maastricht Treaty had trapped governments.8
An additional policy idea from the Commission has been to introduce
reductions in employer taxes on unskilled labour in particular. On the general idea
of an employment subsidy, expanded public employment would be a more
effective method of tackling unemployment, particularly if there are either inflation
or balance of payments constraints (Glyn and Rowthorn 1994). The specific idea of
a differential subsidy for unskilled work – generally defined in these contexts as lowpaid work, which raises a rather separate issue of why skills such as cooking or
cleaning tend not to be recognised as skills – risks reducing firms’ incentives to
improve productivity and upgrade productive techniques (Michie and Wilkinson
1995).
Behind the talk of jobs packages, therefore, lies the longer-term agenda of
economic and monetary union. What has been amply demonstrated in the
academic and policy literature is that measured against the criteria for being an
‘optimum currency area’, the present 25 member states (never mind a Union with
additional members) falls some way short, and if the process of integration is to
proceed, this shortfall would have to be made up – without straining cohesion to
breaking point – by active industrial and regional policies to ensure the continual
(not just one-off) economic adjustments to so-called ‘shocks’ and, more generally,
to different levels and growth rates of output and productivity.
With talk today of a ‘two-speed Europe’ – with some member states having
adopted the single currency and others not – it is worth recalling that the ill-fated
Economic consequences for Britain
49
gold standard did not collapse in one go in the 1930s: some countries attempted to
maintain the fixed exchange rate system, thus heralding a two- (or multi-) tier
system (see Kitson and Michie 1994). The ones who stuck with the system grew
more slowly; those who left first grew fastest. Hence the ‘speed’ with which
countries move towards fixed exchange rate systems should not be confused with
the speed at which their economies will grow. In a two-speed Europe the ‘slow’ lane
may be preferable.
Of course, one of the stock responses to any call for growth is to refer to the
expansionary policies of the Mitterrand government in 1981 and the subsequent
U-turn of 1983. The orthodox interpretation of this experience is that the
Keynesian policies were discovered to be unsustainable because of balance of
payments and exchange rate constraints and hence had to be abandoned. This is
(as argued by Halimi et al. 1994) simply false: these difficulties were not learned
from the 1981–3 experience in France but were perfectly well understood and
stated quite explicitly by, amongst others, the French Socialist Party before taking
office. The problems which any government pursuing such expansionary policies
would encounter were documented in advance, as were the additional policies
which would be necessary to see through the expansion –including the use of trade
policies to ensure that imports grew only in line with exports (see Kitson and
Michie 1995a, 1995b). The point is that no attempt was, in fact, made to introduce
these additional, necessary, policies; the government instead chose the beggar-myneighbour route of ‘competitive disinflation’.
While coordination is preferable (as pointed out by Kalecki in 1932), there are
nevertheless viable programmes for raising employment in a single country;
indeed, the only way of building support for an EU-level expansion may be
through the contagious impact of a successful expansion of employment in one
country. Indeed, the ‘cooperative’ route – of completing the internal market and
pursuing economic and monetary union – has tended to increase industrial
concentration and exacerbate regional disparities; instead an active industrial
policy is needed to ensure the development of industrial activity outside the
European core. To consider the nature which such an interventionist strategy to
bolster industrial performance might take, it is necessary to draw a distinction
between the notion of a developmental state, organised and concerned to promote
economic and industrial development, on the one hand, and a regulatory state
concentrating on competition policy, on the other,. A broadly conceived industrial
strategy (as opposed to just a ‘policy’) is needed to offset the forces of cumulative
causation which otherwise will increase disparities and exacerbate the underutilisation of resources in backward regions in particular.
Current levels of unemployment are a reflection of the political priorities
attached to different objectives of economic policy. The low demand created by
monetarist and restrictive economic policies has eroded the potential to produce:
plant capacity, management structures, sales organisation, skilled and experienced
labour and the number of firms have all settled down at a level consistent with high
unemployment. Increased demand is therefore needed, but it would have to be
sustained if capacity is to be rebuilt. This is unlikely with an independent European
50 Jonathan Michie
central bank dedicated to the achievement of price stability. The emphasis has to
be shifted towards restoring full employment.
Conclusion
Unemployment in Europe is due to the interrelation between macroeconomic
policy, balance of payments constraints and de-industrialisation. The idea of
pursuing active macroeconomic and industrial policies has given way to an
adherence to monetarism, privatisation and labour market deregulation. Yet the
resulting growth in low pay, poverty and unemployment has, ironically, placed an
increasing burden on the public purse. At the same time, productive efficiency is
harmed by the resulting instability in the labour market – particularly within the
increasingly low-paid sectors – and the loss of incentives for producers to upgrade
their productive systems. A vicious circle of low-wage, low-productivity, lowinvestment activity is generated, leading to loss of competitiveness and growing
unemployment, with the increasing burdens on the exchequer provoking yet
further moves down the recessionary spiral (Michie and Wilkinson 1994, 1995).
An alternative agenda would include, first, pushing for global expansion rather
than being the most orthodox, 1920s-style block in the world. Second, there are a
series of measures (such as re-establishing exchange controls) which there seems
little hope of getting adopted, but, to paraphrase Keynes, just because people won’t
listen to sense is no excuse for talking nonsense. The fact that such policies would be
an improvement on the current state of affairs should still be pointed out. Third,
there are things which would appear acceptable to call for even in today’s freemarket climate, such as keeping the government responsible for monetary policy
rather than handing it over to unaccountable central bankers; keeping the
government responsible for fiscal policy, i,e. abandoning the Maastricht Treaty’s
restrictions; keeping the possibility of currency realignments in the event of one
member state’s output becoming uncompetitive, rather than adopting a single
currency; and restoring the right to pursue interventionist industrial policies which
are increasingly falling foul of free-market dictats from Brussels. In other words,
member states should pursue those industrial, interest rate, exchange rate and
fiscal policies that were in force before most of them became outlawed by the
Maastricht Treaty.
What is wrong is the free market, laissez-faire character of the process of
European integration at present. So the basic point about what needs to be done is
that European governments and the European Commission should stop
introducing 1920s-style policies and rules; the countries of Europe should then
pursue interventionist policies to tackle unemployment etc., and should cooperate
internationally over it.
The power of international capitalism to dictate to nationally elected
governments is not new, although it is true that it has been boosted in recent years
by the free-market, deregulatory policies pursued by governments. Probably the
clearest example of such a process, designed to increase the power of multinational
capital and financial markets, has been the programme of increased European
Economic consequences for Britain
51
Community/Union integration. It is quite wrong to interpret this process as a
reaction to the increased power of multinational capital; on the contrary, the Single
European Market programme and now the single currency have themselves
deliberately shifted the balance away from governments. EMU is at heart a
political process that will prevent governments – whether at national or EU level –
from pursuing policies to promote economic and social welfare. Such a scenario is
no more sustainable now than when it was last in place, namely in the 1920s and
1930s. It is likely to come to the same unpleasant end, with individual countries
being eventually forced to take action regardless of the power of international
capitalism. But with the European political elite so wedded to the laissez-faire
politics of the single currency, any attempt by the population to insist that they
should be allowed to express political preferences risks taking ugly nationalistic
forms – against the ‘internationalism’ of the European central bankers and the
entire existing political elite.
Notes
1 A country is said to be on the gold standard when its central bank is obliged to give gold
in exchange for any of its currency presented.
2 The ‘Great Depression’ refers to the global recession of 1929–32.
3 More responsibility should have been placed on those countries whose currencies were
at the top of the currency range to take action, rather than have the burden falling on
those economies already in difficulty. The stronger economies could cut interest rates
and boost government spending. As their economies expanded, they would be likely to
import more. And as their currency is offered on the foreign exchange markets to pay for
those imports, its price against other currencies would tend to decline back towards its
central rate.
4 On the importance of creating industrial capacity as a progressive way of overcoming
balance of payments and inflation constraints see Michie and Grieve Smith 1996, in
particular the chapter by Kitson and Michie (1996b), and also Kitson and Michie
1996a.
5 See for example the ‘Protocol on the Statute of the European System of Central Banks
and of the European Central Bank’ at the end of the Maastricht Treaty.
6 The Single European Market (SEM), also known as the Internal Market or simply
‘1992’, consisted of a timetable of 300 measures agreed at the Milan EC summit of 1985
in preparation for 1 January 1993. Also known as the Cockfield plan after Commissioner Cockfield.
7 The argument that balance of payments deficits do not matter, or that they would be
eliminated with a single currency, are comprehensively demolished by the contributions
in The Economic Legacy (Michie 1992) from Brian Reddaway, from Ken Coutts and
Wynne Godley, and from John McCombie and Tony Thirlwall.
8 For a full critical assessment of the Delors White Paper, see Grieve Smith (1994).
4
What type of European
monetary union?
Malcolm Sawyer and Philip Arestis
Introduction
The creation of a monetary union inevitably involves the use of a single currency
for the payment of taxation and that prices, wages etc. are denominated in that
currency. Further, a single currency inevitably involves the creation of a single
monetary authority (central bank) with the power to set monetary policy. But there
is little else that follows inevitably from the creation of a monetary union. There
are, though, a host of economic policy and institutional arrangements which
surround the euro and its introduction and which would have profound
consequences for the effectiveness of the single currency and, more generally, the
economic well being of the European Union. In this brief chapter we indicate some
of the features of the institutional and policy arrangements surrounding the
implementation of the euro and hint at some alternative ones.
One particular and notable feature of the creation of the European Monetary
Union is that in effect the only economic institution which has been created at the
European level is the European Central Bank (ECB). The creation of other
institutions at the European level has been noticeable by their absence. A further
feature of the EMU is the constraints which are imposed on national governments
in respect of budget deficits and government debt. Specifically, there are limits on
budget deficits of 3 per cent of GDP, and failure to meet that requirement could
lead to a series of fines depending on the degree to which the deficit exceeds 3 per
cent. The Stability and Growth Pact, which has been agreed to govern the
operation of the eurozone, details ‘escape’ clauses which allow a member state that
has an excessive deficit to avoid sanction in the event of an economic downturn.
Nevertheless, this upper limit of 3 per cent of GDP for budget deficits means that,
during the course of the business cycle, budgets may well be in surplus or small
deficit (given the large swing in the size of deficits during the business cycle), and
national governments will be restrained in responding to recessions.
The Stability and Growth Pact and the Maastricht Treaty (along with the
convergence criteria for membership of the euro) reflect a particular neo-liberal
agenda. The Maastricht Treaty, which provides the institutional framework for the
introduction of the single currency, was signed in late 1991, a time when neoliberal ideas held sway and political power was generally held by the right.
What type of European monetary union? 53
Neo-liberal ideas still prevail though perhaps are in some decline, as evidenced by
the electoral victories of centrist parties in many of the EMU countries. But the
neo-liberal agenda has moulded the environment within which the euro will be
introduced. The euro (at least for those 12 countries which have signed up) is
embedded within an institutional and policy setting which we have elsewhere
described as ‘new monetarism’ (Arestis and Sawyer 1998). It is the implicit
argument of this chapter that economic policies reflecting such neo-liberal agenda
will not be successful.
This chapter is organised into three main sections. First, the role of the ECB is
critically examined. It is argued that the ECB is undemocratic and has been given
too narrow a remit. Further, the policy instrument at the disposal of the ECB (that
is interest rates) is inadequate for the purpose of controlling inflation (or indeed
anything else).
Second, there is a woeful lack of institutions and policies operating at the
European level to support the development of a successful European economy.
Specifically there is a lack of a European level fiscal policy (or even coordinated
fiscal policies across nations) which could be used to smooth fluctuations in
economic activity over time.
Third, there is no serious attempt to reduce disparities between regions (in terms
of unemployment, employment, income etc.). There has been a specific rejection
(at the Nice summit in November 2000) of the development of a European-level
social security system.
European Central Bank
The creation of a so-called independent European Central Bank was much in line
with the economic doctrine which we have elsewhere (Arestis and Sawyer 1998)
described as the ‘new monetarism’.1 The essential features of new monetarism are:
1
2
3
Politicians in particular, and the democratic process in general, cannot be
trusted with economic policy formulation with a tendency to make decisions
which have stimulating short-term effects (reducing unemployment) but which
are detrimental in the longer term (notably a rise in inflation). In contrast,
experts in the form of central bankers are not subject to political pressures to
court short-term popularity and can take a longer-term perspective where it is
assumed that there is a conflict between the short term and the long term.
Inflation is a monetary phenomenon and can be controlled through monetary
policy. The money supply is difficult (or impossible) to control directly, but the
central bank can set the key interest rate (the ‘repo’ rate) to influence monetary
conditions, which in turn influence the future rate of inflation.
The level of unemployment fluctuates around a supply-side determined
equilibrium rate of unemployment, generally labelled the NAIRU (nonaccelerating inflation rate of unemployment). The level of the NAIRU may be
favourably affected by a ‘flexible’ labour market, but it is unaffected by the
level of aggregate demand or by productive capacity.
54 Malcolm Sawyer and Philip Arestis
4
Fiscal policy is impotent in terms of its impact on real variables and as such it
should be subordinate to monetary policy in controlling inflation. It is
recognised, though, that the government budget position will fluctuate during
the course of the business cycle, but in the context of an essentially passive
fiscal policy.
The independent ECB is given the task of using monetary policy to control
inflation. Fiscal policy is largely neutered and constrained by the 3 per cent limit on
budget deficits with no EU-level fiscal policy.
There are (at least) three basic objections to the manner in which the ECB has
been set up. First, there is the essentially undemocratic nature of the ECB in the
name of protecting its independence. Article 107 of the amended Treaty of Rome
states that:
When exercising the powers and carrying out the tasks and duties conferred
upon them by this Treaty and the Statute of the ESCB, neither the ECB, nor a
national central bank, nor any member of their decision making bodies shall
seek or take instructions from Community institutions or bodies, from any
government of a Member State or from any other body. The Community
institutions and bodies and the governments of the Member States undertake
to respect this principle and not to seek to influence the members of the
decision making bodies of the ECB or of the national central banks in the
performance of their tasks.
This precludes influence from say the European Parliament on the decisions of
the ECB, even though the ECB is the only European-level economic policymaking body.
Second, the objective given to the ECB when setting monetary policy is the
achievement of low inflation. Objectives such as a high level of economic activity,
low unemployment or even the external value of the euro are to be considered. If
the ‘new monetarism’ were valid, this would not matter since it is deemed that
monetary policy does indeed control inflation, and that the level of unemployment
is unaffected by monetary policy. But in the real world, the setting of interest rates
has a differential impact across regions and nations, and can have an influence on
the exchange rate (and thereby on exports and imports). Differences in inflationary
experience and the rate of unemployment across regions and nations make it likely
that interest rates will be put up when inflation appears in one part of the European
Union even when other regions are not experiencing inflation and when the levels
of unemployment are high.
Third, the interest rate is a weak policy instrument to use for the control of
inflation. The extent to which interest rates in a single country (or in this case in the
European Union) can be varied relative to interest rates in other countries is
heavily circumscribed. It is difficult to believe, for example, that real interest rates
could be maintained 2 per cent above or below the real rate of interest in the United
States of America. Further, the extent to which interest rates can influence the rate
What type of European monetary union?
55
of inflation is small. This means that the eurozone is left with little to counter any
upsurge in inflation. At the present time, with inflation subdued, this may not be a
serious concern, but any upswing in inflation, whether generated within the
European Union or more widespread, would present serious difficulties.
It is imperative that the sole economic policy maker at the European Union level
is brought under democratic control, and that the objectives to be pursued by the
ECB are broadened to include high levels of employment and economic activity.
But this should be done with the recognition that monetary policy is not an effective
way of guiding the economy.
Fiscal policies and redistribution
The adoption of a single currency by eurozone countries clearly removes the
possibility of variation in the value of their domestic currency. Changes in the
exchange rate can allow a country to offset differential shocks and differences in
economic performance. It may be questioned how far a country can determine its
own exchange rate in the globalised financial markets, though since an exchange
rate is the relative value of one currency in terms of another it is rarely the case that
one country can completely determine the value of its own currency. It is also the
case that exchange rates have been highly volatile since the breakdown of the
Bretton Woods system, and that exchange rates have diverged significantly from
purchasing power parity (see, for example, Krugman 1989; Rogoff, 1996).
Nevertheless, variation in the exchange rate (whether in the context of a fixed or a
flexible exchange rate system) does provide an adjustment safety valve to differential shocks and economic performance, even though the safety valve may not
always work quickly (in the case of fixed exchange rates) or may often be faulty (in
the case of flexible exchange rates).
It is clear that there are few, if any, mechanisms with the Stability and Growth
Pact and the single currency for a country or region to adjust to differential shocks
and economic performance. The ability of national governments to stabilise their
own economies becomes more circumscribed through the requirements of the
Stability and Growth Pact and the limits on the size of budget deficits. It is often
pointed out that most single-currency zones involve a central or federal
government tax and public expenditure programme, which is substantial relative
to national GDP, and a government budget, which can run significant deficits.2
The tax and public expenditure programme generally involves redistribution from
richer regions to poorer ones, whether as an automatic consequence of a progressive tax and social security system or as specific acts of policy. The redistribution acts as a stabiliser with negative shocks leading to lower taxation and higher
social security payments in the region which is adversely affected. With the
removal of exchange rate variations as an adjustment mechanism, it could be
expected that economies would adjust to differential shocks and economic
performance through a variety of other routes. These would include (in response to
a negative shock) declines in economic activity, reductions in living standards and
outward migration. There is then a requirement for the development of a larger
56 Malcolm Sawyer and Philip Arestis
EU tax base within a progressive tax system and the use of the tax revenue in a
redistributive manner.
The problem of unemployment will be particularly serious in those cases where
governments have chosen the wrong exchange rate at entry. An overvalued entry
exchange rate will mean an extended period of recession to accommodate its
effects, which emanate from the absence of the adjustable exchange rate safety
valve. This is accentuated by the virtual absence of fiscal transfers, whether
automatic or discretionary, from the relatively rich regions to the relatively poor
ones. There is clearly not a tax and social security system operating at the EU level
which would make transfers between rich and poor in an automatic manner, and
provide an element of fiscal stabilisation. The expenditures on regional aid
(structural and cohesion funds) and to a lesser degree agricultural policies do make
some transfers from rich to poor, but on a very limited scale. In short, the European
budget is neither on a sufficient scale nor of the right design to provide significant
interregional insurance in the EMU (Fatas 1998).
The structure of taxation and public expenditure (and the balance between them
as reflected in fiscal policy) can redistribute income (depending of course on the
degree of progressivity of the tax system and the ways in which public expenditure
is allocated) in two particular ways. First, it can in effect redistribute income over
time – taxes rise when income rise, fall when income falls. This is the well-known
stabilising effect of a progressive tax system. Second, richer regions tend to pay
higher levels of tax and (perhaps) receive lower levels of public expenditure. There
is a redistribution between regions – some of this redistribution may be a deliberate
design of public expenditure and some a by-product of a progressive tax system.
The EU level of public expenditure is restricted to around 1.5 per cent of the
GDP of the European Union, and there is a requirement that the EU budget is
balanced so that taxation raised through national governments is exactly equal to
the level of expenditure. Whilst there is some redistribution (e.g. in the form of
regional policy), it is inevitably rather minor, given the size of the overall budget
(and also the size of the common agricultural policy within that). The MacDougall
Report (1977), written for the European Commission, regarded a EU-level budget
of around 7.5 per cent of GDP as necessary to provide adequate stabilising
properties.
Fiscal policy at the EU level (whether operated by the European Commission or
through the coordination of national fiscal policies) could make a substantial
contribution to the effective operation of the single currency. This would be for (at
least) three reasons. First, there is no particular reason to think that the level of
aggregate demand generated by the private sector will be sufficient to create or to
maintain high levels of economic activity. Indeed, currently many of the EU
economies suffer from high levels of unemployment and insufficient demand (in
part created by the drive for fiscal orthodoxy to fulfil the Maastricht Treaty
criteria). There are occasions (such as the USA currently) where private sector
demand is high, with low savings and/or high levels of investment, so that the
resulting private sector deficit is then matched by a public sector surplus. We
may refer to the following national income accounts identity to make the point:
What type of European monetary union?
57
(I – S) + (X – M) = (T – G), where I is investment, S is savings, X is exports, M is
imports, T is taxes and G is government expenditure. Positive values on the lefthand side, i.e. net private dissavings and export surplus, are matched by positive on
the right-hand side, i.e. budget surplus. But there will be other occasions when
private sector demand is low, and there is the requirement for budget deficits to
maintain demand.
Second, fiscal policy provides an additional policy instrument (in addition to
monetary policy) through which the level and composition of aggregate demand
can be influenced. The ‘one-club’ nature of monetary policy has often been noted,
and also the degree to which a uniform policy is applied across diverse economic
situations.
Third, the extent of trade between the European Union and the rest of the world
is relatively low, particularly as compared with the international trade of the
countries which will compose the eurozone, for much of the trade by one EU
country is with other EU countries. Fiscal policy (and indeed any policy which
leads to demand expansion) may have limited effect domestically as the demand
spills abroad. But this is not the case for the European Union, and the impact of
fiscal policy on domestic demand and then the level of economic activity can be
expected to be substantial.
Disparities
The single European currency will come into being against the background of high
levels of unemployment across Europe (9.0 per cent at the time of writing in early
2001) and with enormous disparities: unemployment rates ranging from 2.6 per
cent in the Netherlands through to 14.6 per cent in Spain. Average growth of GDP
per capita ranges from 1.9 per cent (Austria) to 5.9 per cent (Ireland), i.e. by a factor
of 3. These disparities are deep seated and much more than the temporary
disparities thrown up by economies at difference stages of the business cycle. These
disparities raise many questions: for example, can a monetary union function
economically and politically in the face of such disparities? Further, what attempts
should be made through economic policies to reduce those disparities? Also lying
behind those disparities are considerable differences in the institutions of the
national economies such that the economies behave and perform differentially,
and such that a single policy measure (for instance, a change in the euro rate of
interest) would have quite different effects on the national economies.
The present disparities in regional unemployment levels (and also in labour
market participation rates) within the European Union would suggest that even if
full employment were achieved in some regions, there would still be very
substantial levels of unemployment in many others. In the presence of such
disparities in unemployment, the achievement of a low level of unemployment
overall (not to mention full employment) would be well-nigh impossible.
Inflationary pressures would build up in the fully employed regions even when the
less prosperous regions were still suffering from significant levels of unemployment.
Interest rates would then rise to dampen down the inflationary pressures in the
58 Malcolm Sawyer and Philip Arestis
prosperous regions without consideration for the continuing unemployment in
other regions.
Eichengreen (1997) offered the suggestion that the European Investment Bank
(EIB) can borrow off-budget to perform tax-smoothing functions, however, this
would exceed the EIB’s present remit.3 Article 198e of the Maastricht Treaty states
that:
The task of the EIB shall be to contribute, by having recourse to the capital
market and utilising its own resources, to the balanced and steady development of the common market in the interest of the community.
Whether the functions of the EIB can be enlarged to include stabilisation policy
(distribution over time) is extremely questionable. However, it can entail
redistribution across countries, and it is specifically this function which should be
expanded and strengthened from its present form where assistance is only in the
form of loans and guarantees.
Therefore, a further recommendation would be to have a revamped EIB to
supplement the activities of the ECB, with the specific objective of enhancing
investment activity in those regions where unemployment is acute (Arestis et al.
2001). Enhanced investment activity will, thus, aim to reduce the dispersion of
unemployment within the framework of reducing unemployment in general. This
could be achieved through encouraging long-term investment whenever this is
necessary by providing appropriate finance for it.
We suggest an overhaul of the EIB’s remit because of the changing environment
in which it operates. As highlighted by Honohan (1995), the EIB was established at
a time when national capital markets were less developed than at present. Now,
however, many lenders of loanable funds compete with the EIB, and in this respect
its public policy role is shrinking. Despite this trend, there still remains scope to
extend the EIB’s public policy role. In particular one area for possible intervention
has been identified. The case for a revamped and extended EIB is based on three
considerations. First, there is a need for differentiated policies, which will enable
the less prosperous regions to catch up with the more prosperous ones; this in turn
will enable higher average levels of employment and economic activity. Second,
the forces of cumulative causation in the context of a single currency and market
will tend to stimulate investment in the more prosperous regions rather than in the
less prosperous ones. Third, the high set-up costs of venture capital projects and the
disproportionate number of small firms in the EU peripheral areas (which
generally experience higher levels of unemployment) provides scope for the
provision of subsidies for venture capital activities because costs are mainly
independent of the scale of borrowing (Honohan 1995).
Summary and conclusions
A single currency with a central bank as the only policy-making institution would,
we argue, be unacceptable. We would also suspect that it is an unstable arrange-
What type of European monetary union?
59
ment. The ECB will be unable to control inflation, and the setting of interest rates
will inevitably disadvantage some regions and nations. The transparency of the
single currency will be a transparency not only of prices but also of living standards
and levels of unemployment. It is an open question as to whether an economy with
the degree of diversity (of economic performance and of economic institutions)
such as the European Union can operate effectively without policies which
recognise those disparities and which seek to mitigate the effects of the disparities
and to reduce them over time. Creating a single currency with the only EU-level
institution of the ECB and to impose on that single currency a set of policy
arrangements which are deflationary in nature are not good omens for the success
operation of the European economies. The functioning of a single currency will
require the development of federal level policies and institutions.
Notes
1 This ‘new monetarism’ has, of course, infected ‘new Labour’, as reflected in the title of
our paper ‘New Labour, new monetarism’ (Arestis and Sawyer 1998).
2 The CFA zone in Francophone West Africa is an exception.
3 The Treaty of Rome created the EIB in 1959. It specifically focused on the financing of
infrastructural and other fixed capital formation projects. The scale of its operation has
been very small (see Eichengreen 1997).
5
Economic performance and
the euro
Janet Bush
Introduction
It is a distinct oddity of the British debate about whether to join the euro that, for a
long time, it has been the Right that led the opposition and the Left – or rather the
pseudo-Left represented by New Labour and the Liberal Democrats – that has
been the warmest advocate of joining. In Sweden, which decisively voted no to the
single currency in September 2003, the balance of political opinion was quite
different with the Left and the trade union movement swinging opinion against
Economic and Monetary Union by highlighting the threat posed to Sweden’s
cherished tradition of generous social welfare and labour market protection.
The Swedish prognosis was spot on and, finally, with the evidence of four years
of privatisation, public spending cuts, concerted attempts to dismantle labour
market protection and a deadly combination of tight money and tight budget
policies which has strangled growth and exacerbated Europe’s dreadful unemployment record, the British Left is beginning to wake up to the true implications of the
euro project.
Economic and Monetary Union is a battering ram towards free market
economics. For that reason, if political issues of democracy and sovereignty did not
override all others for many root-and-branch British Conservatives, the economics
ought to be attractive. To outliers such as former Chancellor Kenneth Clarke, it is
indeed the hope of a free market Europe that has partly fuelled his euro
enthusiasm.
Painfully mindful of the disastrous results of mass unemployment in Germany in
the 1930s, Europe has, in the entire post-war period, held out against neoliberalism and defended a consensual social market model of economic management in defiance of what has become known as the Washington Consensus.
However, gradually, a new Brussels consensus started to emerge among Europe’s
political elites, egged on by multinational business. They were collectively fed up
with Europe’s relatively sclerotic growth, putting it down to the handicap of
‘inflexible’ labour markets, overly generous welfare provision and industrial
protection. As Professor Christian Watrin of Köln University said to me in the
early 1980s: ‘What Germany needs is a dose of Thatcherism.’
This theme has appeared repeatedly in the utterances of Europe’s new orthodox
Economic performance and the euro 61
priests. Between them, the President of the European Central Bank (ECB), the
Vice President and the Chief Economist had, by February 2002, made 14 appearances at the European Parliament’s Committee on Economic and Monetary
Affairs for the purpose of presenting a report on monetary policy. On 12 occasions
the representative of the central bank asserted that further efforts were required to
reduce taxation or government spending, or that fiscal stabilisation would otherwise be inappropriate, and on 13 of them reference was made to the desirability of
‘structural reform’, ‘deregulation’ or some other expression with a meaning
including labour market deregulation.
By early 2003 the ECB’s agenda was even clearer. In its Monthly Bulletin
published at the start of May, the ECB gave warning that free health care in the
eurozone would have to be restricted to emergency services only because otherwise
the cost would overwhelm European economies. Governments should distinguish
between ‘essential, privately non-insurable and non-affordable services’ and those
where ‘private financing might be more efficient’. Ageing populations would make
state pensions, tax-funded health services and long-term care unaffordable and, it
continued, tax rises to meet the extra demands would soon become politically
unacceptable.
This report emerged on the day of a key UK parliamentary debate on
foundation hospitals, and the link between privatisation of public services and
joining the euro was finally rammed home. Gordon Brown’s Treasury has so far
stood firm against interference by the European Commission in the management
of British fiscal policy – the Chancellor has repeatedly made it clear that tax,
spending and borrowing decisions remain in his purview, whether it has been in
rejecting the Commission’s advice in its Broad Economic Guidelines that, to
comply with the European Union’s Growth and Stability Pact (GSP), Britain
would have to cut spending by £10 billion; or in withstanding pressure for a
European withholding tax on the City; or in standing firm against attempts to
impose VAT on children’s books and clothes. However, it is a source of significant
dismay that a Labour government in Britain is not only prepared to champion the
dismantling of publicly funded services but is, in fact, the main cheerleader for the
deregulation agenda in Europe which the euro is catalysing.
The neo-liberal stranglehold on growth
In years gone by Britain’s economy was pityingly described as the ‘sick man of
Europe’. The eurozone now deserves to be known as the ‘sick man of the global
economy’. In September 2003 the International Monetary Fund again downgraded its forecast for eurozone growth, and its chief economist Kenneth Rogoff,
pointedly contrasting the burgeoning recovery in the United States of America
(and the United Kingdom), observed: ‘For the moment, most Europeans who want
to see an economic recovery will have to watch it on TV.’
Neo-liberals, including some in the Blair government, argue that the eurozone’s
low growth and high unemployment is the result of structural rigidities, most
notably in labour markets and in the imposition of high welfare taxes on
62 Janet Bush
employers. If only eurozone governments would scale down the welfare state and
introduce an Anglo-Saxon labour market, all would be well.
The real culprit is, however, macroeconomic policy, which has squeezed growth
and kept unemployment high for decades now.
Since the oil shocks of the 1970s the European economic establishment has
embraced a classic monetarist orthodox approach, centred on bearing down on
prices by reining in growth and cutting budget deficits. In the 1970s the
Bundesbank reacted with extraordinary zealousness to the threat of higher
inflation from rising oil prices, and other central banks followed the German
central bank’s restrictive policies throughout the 1980s. Inflation came down but
so did growth.
The obsession with inflation and disregard of growth continued in the 1990s
after the European establishment decided to formalise its commitment to
orthodoxy in plans for Economic and Monetary Union, enshrined in the 1992
Maastricht Treaty. Centre stage was a set of convergence criteria, aimed at making
it more sustainable for different economies to live with a single interest rate. The
criteria were highly conservative, ordering reductions in inflation through
swinging cuts in budget deficits and public debt levels for applicant countries. By
1999, when the euro was launched, the orthodox economic establishment was
congratulating itself on a cut in EU inflation from an average of 4.9 per cent in
1986–90 to 3.9 per cent in 1991–5. Budget deficits fell sharply. But the result of this
restrictive programme was an exponential rise in unemployment. Between 1992
and 1999 national income in the economies that joined EMU rose by only an
average of 1.7 per cent a year. From 1994 to late 1998 the average rate of
unemployment never dropped below 10 per cent (about twice the rate in the
United States over the same period (Figures 5.1 and 5.2)).
Attributing these economic developments substantially to the Maastricht
convergence programme may seem controversial, but compare what happened in
those European economies that did not set policy to join the euro in the first wave.
The United Kingdom, which saw unemployment double between 1990 and 1992
4300
4200
4100
4000
3900
3800
3700
3600
Oct-02
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
Apr-01
Jan-01
3500
Figure 5.1 German unemployment, January 2001–October 2002 (000s).
Economic performance and the euro
63
2500
2450
2400
2350
2300
2250
Oct-02
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
Apr-01
Jan-01
2200
Figure 5.2 French unemployment, January 2001–October 2002 (000s).
1040
1020
1000
980
960
940
920
Oct-02
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
Apr-01
Jan-01
900
Figure 5.3 UK unemployment, January 2001–October 2002 (000s).
when it briefly locked the pound to European currencies in the Exchange Rate
Mechanism, then saw unemployment fall from 9.3 per cent to 6.1 per cent in 1999
(Figure 5.3). Able to pursue monetary and fiscal policies unfettered by Maastricht
and then by the discipline of the euro itself, unemployment fell further to 5.1 per
cent by the end of 2002. Denmark, which also negotiated an opt-out from the euro,
saw unemployment drop from 8.2 per cent to 4.7 per cent at the end of 2002. A
measure of how restrictive policies were for euro candidates comes from Brian
Burkitt of the University of Bradford, who estimated that, had Britain joined the
euro in 1999, it would have had to cut public spending by £42 billion to meet the
Treaty’s 3 per cent deficit limit.
Inside EMU the squeeze has continued. The European Central Bank was
modelled on the Bundesbank, with a sole mandate to bear down on inflation.
Unlike the US Federal Reserve, it has no mandate to promote growth and employment and the ECB has been far slower than central banks in the United States or in
Britain to cut rates in response to the world slowdown since 2001 (Figure 5.4).
64 Janet Bush
4.0
2.0
➂
➀
➁
1.0
0.0
➃
➃
➃
➂
–1.0
–2.0
➁
➁
➁
➃
–3.0
➀ UK
➁ Germany
➂ France
➃ Italy
➂
–4.0
–5.0
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
–6.0
–7.0
➀
➂
➃
➁
2002
3.0
Figure 5.4 Growth rates in the United Kingdom, Germany, France and Italy, 1982–2002
(HM Treasury).
Compounding this ultra-conservatism on interest rates has been the continuing
squeeze on public spending in the eurozone under the 3 per cent deficit limit
imposed by the Growth and Stability Pact. Even as growth stagnates and
unemployment rises, eurozone economies are being obliged to cut spending or
raise taxes in order to comply. A counter-cyclical boost to demand, as Keynes
classically prescribed, is outlawed. Indeed, the opposite has been occurring – fiscal
policy is being tightened even as growth slows.
Public spending cuts and tax rises are being pushed through across the
eurozone. At the time of writing (autumn 2003), Italy’s 2004 budget plans to
include a mixture of revenue-raising measures and spending cuts that would total
€16bn–18bn (US$18bn–20bn, £11bn–12.7bn) (FT, 11 September). The Netherlands was expected to unveil a €17bn package of cuts in its budget, including a twoyear freeze on welfare benefits, civil servants’ pay and child benefits, together with
higher tobacco prices (FT, 15 September). In Germany:
University funding has been slashed, tuition fees brought in for long-term
students, subsidies for housing abolished, urban renewal projects abandoned,
charges introduced for school books, kindergarten fees jacked up, 1,450 police
jobs axed, swimming pools closed, grants for welfare recipients ended,
fountains turned off, arts funding chopped, a freeze imposed on civil-service
vacancies, and plans to lop €1 billion off the city’s wage bill of €7 billion by
2006 have been approved.
(Economist, 19 July)
Economic performance and the euro
65
Outside the euro, Britain, although theoretically bound by the GSP, has escaped
such enforced public spending cuts and instead, in the 2003 budget, has been able
to raise borrowing, preserve investment plans and boost the economy while it has
been relatively weak, the classic Keynesian response to the threat of recession.
Despite a general consensus at the start of 2003 that the rigidity of the Pact was
exacerbating the eurozone economic slowdown, the orthodox architects of the
rules stayed firm. In March the European Parliament (EP) adopted a resolution in
favour of enshrining the Pact into the new EU Constitutional Treaty to avoid any
backsliding on fiscal discipline. The EP even stipulated that ‘factors such as public
investment in services’ should not be taken into account in calculating deficits.
Even the International Monetary Fund (IMF), the world’s cheerleader of neoliberal economics, takes a more flexible view. In its World Economic Outlook, in 2002,
it called for further action to bring eurozone deficits down despite evidence of tepid
growth. By the spring of 2003 it was so alarmed that it called on the European
Union to relax its budget rules. ‘Automatic stabilisers should be allowed their full
impact, even if that were to lead to a breach of the 3 per cent limit of the Stability
Pact in 2003’, the Financial Times reported in advance of formal publication of the
IMF’s spring Outlook.
Monetarism goes east
Now, with ten new members due to join the European Union in 2004 – and forced
to sign up to membership of the euro at some stage as the price of entry – the neoliberalism is being applied also in eastern Europe, which has provided some rare
European growth hot spots in recent years. There is the obsession with inflation at
the expense of jobs. In March, Tommaso Padoa Schioppa, a member of the ECB
Board, told applicant countries that ‘they must strive for price stability right from
the beginning of the preparation process’ and ensure that they institute independence for their central banks, so that the fight against inflation is put at the centre of
policy. Applicant countries are also under intense pressure to cut budget deficits,
potentially devastating for their already high unemployment levels.
Poland, the largest of the accession countries, is a depressing case study. While
unemployment peaked at over 18 per cent in 2002, inflation had fallen to an alltime low of 1.9 per cent as interest rates were kept above 8 per cent. Clearly, the
economy has been suffering from a lack of demand, and monetary policy is too
restrictive. Two small coalition partners in Poland’s left-wing government drafted
a controversial bill in 2002 demanding that the independent National Bank of
Poland‘s mandate should be made to include the promotion of employment and
growth in addition to ensuring price stability. Poland’s president rejected the bill,
proposing an alternative measure that would comply with EU requirements for
central bank independence.
Low growth has seen Poland’s budget deficit soar and, as the country struggles to
shape up to meet the Maastricht criteria for euro entry, it is under pressure to cut its
deficit – a policy that will only exacerbate Poland’s lack of growth and mass
unemployment. In 2002 Poland’s parliament proposed a programme that would
66 Janet Bush
limit the annual growth of public spending to only 1 per cent in real terms. Days
after Hungarians voted overwhelmingly to join the European Union, their prime
minister revealed a substantial programme of public-spending cuts, including cuts
in health care. In 2002 Hungary’s deficit ballooned to 9.4 per cent of GDP. To
meet the euro entry criteria, it has to fall to no more than 3 per cent of GDP. There
is no escape from a chronic slowdown ahead, led by fiscal retrenchment.
In its end-2000 survey of the region, the European Bank of Reconstruction and
Development (EBRD) identified the impossible circle that central and eastern
European economies are being forced to square if they are to comply with the
membership rules for the European Union and Economic and Monetary Union. It
acknowledged that ‘rapid growth over a sustained period is necessary for the
accession countries to catch up with the EU average for productivity and living
standards’. In 2001 the average income per head in the ten accession countries was
only 40 per cent of the EU average. However, the EBRD said, ‘at the same time
they will be subject to the demands of the Stability and Growth Pact and, for those
countries striving for early adoption of the euro, the Maastricht criteria’. It noted
that the ‘looming requirement of a general government budget that is close to
balance or in surplus in the medium term further points to the need for early fiscal
consolidation in many of the accession candidates’. Fiscal consolidation is
economist-speak for cutting budget deficits either through lower public spending
or higher taxes.
As in western Europe, eastern Europe is coming under pressure to cut
unemployment not through the pursuit of higher growth but through ‘free market
reform’. Quite simply, workers in high unemployment areas will be expected to see
their wages and conditions slashed until they ‘price themselves back into the
market’. Poland, for example, is planning to make its Labour Code more flexible.
In Germany, on the same day as the Institute for Labour Market Research issued
its estimate of 7.2 million unemployed, the government announced cuts in
unemployment benefit entitlement.
Institutional chaos – the forcing mechanism for political
integration
It is not an exaggeration to suggest that macroeconomic policy has been set on
maximum squeeze precisely because this will engineer a crisis which will be a catalyst
towards more flexible markets – the aim of neo-liberals – and, if this reform
program fails to live up to expectations (as those who want to force the pace of
European political integration quietly hope), radically change the institutional
structure of EMU. Romano Prodi, President of the European Commission, came
close to admitting this in an interview with the Financial Times on 4 December 2001.
He said:
I am sure the euro will oblige us to introduce a new set of economic policy
instruments. It is politically impossible to propose that now. But some day
there will be a crisis and new instruments will be created.
Economic performance and the euro
67
The argument seems to be that the euro would damage European economies
without political change and is therefore a useful forcing mechanism. This is social
engineering on a grand scale: Trotsky in Brussels – cause economic chaos and hope
for a positive political outcome.
Divergence is actually the norm in currency unions and the disparities in Europe
are dramatic compared with those of the United States, making the rigidities of the
euro system very worrying indeed. In the United States, unemployment ranges
between 2 per cent and 6 per cent. In 2001 Eurostat figures showed a range in
unemployment rates in the European Union of 1.2 per cent to 33.3 per cent. In the
ten accession countries, the range was similar, between 2 per cent and 32.8 per
cent. One quarter of EU regions and nine out of ten of the ten accession countries
had GDP below 75 per cent of the EU average. And the average woman in the
European Union earns a quarter less than a man. Inflation rates have varied wildly
in the eurozone (Figure 5.5).
Convergence is not the answer – no economies or regions ever move in precise
lockstep with each other and the mere existence of monetary union, as some of its
advocates argue, does not force them so to do. What is needed – and what the US
monetary union developed – is increased flexibility in other areas. Professor
Robert Mundell who won the Nobel Prize in economics for his paper on ‘optimal
currency theory’ concluded that three ingredients are needed to make a monetary
union work: labour mobility, deregulated labour markets and a redistribution
mechanism through a federal budget.
In Europe’s monetary union, none of these currently exists. Labour mobility in
the European Union is 27 times less than in the United States of America, according to the European Commission; moves to make labour markets flexible have
foundered in the face of popular European support for a consensual social model;
and the eurozone fiscal framework is incapable of playing a rebalancing role.
In well-run economies, monetary and fiscal policies work in harmony. In
Britain, even with an independent central bank, an observer from the Treasury sits
▲
▲
Figure 5.5 UK and eurozone members’ inflation, harmonised index of consumer prices
(HM Treasury).
68 Janet Bush
in on interest rate meetings. Before the Chancellor unveils his annual budget,
private soundings of the Bank of England are taken to ascertain whether the
package will impact on interest rates. In the eurozone, such coordination is
precluded by a horribly lop-sided institutional set-up. A strictly independent
European Central Bank runs monetary policy. But there is no single institution to
run fiscal policy for the simple reason that member states were not prepared to give
up control of tax, spending and borrowing decisions, described by arch-europhile
former chancellor, Kenneth Clarke, as ‘the cornerstone of democracy’.
Put bluntly, the ECB could make brilliant judgements in setting the euro interest
rate – but, if politicians play fast and loose on the fiscal side, the system will still be
unstable. So the Growth and Stability Pact was agreed, limiting governments at all
times to budgets of 3 per cent of GDP or less or face fines. As is now well known, the
GDP, in practice, is unworkable and damaging.
The elemental flaw is that it is not enforceable. The theory is that ‘peer pressure’
and a slap on the wrist from the European Commission would force member states
to comply. In practice, smaller countries with less clout have kept to the rules and
big countries have flouted them ever more recklessly. The prime minister of
France, which has already burst the GDP’s limits, is dismissive. He said recently:
‘My first duty is employment and not to solve accounting equations and do
mathematical problems until some office or other in some country or other is
satisfied.’
The second problem is that the GDP requires member states to do exactly the
wrong thing when they hit rough economic waters. Instead of temporarily raising
borrowing – as Gordon Brown has done in Britain, with the effect that growth is
beginning to recover – eurozone members have to cut borrowing and spending
and raise taxes. Take the Netherlands. It recorded a GDP contraction of 0.5 per
cent in the second quarter. Yet in September it announced public spending cuts to
the equivalent of US$12.4 billion. As Romano Prodi, President of the
Commission, said of the GDP, it is ‘stupid. The Growth and Stability Pact will have
to be loosened but what is currently on the agenda is mere tinkering.
EMU’s fiscal black hole
Monetary unions do not need marginal fiscal flexibility; they need huge flexibility.
This brings us back to Professor Mundell’s third condition for a successful currency
union – a federal budget to act as an automatic stabiliser. In the United States of
America, some 25 per cent of US GDP is available to redistribute resources
automatically through the transfer of tax revenues in prospering states to the
unemployment benefit in stagnating states. For every $1 fall in a state’s GDP, 40
cents will be paid from the federal budget. This is the glue that has kept the US
monetary union together.
No such system exists in Europe. The EU budget is 1.27 per cent of EU GDP
and half of that goes on agricultural subsidies. This is wholly inadequate and there
is no realistic prospect of change because of political opposition to paying a higher
proportion of taxation to the European Union. After a Belgian proposal in mid-
Economic performance and the euro
69
2001 of a new EU tax, even the most committed European integrationists were
horrified. The Dutch finance minister observed: ‘The last time a new tax was
launched in the Netherlands it resulted in the Eighty Years War. I am not sure a
new tax for the EU would be much better this time.’ Post-enlargement, I suspect
opposition to paying a higher proportion of taxes direct to the European Union will
be even more entrenched as western electorates baulk at their tax euros being used
to subsidise relatively poor new entrants.
So, there is a solution to both the problem of fiscal enforcement and redistribution, but it is a political non-starter. The euro needs a single fiscal authority,
running a federal budget. In its submission to the Convention on the Future of the
European Union, the Commission proposed it be that authority, an ‘economic
government of Europe’. But the draft EU constitution, in its current form, keeps
national vetoes over taxation. Popular political opposition to centralisation of the
European Union – most recently expressed in the decisive Swedish ‘no’ vote to the
euro – will ensure this continues to be the case. There is, quite simply, no prospect
of a workable fiscal policy in EMU and this leaves the euro in limbo. I suspect that
continued low growth, economic instability and political tensions will wreck the
system in the years ahead.
Is even a perfect monetary union worth the trouble?
As a postscript to what I believe is a true description of the extraordinary economic
and political fault lines in the euro project, let me look finally at whether,
intrinsically, it is worth sorting out this mess on economic, rather than political,
grounds. The fundamental economic argument of euro advocates is that a single
currency is needed to complete and perfect the Single Market. That theory is, in
itself, flawed. Bear in mind that the richest state in Asia is Singapore, a small island
with no natural resources and with its own currency. The richest country in Europe
is Switzerland, which is not even a member of the European Union, let alone the
eurozone. The truth is that membership of the Single Market and membership of
the euro is a separate matter.
One, even in the view of the European Commission, is far more potentially
valuable to its participants than the other. The Commission’s Ceccini report in the
late 1980s put the gains of belonging to the Single Market at some 4 to 6 per cent of
GDP; (a post-mortem on this analysis a couple of years ago admitted that only
around 20 per cent of these gains had actually materialised). In 1990 another
report by the Commission titled ‘One Market, One Currency’ concluded that
joining the euro would produce a gain of 0.5 to 1.5 per cent of GDP.
It is quite likely that, for Britain, the actual figure would be substantially lower
than this. The Commission had a figure of 0.4 per cent for transactions, including
lower transaction costs and lower exchange rate volatility. However, this was an
estimate for an average EU country and Britain is a larger economy than average
and trades less in the European Union than the average. Quite properly, therefore,
this component could be reduced to around 0.2 per cent. Then the Commission
had a gain of 0.3 per cent from more price certainty and less price discrimination.
70 Janet Bush
This is highly contentious given that increasing use of the Internet means that there
is very little lack of transparency in current prices and that we live in a low inflation
world. The rest of the Commission’s putative gain from membership of the single
currency comes from the theoretical extra investment and output generated by the
first two components, an effect of some 0.7 per cent. Given the analysis above, let us
cut that by half.
So, a credible case can be put for the gains of membership of the euro for the
United Kingdom being only around 0.5 per cent of GDP. There continues to be a
case for remaining a member of the Single Market, but the case for joining the euro
seems laughably trivial compared with giving up control of both monetary and
fiscal policy and so taking a substantial step towards a far more centralised, remote
political system that, thus far, does not have the consent of the peoples of Europe.
6
The euro
An outsider’s perspective
Paul Ormerod
Introduction
In this chapter I want try to look from the perspective of, say, a new or candidate
member of the European Union as a whole: one of the countries of eastern Europe
which has been struggling to adjust to the concept of a market economy, to the
realities of the world economy; or, more generally, one of the countries in South
America or East Asia which, whilst not desperately poor, are still a long way behind
western Europe in terms of living standards. What does the euro have to offer to
countries which have the potential to move towards western European living
standards, but which have not yet found the elusive mix of institutional
arrangements and incentives which generates such a profusion of wealth?
What might the euro seem like to a poorer country with aspirations to become
rich? Many countries are anxious to join the European Union, and we can
immediately see why in Table 6.1. This shows the GDP per capita of Greece,
Ireland, Portugal and Spain in 1975 and in 2000. The table does not show the raw
data, but their per capita GDP relative to the rich EU core of France, Germany, Italy
and Benelux.
In 1975 these four countries were fairly poor, on the fringe of western Europe.
By 2000 they had started to move towards the income levels of the EU core. All
countries in the European Union grew in absolute terms between 1975 and 2000,
but the ‘Fringe Four’ of 1975 grew more rapidly.
I cannot resist mentioning that the easiest way to get this data on the web was
from the CIA’s site. The US government offers speedy access to large amounts of
Table 6.1 Per capita GDP relative to the EU core (%)
Greece
Ireland
Portugal
Spain
Source: CIA.
1975
2000
55
55
55
70
65
90
65
75
72 Paul Ormerod
data for free – in contrast to European agencies such as Eurostat whose sites tend to
be slow to access and who charge for almost everything. In terms of encouraging
the use of new technology, there is a lesson here.
But the key point about Table 6.1 is that membership of the European Union
has positively benefited its poorer member states. There is a strong incentive for
others to join.
Yet the euro cannot have played much of a role in enabling these countries to
start catching up with the affluent core in terms of living standards. A simple but
very important reason is that the euro did not exist until 1999. The catch-up has
happened in part because of the distribution of subsidies from the richer countries,
and in part because of the increasing integration of Spain, Portugal and so on with
the wider EU market.
Of course, it is argued now that the euro will intensify this process, by reducing
transactions costs and promoting price transparency. Whilst this is true, it is much
less important than the need to complete the process of implementing the concept
of the single market. There are still far too many barriers to trade and competition
across the European Union. To give one example: the punitive air fares on most
European routes are due to the willingness of the Commission to allow, by one
means or another, a succession of massive subsidies to continue to be paid to
inefficient national carriers. Another example is the mobile phone, and the failure
to establish common standards across the European Union. Energy spent on
introducing the euro could have been better spent on removing trade barriers and
completing the single market.
The striking feature about the past half-century or so is that a substantial number
of countries, principally in Asia, have seen rapid expansions of their living
standards – first of all Japan, then countries like South Korea and Singapore,
Malaysia and Indonesia and now India. It is precisely those countries which have
embraced the concept of globalisation and increasing integration with the rest of
the world which have done well. It is states such as Burma, North Korea and
Afghanistan, which have cut themselves off, which have gone backwards.
So membership of the European Union offers the benefits of globalisation, of
ready access to a huge market. In addition, membership gives a clear badge which
certifies credit worthiness and political stability. This enables countries to attract
direct investment from overseas. Further, the European Union provides large
subsidies to help cushion the shocks which such integration inevitably brings.
But it is not clear what benefits the euro as such, rather than membership of the
European Union, brings. Indeed, a case can be made that on balance it hinders
rather than helps Europe. Certainly, in the role of a new or candidate member of the
European Union, I would be concerned. The emphasis on the euro rather than the
single market would make me worry that barriers to the things I produced might not
come down as rapidly as I would like. Indeed, this is a far from hypothetical concept,
as is shown by the debate on how much mobility of labour will be allowed from the
eastern European countries once they are in the European Union.
An immediate concern arises from the wider political economy context, rather
than the narrower focus on technical economics. There is legitimate concern about
The euro: an outsider’s perspective
73
the impact of globalisation on the democratic process. Large corporations, it is felt,
are taking decisions which influence people both much more strongly, and at the
same time more remotely, than do elected governments.
Much of this worry is misguided and often seriously misplaced. Nevertheless,
there is a sense of unease about the remoteness with which decisions are taken.
Unfortunately, the euro brings with it its very own democratic deficit. It is by no
means clear that the electorates of western Europe would have gone ahead with the
euro project if it had been submitted to referenda. We know that the only country
where a vote was permitted recently, Denmark, rejected membership. This was
despite the overwhelming support for entry on the part of the political establishment and the media. No other European government dared to put the question
before its electorate in the immediate run-up to the introduction of the currency.
New and aspirant members of the European Union in eastern Europe are of
course no strangers to the idea of having crucial decisions taken on their behalf by
the political elite. But the lack of democratic validation is, I believe, a potentially
serious problem for the euro. Across western Europe, we have already seen the
growth of parties outside the political mainstream in many of the member states.
Discontent with the remoteness of the European Commission appears to be a
common feature of the otherwise widely disparate platforms of such parties, some
of which are rather disagreeable.
The creation of the euro reinforces centralising tendencies within the European
Union. Spain, after all, is not Slovenia, but a strong and powerful economy. But
just how much influence does the governor of the Spanish central bank have on
decisions taken at the European Central Bank (ECB)? I think we all know the
answer. The real danger, I would feel looking from the outside, in joining the
European Union and the euro is that my voice would simply not be heard at all. In
any adverse circumstances, the euro project would be administered solely in the
interests of the EU core.
But even from a French or German perspective, the particular way in which the
rules of operation of the ECB have been framed may prove a handicap. The
obsession with inflation and the trap of the fiscal stability pact may prevent the
ECB from following potentially expansionary policies during any economic
downturn.
Countries outside the European Union require not only access to EU markets if
they are to eventually prosper, but they require a healthy growth rate in the
developed world of which the Union is such a major part. Downturns in the developed world are often reflected in much sharper recessions elsewhere. A squeeze on
export earnings in hard currencies can be magnified sharply in the domestic
economies of the developing world. For example, in the general world slow-down
between 1980 and 1982, the EU 15 grew in real terms by only 1 per cent. But
growth in both Argentina and Brazil was sharply negative, at –11 and –8 per cent
respectively.
The role of institutions, of the process and rules under which economic agents
take decisions is in my view absolutely central to how economies perform.
Unfortunately, the rules governing the operation of the ECB have been designed to
74 Paul Ormerod
fight yesterday’s battles. The complete focus on the control of inflation is seriously
misplaced. As a result, the prospects for output growth in the European Union, and
hence in the developing world, may be affected adversely.
Think back – well, some of us can – to the dark days of 1973. Since the early
1950s inflation rates had been very similar in all western countries. Even in 1973,
with huge inflationary pressure from world commodity prices, and at higher
absolute levels of inflation, this still obtained. Inflation in most countries was in the
range 6–8 per cent, with Italy being somewhat higher at 10 per cent. Following the
oil shock, inflation rose sharply everywhere in 1974, reaching over 12 per cent even
in Germany. But by 1975 a huge disparity in inflation rates had occurred. In
Britain, inflation was 21 per cent, in Italy 16 per cent and in Germany just over 4
per cent.
A great deal of economic policy since then has attempted to deal with these
discrepancies, which arose, after a long period of convergence, in a period of only
18 months. Policy makers remain obsessed with this period, which is a most
unusual one.
In general, the western economies have seen extremely low rates of inflation. It
varies, of course, from year to year, but on average it has been low. Even in the two
decades of full employment in the 1950s and 1960s it was only around 3 per cent.
With the exceptions of wartime and the unique circumstances following the 1970s,
it has usually been even lower. Low inflation is the norm, and the opening years of
the twenty-first century are no exception to this rule.
Low inflation exists because of appropriate institutions and structures. These are
very complex but can be described very simply. First, the structures of capitalism,
to a much higher degree than any other previously or actually existing social and
economic system, encourage innovation. Second, there is the existence of
competition in the product markets. I do not mean by this the idealised world of
perfect competition in economic theory, but we cannot ignore the substantial
amount of competition which there is in most product markets. These two factors
set the general framework for low inflation.
It is not an accident that the hyperinflations, when inflation reaches millions of
per cent, we have seen have only taken place in a restricted set of institutional
settings: in siege economies, in wartime and in societies in which the fabric of civil
society is extremely strained – Germany in the 1920s, various central European
states at the end of the Second World War, Balkan economies in the 1990s are
some examples of hyperinflation. All these were societies under massive strain. We
could think of some European countries, such as Britain and Italy in the mid1970s, as very mild examples of this latter phenomenon.
A monetarist might well say that irresponsible monetary policies could prove
stronger than these two institutional factors. In a logical sense, this is trivially true.
But in practice we never, ever observe a central bank in an orderly, peacetime
western society expanding the money supply by one million per cent, even
assuming there were enough helicopters in the world to scatter it with. It is much
harder to imagine a counter-factual in which this happens than it is to imagine the
workers of Britain and Italy being disciplined by monetary policy in 1974.
The euro: an outsider’s perspective
75
An implication of this is that detailed, short-term targeting of inflation rates is
more or less meaningless. We should decide the kind of inflationary regime we are
in – a low one at present – and not worry about year-on-year fluctuations. The
ECB should be far more concerned with output growth than with inflation.
The lack of any stable relationship between the growth in demand and inflation
in the European Union is shown in Figure 6.1. This plots the annual rate of
inflation in the EU 15 against the rate of growth of real GDP over what might be
termed the ‘transition’ period of 1971–94. Inflation rose in the early 1970s, was
gradually contained and by the mid-1990s had fallen to under 3 per cent.
The striking feature of the chart is the lack of any recognisable pattern in the
relationship between inflation and growth. The picture is the same if the growth in
the previous year is used instead. Yet policy makers continue to act as if faster
growth leads automatically to higher inflation. In reality, fast growth can coincide
with low inflation, the United States of America in the 1990s being but the latest
example of this.
It is the misplaced emphasis on containing inflation which is my main concern
about the operation of the euro. If this has the effect of restricting output growth in
the European Union, the developing world is likely to suffer even more than the
Union itself. Far from assisting the rest of the world, the euro may damage it. The
potential parallels with the Great Depression of the 1930s and the policies of
central bankers are too close for comfort in the present circumstances.
So, overall, if I were a potential EU member I would say that the case for joining
remains very strong. But this is because of the access gained to the enormous EU
10
75
80
74
81
76
82
8
77
79
78
71
Inflation
83
73
72
6
84
91
85
90
86
89
92
4
88
93
87
94
0
1
2
3
Real GDP
Figure 6.1 Inflation and real GDP growth in the EU15 (%).
4
5
76 Paul Ormerod
market and the increased attractiveness of the country to foreign investment rather
than to the elusive benefits of the euro. I would prefer that the member states had
focused their energies over the past few years on admitting eastern European states
rather than on the euro. I would hope that any economic difficulties which might
arise from the euro would not continue to distract them from this. Finally, if I were,
say, a South American government, I would certainly be worried about an
economic slow-down in Europe, and concerned in particular that the policies of
the ECB might exacerbate this, with potentially devastating consequences for my
economy.
7
The ECB in theory and practice
Mark Baimbridge
Introduction
The European Central Bank (ECB) is a creation of the Treaty on European Union
(TEU), which designed it to be the most independent monetary authority in the
world. The ECB’s architects sought to insulate it completely from political
pressures, both at the national government and at the eurozone level. The position
of the ECB under the TEU permits no clear accountability to either national or
federal European institutions. It stipulates that the ECB Council’s deliberations
remain confidential, whilst the only method of questioning the ECB’s policies is
through periodic reports to the European Parliament. The ECB is the sole body
credited with determining the appropriate monetary and exchange rate policy for
the entire eurozone and as such its ability to fulfil its stated objectives will be crucial
to the eventual success or failure of European Monetary Union (EMU).
The crucial operational features of the ECB are that its sole policy objective is
the pursuit of price stability. It is also responsible for defining and implementing the
European Union’s monetary policy, together with supporting the attainment of
general economic objectives. This design format is founded upon both theoretical
(Kydland and Prescott 1997; Barro and Gordon 1983; Alesina 1989; Alesina and
Grilli 1991) and empirical (Bade and Parkin 1988; Alesina 1988 and 1989;
Cukierman 1992; Alesina and Summers 1993) studies whereby the transfer of
monetary policy from governments to an independent central bank is likely to
result in lower inflation.
Consequently, the paucity of critical analysis of the ability of the ECB to stabilise
the eurozone economy, complete with low inflation, full employment, a
sustainable balance of payments and good level of economic growth, should be of
great concern for all interested in European integration. However, the legal
framework, institutional arrangements and emerging operating practices of the
ECB are increasingly coming under closer scrutinisation and criticism (Buiter
1999; Howarth and Loedel 2003). This chapter seeks to contribute to this debate
through analysing two aspects of the ECB. First, it reviews its theoretical
underpinning in terms of the concept of central bank ‘independence’. Second, it
examines the ECB’s philosophy and conduct of monetary policy.
78 Mark Baimbridge
Central bank independence
The apolitical status of the ECB can be examined in greater detail in relation to the
concepts of economic and political independence. The latter refers to its decisions
not being conditional on the approval of government, whilst the former pertains to
its ability to operate monetary policy without government undertaking contrary
actions. Table 7.1 illustrates the comparative position in terms of the political,
economic and combined indices of national central banks (NCBs), following the
adoption of the ECB criteria. The comparative figures are calculated by subtracting the value of the ECB indices from those of the EU member states’ central
banks. This procedure clearly identifies the German Bundesbank as providing the
blueprint for the ECB with no required revisions to its independence characteristics. The central bank of the Netherlands is the only other to fall below the overall
mean comparison figure of six, whilst Denmark and Ireland coincide with the
average. In contrast, those NCBs requiring the largest institutional reforms to meet
the TEU requirements were, in ascending magnitude: Belgium, France, Spain,
Britain, Italy, Greece and Portugal. It is interesting to note that this division of EU
member states mirrors the established concept of ‘core’ and periphery groups
regarding the formation of the single currency area.
The belief that central banks should be independent from political influence has
deep historical roots and featured in the discussions leading to the establishment of
many twentieth-century central banks (Toniolo 1988). The historical desire to
impose limits upon the government’s ability to fund itself through seigniorage is
combined with the orthodox contemporary argument that politicians manipulate
monetary policy to win elections, resulting in an excessive concentration upon
short-term macroeconomic fine-tuning (Swinburne and Castello-Branco 1991).
The conceptual case for central bank independence is primarily based on the view
Table 7.1 Comparison of central bank independence of EU member states and the ECB
Present index
of political
independence
Comparison to
political
independence
of ECB
Present index
of economic
independence
Comparison to
economic
independence
of ECB
Comparison to
combined
independence
of ECB
Belgium
Denmark
France
Germany
Greece
Ireland
Italy
Netherlands
Portugal
Spain
UK
1
3
2
6
2
3
4
6
1
3
1
–5
–3
–4
0
–4
–3
–2
0
–5
–3
–5
5
4
4
7
2
4
1
4
2
3
5
–2
–3
–3
0
–5
–3
–6
–3
–5
–4
–2
–7
–6
–7
0
–9
–6
–8
–3
–10
–7
–7
Mean
3
–3
4
–3
–6
Source: Baimbridge et al. (2004).
The ECB in theory and practice 79
that arrangements raising the credibility of monetary policy will increase its
effectiveness in pursuit of price stability. Although this view has long been held,
only in recent years has the concept of policy credibility been defined and analysed
rigorously (Cukierman 1986; Blackburn and Christensen 1989). The establishment of an independent central bank with strong anti-inflationary preferences is
seen as a way for the state to bind its hands against the electoral temptation of
inducing unanticipated increases in the price level. As commitment increases
credibility, orthodox theory predicts that divergences between the central bank’s
policies and people’s expectations will become smaller. It is from this theoretical
perspective of monetarism and rational expectations that the ECB was launched.
However, this approach has been challenged. First, if central bank independence increases credibility, it should be associated with greater rigidity in the
setting of nominal prices and money wages, reflecting the fact that the bank’s
promise to keep inflation low is believed. However, studies of OECD countries by
Posen (1993, 1998) indicated that neither effect occurs. Indeed independence not
merely fails to reduce the cost of disinflation, but rather seems to increase it.
Second, most of the contemporary support for central bank independence stems
from a partial and frequently historically naive view of West German experience,
whereby any one item that helped to promote rapid post-war German growth,
such as the independent Bundesbank, was part of a structural totality defining its
role. Accordingly it is unlikely to be effective if transferred by itself to other
countries or onto the broader EU stage (Dowd 1989, 1994). It may be more appropriate to reverse the fashionable view; the structural conditions that produced the
strength of the German economy, allowing it to grow while maintaining a low
inflation rate also enabled it to afford the luxury of an independent central bank
concentrating on monetary stability.
Third, the theoretical case for independence is based on two analytical assumptions that have become generally accepted by economists: (i) the vertical long-term
Phillips curve, which implies that price stability can be achieved with no longterm cost of unemployment; and (ii) the political business cycle. However, both rest
on insecure foundations. The vertical Phillips curve analysis rests upon the concept
of a natural rate of unemployment, the frequently changing determinants of which
economists remain largely ignorant (Davidson 1998; Karanassou and Snower
1998; Madsen 1998; Nickell 1998; Phelps and Zoega 1998). Moreover, repeated
studies indicate that relatively little evidence exists for the occurrence of any
systematic political business cycle (Kalecki 1943; Breton 1974; Nordhaus 1975;
MacRae 1977; Wagner 1977; Frey 1978; Alesina 1989).
Fourth, the empirical evidence concerning central bank independence and
lower-than-average inflation compounds difficulties. The persuasive nature of
monetarist ideas led to the widespread conviction that low inflation is an important
condition for high and sustained growth. Thus its achievement should be the
priority for government economic policy. However, many studies indicate that no
significant relationship exists between low inflation and higher rates of growth until
double-digit rates of price increase occur, which do retard economic development
(Thirlwall and Barton 1971; Brown 1985; Stanners 1993).
80 Mark Baimbridge
Moreover, economic policy objectives should be sufficiently comprehensive as
to include the pursuit of multiple policy targets. However, if responsibility for price
stability rests solely with an independent central bank, while others remain with
government, economic management potentially becomes more difficult due to the
separation of monetary and fiscal policy (Blake and Weale 1998). Hence, an
advantage of a non-independent central bank is that budgetary and monetary
measures can complement each other, forging a coordinated strategy of economic
management. Analysis of the role of a central bank confirms that, in a world of
external shocks, the case for delegating monetary policy is weak and that a
coordinated approach is more likely to achieve the electorate’s objectives (Rogoff
1985a, 1985b). Moreover, periods of high inflation have not occurred wholly, or
even mainly, due to lax monetary expansion, whilst there is greater international
evidence of fiscal, rather than monetary, policy being manipulated for electoral
ends (Alesina 1989).
When assessing the impact of central bank independence upon price stability,
economists have mostly utilised imputed ‘degrees of independence’ to evaluate the
heterogeneous character of central banks (Mangano 1998). The initial method of
imputing degrees of independence, based solely on legislature arrangements,
found no relationship between inflation performance and independence (Bodart
1990). The index was refined by subsequent studies, which constructed a measure
of central bank independence that reflected both ‘political independence’ and
‘economic independence’ (Alesina and Grilli 1991, Grilli et al. 1991). The former
relates to the ability of the monetary authorities to choose the goals of policy, whilst
economic independence is defined by their capacity to choose the instruments with
which to pursue policy objectives. The main conclusion from such analyses is that
the average rate of inflation, and occasionally its variability, is significantly lower in
countries that possess independent central banks.
However, the value of such evidence is problematic, as the authors usually
acknowledge, because measurement of ‘degrees of independence’ possesses serious
weaknesses, which cast doubt upon the purported association between central
bank independence and the attainment of price stability. The main failings of this
approach are (i) that a limited spread of rankings inevitably restricts sensitivity
across a wide number of inherently different countries, which raises difficulties
concerning the index’s analytical usefulness; (ii) that many of the studies cover
overlapping time periods, opening up the possibility that they have found a result
unique to that particular set of data (Friedman and Schwartz 1991).
Fifth, disregard for non-economic factors that shape fiscal and monetary policy
choices is a consistent feature of these studies, illustrated by their assumption that
electorates always prefer low inflation to the possible trade-off of higher economic
growth and employment (Muscatelli 1998). However, even after analysing the role
of political factors, other potential sources of differences in inflation rates are often
neglected, such as the position of the government in the political spectrum and
various proxies of social consensus (Hansson 1987), the size of the public sector
(Alesina 1988) and that lower inflation could result from the presence of ‘guest’
workers during periods of economic growth (Burdekin and Willett 1991).
The ECB in theory and practice 81
Finally, a problematical aspect of this research is the statistical analysis of the link
between central bank independence and inflation, with most studies relying upon
the plotting of graphs. Furthermore, the manner in which the determined characteristics of central banks are aggregated to produce the overall index of central
bank independence is a major area for concern. Consequently, the index is usually
constructed through one of a number of alternative methods, none of which is
universally valid.
Monetary policy and philosophy
In October 1998 the Governing Council of the ECB announced that a key aspect
of monetary policy strategy would be a quantitative definition of price stability.
Furthermore, in order to assess risks to price stability, the ECB would make use of
two pillars. First, attributing a prominent role to monetary indicators as signalled
by the announcement of a quantitative reference value for the growth of a broad
monetary aggregate and, second, a comprehensive analysis of a wide range of
other economic and financial variables as indicators of price developments (ECB
1998, 1999, 2000, 2001; Issing et al. 2001). In relation to the quantitative definition
of price stability, the ECB Governing Council initially did not give a precise
definition. In order to specify this objective more precisely, the Governing Council
announced the quantitative definition of price stability as ‘a year-on-year increase
in the Harmonised Index of Consumer Prices (HICP) for the euro area of below
2 per cent which was ‘to be maintained over the medium term (ECB 1998).
Consequently, the ECB (2003) argued that this definition of price stability has been
conducive to a firm anchoring of inflation expectations in the euro area at levels
compatible with the definition, thereby helping to contain the inflationary effects of
the substantial price shocks which have occurred.
While the announcement of a quantitative numerical value for the price stability
objective of the ECB was welcomed, there has been criticism regarding specific
features of the definition. First, regarding the choice of the price measure, it has
been argued that the ECB should put more emphasis on measures of ‘core’ or
‘underlying’ inflation, or even specify its objective in terms of a measure of core
inflation (Gros et al. 2001; Alesina et al. 2001). Such measures could help to avoid
the risk of monetary policy makers focusing excessively on temporary price
fluctuations. Second, it has been argued that the ECB’s quantitative definition may
be too ambitious given a positive measurement bias in the HICP that could
hamper the adjustment process at low levels of inflation (Fitoussi and Creel 2002;
De Grauwe 2002). Third, it has been argued that the ECB’s definition is imprecise
and asymmetric, which may result in it being less effective in anchoring inflation
expectations and possibly hindering the clarity of explanations of policy moves
(Svensson 2002, 2003; International Monetary Fund 2002). Finally, the choice of
the specific quantitative objective requires a balance between the costs of inflation
and rationales for small positive inflation rates (Yates 1998; Wynne and
Rodriguez-Palenzuela 2002; Coenen 2003; Klaeffling and Lopez-Perez 2003).
Unfortunately, such a review of the costs and benefits of moderate inflation does
82 Mark Baimbridge
not allow the optimal rate of inflation to be precisely defined; it indicates the need
for an inflation objective embodying a sufficient safety margin against deflation. In
response to this criticism the ECB (2003) suggested that inflation objectives above 1
per cent provide sufficient safety margins to ensure against these risks.1
In relation to the first pillar, its key characteristic is the announcement of a
reference value for the annual growth of M3. Hence, the ECB seeks to communicate the medium-term focus of monetary policy to the public, as it relieves the
central bank from responding to short-run fluctuations in financial and other
variables (ECB 2003). Furthermore, by signalling continuity of the Bundesbank’s
strategy, the ESCB hoped to quickly establish credibility (von Hagen and Brückner
2002). However, the role of money and monetary analysis has generated
controversy regarding the robustness of the chosen leading indicator’s properties
with respect to price developments, on the grounds that the correlation between
money growth and inflation appears to have declined over time in parallel with
restored conditions of price stability (Begg et al. 2002). In this context, the necessity
for announcing a reference value for money growth has also been queried, together
with the usefulness per se of a separate ‘money’ pillar (Svensson 2003).
In contrast, the second pillar consists of an assessment regarding future price
developments (ECB 1998). Initially, it represented the analysis of short-run price
developments based on measures of real activity, wage cost, asset prices and fiscal
policy indicators, together with indicators of business and consumer confidence
(ECB 1999). However, no framework was specified as to how these variables would
be used to assess price developments, nor was any guidance given on the relative
weight of the variables in such assessments. It is therefore an opaque part to the
ESCB’s strategy, being void of systematic analysis and being fully discretionary
(von Hagen and Brückner 2002). Furthermore, Gaspar et al. (2001) suggest that the
analysis is now organised in the form of a macroeconomic projection, although the
ECB does not provide confidence intervals for its projections (Gali 2001).
Finally, according to the ECB (2003), the two pillars are used in parallel in
monetary policy decision making. However, there is no indication of what their
relative weights are, thus resulting in an incomprehensible strategy, as Issing et al.
(2001) partially acknowledge. Although there is nothing that would make the use
and revelation of the relative weights of the two pillars impossible, the reason why
the ECB has so far denied the public transparency of its strategy is more likely
related to the internal decision-making processes (von Hagen and Brückner 2002).
Labour’s response to central bank independence
Whether or not Britain has an independent central bank may seem an obscure
matter. But it is not. It is crucial to determining whether a Labour government can
deliver on a range of policies from the basics of growth and jobs to wider issues of
social justice. The cause of central bank independence became a 1990s bandwagon
that a great many people scrambled to join. For instance, two former Conservative
Chancellors of the Exchequer, Nigel Lawson and Norman Lamont, together with
ex-Treasury Chief Sir Peter Middleton, pressed the case for an independent Bank
The ECB in theory and practice 83
of England after their respective departures from government. Indeed, for those
still clinging on to the remnants of monetarism, they discerned that an independent
central bank would be the ideal way of securing the monetarist legacy beyond the
1980s. An independent bank would ensure that monetarists remained in power if
not in office, because it would steer the economy by financial indicators to the
detriment of the real economy. Hence, they believe that central bank independence would lock monetarism and monetarist priorities into the system regardless of
whether Labour came to power.
However, perhaps the greatest catastrophe in this area was the near universal
acceptance by Labour politicians and policy advisors of the merits regarding
central bank independence. Many were swayed by the number of commentators
who wrote favourably on the subject, arguing that this provided the medicine for
Britain’s economic malaise; others required little convincing, such as pro-EU
enthusiasts who happily accepted that as part of the TEU it must be good; whilst a
final group were attracted by the idea of being able to impose a high interest rate
regime via an independent central bank without having to answer to the public or
to the Labour movement for the consequences. Thus, through this unholy alliance
the New Labour hierarchy accepted with little question the concept of central bank
independence upon gaining power in 1997; one of its first acts was to grant the
Bank of England ‘operational independence’ regarding the setting of interest rates
in accordance with an inflation target. However, the Labour Party cannot accept
this contemporary swing in opinion if it is to remain true to its fundamental belief in
social justice (see Bean 1993; Holtham 1993).
The concept of an independent Bank of England, or an independent ECB,
essentially seeks to revert to the principles of the gold standard, under which the
level of money wages was compelled through the rate of interest to adjust to the
operation of the financial system. Thus structures of social protection become open
to undermining by the operation of unaccountable market forces. Independent
central banks, national or continental, are currently being advocated as the vehicle
to implement this sea change in the class struggle. Socialists, on the other hand,
must continue to assert the primacy of democratically accountable control over the
money supply, in order that the goals of full employment, rising living standards
and distributive justice can be pursued. Otherwise the business and moneyed
interests, which control credit flows and determine financial confidence, will exert
a silent veto through the ‘independent’ central bank over the range and character
of government action deemed to be ‘permissible’. The exercise of such a veto
would mean permanent deflation and institutionalised higher unemployment
throughout the European Union and the United Kingdom.
Conclusion
The theoretical and empirical evidence surveyed in this chapter suggests that the
creation of an independent central bank is a more finely balanced exercise than is
frequently portrayed, in particular given national economies which continue to
experience varying economic cycles and possess divergent economic structures.
84 Mark Baimbridge
Moreover, the interest rate decisions taken by central banks are amongst the most
sensitive actions deployed in a modern economy, influencing growth, living
standards, the level of unemployment and the cost of credit and mortgages.
The ECB’s problems arise from its lack of democratic accountability, transparency and democratic legitimacy as well as from its arbitrary objectives, questionable economic philosophy and the potential for intermittent conflict with the
national governments whose destinies it possesses considerable influence over. An
alternative model of a democratically accountable and controlled ECB, operating
in coordination with a combination of nationally determined fiscal policies, or a
newly established federal authority, would prove a more effective and desirable
model for EMU.
Note
1 This is also in line with the practice followed by all of the central banks of the major
developed countries that have specified numerical values for their objectives; all have a
mid-point above 1 per cent. For example: the Bank of England: 2.5 per cent (RPIX
index, approximately 1.75 on average in HICP terms); Sveriges Riksbank: 2±1 per cent
(CPI); Norges Bank: 2.5±1 per cent (CPI); Bank of Canada: 1–3 per cent (CPI); Bank of
Australia: 1–3 per cent (CPI); Reserve Bank of New Zealand: 1–3 per cent (CPI). The
Federal Reserve System and the Bank of Japan have not specified a quantitative
definition of their price stability objectives. The Swiss National Bank has adopted a
definition of price stability that is equivalent to that of the ECB.
8
The left must wake up –
Europe isn’t working
Larry Elliott
History, says Tony Blair, is on his side. Back in 1975, Labour turned public
opinion around over Europe, and if Harold Wilson could do it then, Blair sees
absolutely no reason why he can’t do it now.
If nothing else, you have to admire the prime minister’s confidence, but he is
deluding himself if he thinks the conditions in the mid-1970s are even remotely the
same as those today. Wilson had the leaderships of all three parties on his side,
together with business and the press. Ironically, however, Wilson’s trump card was
that he was presiding over one of Europe’s most dysfunctional economies.
For those not old enough to remember, 1975 was the year of stagflation –
unemployment was rising and inflation hit a post-war peak of 27 per cent. The vote
over whether Britain should pull out of the European Economic Community came
less than 18 months after the country had been put on a three-day week, and
prudent families still kept a healthy stock of candles in case the lights went out.
But it was not just that Britain’s performance was so dismal; it was that Europe
was doing much better. Germany was Europe’s powerhouse, with its recovery
symbolised by the spanking new stadium built in Munich for the 1972 Olympics.
Voters looked across the Channel and came to the obvious conclusion: Europe
worked and Britain didn’t. In those circumstances, it was not difficult to persuade
the electorate to have second thoughts.
The comparison with 2004 is stark. Back in 1975, Britain was about to get an
unwelcome visit from the International Monetary Fund, which insisted on deep
and unpopular cuts in public spending as the price of a rescue package. Today it is
the eurozone that is the target for the IMF’s criticism; it has concerns about
Britain’s housing market, but says Europe is the one part of the world left
untouched by the global recovery. Economic conditions, it says, remain wintry and
justify lower interest rates to stimulate growth. When even the IMF is urging
cheaper borrowing, you really have got problems.
None of which is to argue that all is wonderful with Britain’s economy. Those
who point to the whopping trade deficit, the withering of manufacturing and the
mountain of consumer debt are right to be concerned that the good times might
not last for ever. But the signs are that, for the next couple of years at least, Britain
will continue to enjoy faster growth and lower unemployment than the single
currency bloc. ‘In contrast to the eurozone, macroeconomic performance in the
86 Larry Elliott
UK remains strong and the main risk to the outlook is the possibility of an abrupt
correction in the housing market’, the IMF says. It likes the way the Bank of
England has handled interest rates and praises Brown for using higher public
spending to underpin growth.
For a nation that has tended to be indifferent, if not downright hostile, to the idea
of closer political integration in Europe, all this matters. The idea that Britain
risked missing out on a big party happening on the other side of the Channel
proved a compelling argument in 1975, but it lacks the same punch today. Indeed,
giving extra powers to a Europe that is struggling sits oddly with the government’s
approach to failing schools and underperforming hospitals.
This problem haunted Blair as he contemplated whether to hold a referendum
on the euro, and in the end he decided – almost certainly correctly – that he could
not hope to convince voters that joining the single currency was vital for Britain’s
future prosperity at a time when the eurozone was doing so badly. The same will
apply to any campaign on a constitution; the government may find that a generally
quite contented public rejects the argument that a Europe of 25 nations requires
changes to the relationship with Brussels and will simply ask: ‘If it ain’t broke, why
fix it?’
Of course, those pressing for a yes vote will say that Britain will be broke unless it
supports the constitution and (eventually) joins the euro, but the conservatism of
the electorate should not be underestimated.
There is an alternative scenario, which is that the prophets of doom are right
about Labour’s economic ‘miracle’ being built on sand. Should there be an
almighty crash in the property market which pushed the economy into recession
and sent unemployment surging back above a million, then it might be possible to
deploy the 1975 argument. This would be good news for Kenneth Clarke, Michael
Heseltine and other Conservative pro-Europeans, but it would put at jeopardy
Blair’s chances of winning a third election. In short, the prime minister is in a bit of
a fix. If the economy stays strong he stands to win the election, but lose the
referendum. If the economy blows up, he wouldn’t be in a position to hold a
referendum because he will have been kicked out of Downing Street.
Two conclusions can be drawn from the recent spat between Gordon Brown
and the European Commission over fiscal policy. The first is that the Stability and
Growth Pact is in tatters. The second is that those who should be supporting the
demise of this monetarist relic risk being on the wrong side of the argument.
The arguments used to defend the Pact are not new. Sir Geoffrey Howe was fully
acquainted with them when in the spring of 1981 he tightened fiscal policy during
the depths of Britain’s worst post-war recession.
This was monetarism’s moment. Howe justified the budget squeeze by arguing
that higher deficits would lead to an increase in the money supply. That, according to
Milton Friedman’s disciples, meant higher inflation. They hailed the chancellor’s
action as a wise move which yoked together the two central pillars of monetarism:
controlling the money supply and balancing the budget. Growth started to pick up
shortly afterwards. QED.
Not everybody saw things this way. The Times printed a letter signed by 364
The left must wake up – Europe isn’t working 87
members of the great and good of the economics profession. They viewed Mrs
Thatcher’s ideas as reactionary, deflationary nonsense and warned that tightening
fiscal policy in a slump would hold back recovery and that unemployment would
continue to rise (as it did, for another five years).
Whatever the rights and wrongs of this argument, by the time of the second big
Conservative recession in the early 1990s, both of monetarism’s main tenets had
been ditched. The money supply was no longer targeted and big budget deficits
were amassed. Two bouts of high unemployment put paid to talk of balancing the
budget, although one way of saving money was found – cutting capital spending on
Britain’s infrastructure. The cumulative effect of this neglect – exacerbated by
Labour’s parsimony in its first term – is now glaringly evident.
Fortunately, since the death of monetarism the United Kingdom has found a
better way to achieve healthy public finances. Growth has averaged 3 per cent a
year and unemployment has fallen. The result has been that the ratio of public debt
to GDP has dropped to about 30 per cent and the budget on current spending was
in surplus for over four years. The government decided to exploit this strong fiscal
position by pledging to borrow money so that it can double net investment to 1.7
per cent of GDP by 2003–4. Even so, this will only repair a small fraction of the
damage caused by years of neglect, taking net investment back to the levels of 1989,
Thatcher’s last full year in power, and still well below the average for the European
Union as a whole.
So what’s wrong with ploughing money into the nation’s infrastructure, you
might ask. Nothing, provided you accept that there are positive returns to be made
on investment in capital infrastructure in a country like Britain, which has a very
sound fiscal position.
But – of course, there is a but – Mr Prudent’s plans are seen as not prudent
enough by the European Commission, which views the intention to borrow 1.2 per
cent of GDP (£10bn a year in real money) as a breach of the Stability and Growth
Pact, which requires member states to keep their budgets in the black. Brown went
ballistic when the Commission published its views. The government has a mandate
for what it is doing, having fought and won the 2001 General Election on the issue
of increasing spending on public services.
Moreover, it is clear that the government’s fiscal set-up is far more flexible and
appropriate to current economic conditions than the Stability and Growth Pact,
underpinned as it is by the same monetarist belief in balanced budgets that gave us
the 1981 budget. Britain’s fiscal rules distinguish between current and capital
spending, and ensure that public finances are sustainable over the economic cycle
as a whole. The Pact does neither.
Brown is not the only finance minister to realise that there are serious flaws in the
Pact. A meeting of European Union economic and finance ministers last summer
agreed a new code of conduct for interpreting the Pact, including the need to take
into account the state of the economic cycle, whether the level of public debt is
sustainable and the case for higher spending on investment. The Commission, for
reasons best known to itself, ignored all this and proceeded to interpret the Pact
rigidly when it looked at the state of EU budget deficits.
88 Larry Elliott
In Britain’s case, there was some justification for concern. The method for
calculating whether a country’s fiscal policy is entering the danger zone takes
account of how volatile the economic cycle is and how responsive the deficit is to
changes in growth. Britain has seen gyrations in the economic cycle, and its low
marginal tax rates mean that the deficit is sensitive to changes in GDP. As such, the
Commission believes that the UK deficit should be 0.5 per cent or lower, just to be
on the safe side.
Brown argues that this takes no account of the changes made to UK fiscal policy
since 1997, and if implemented would force him either to raise taxes or cut public
spending to an unacceptable degree. Balancing the budget would mean reducing
the planned deficit by 1.2 per cent of GDP – about £10bn a year. This is the
inexorable logic of the Commission’s position, despite its attempts to wriggle off the
hook.
This is where the fun really begins, because at this point an arcane argument
about fiscal policy becomes intertwined with the question of euro entry and the
timing of a referendum. The Growth and Stability Pact is dumb economics. It was
a 30 per cent devaluation and lower interest rates that prompted recovery in
Britain from the slump of the early 1980s, not Howe’s monetarist budget. One
thing Europe’s economy certainly does not need at present is a pro-cyclical fiscal
policy. As far as Britain is concerned, dogged support for the Pact is even dumber
politics. Root-and-branch reform of the Pact would make it easier, not harder, to
convince a sceptical public of the dubious benefits of euro membership.
From Brown’s point of view, the prospect of Britain coming under pressure to
cut public spending if it joined the single currency is a serious issue. Most Labour
supporters would agree; they find it difficult to accept the idea that the national
interest would be served by further needless cuts in planned spending on the public
infrastructure. Union leaders, particularly those strongly represented in the public
sector, are becoming decidedly twitchy.
All this is deeply unhelpful to those who believe that it is the Treasury’s job to
ignore the dubious economics of monetary union and rubber-stamp an early euro
referendum. Opponents of monetary union are supposed to be frothing right-wing
xenophobes, not trade unionists and Labour voters anxious about public spending
cuts resulting from the application of outdated monetarist dogma. As such,
Brown’s entirely justified insistence that the Commission back off has been greeted
frostily by those who would have been up there on the barricades with the 364 antiThatcherites in 1981. They are now in the confused position of trying to draw
a distinction between two kinds of spending cuts: Conservative spending cuts
(reactionary and bad) and European commission ones (progressive and good).
Scepticism is hard-wired into the left. It is sceptical about the claims made for the
private finance initiative. It is sceptical about the government’s claims for weapons
of mass destruction in Iraq. It is sceptical about trickle-down economics, the need
to build over the green belt, GM foods and the World Trade Organisation.
Nobody bats an eyelid at any of this. Scepticism is the beating heart of
democracy; it is what informs the approach of a Jeremy Paxman when confronted
by a cabinet minister. Scepticism is seen as right and proper in all areas of policy
The left must wake up – Europe isn’t working 89
bar one. That, of course, is Europe, where scepticism is viewed as that most
heinous of sins – fraternisation with the swivel-eyed loonies of the right.
This response is futile and daft. Scepticism about the European Union is
inevitable and long overdue, particularly on the left. Let’s take a few examples.
Who among us is not sceptical about the Common Agricultural Policy, which costs
every family of four an extra £16 in dearer food bills and stunts the development of
poor countries by denying them access to European markets? Aid agencies such as
Oxfam have been outspoken in the need for radical reform.
And how about the Common Fisheries Policy? Were not the environmentalists
right when they said it would result in the waters of the North Sea being hoovered
dry by factory trawlers?
And then there’s growth and unemployment. More than a decade ago the
Keynesian left in Britain warned that a European central bank with a deflationary
mandate would result in weak growth and lengthening dole queues, and they were
absolutely correct.
Some of the smaller countries in Europe – Ireland and Finland, for example –
have better recent records than the United Kingdom, but overall the performance
of the 12-nation eurozone has been dire. It is 12 years since it enjoyed faster growth
than Britain, and the result has been a big difference in unemployment: below 5 per
cent in the United Kingdom, almost 9 per cent in Euroland. What are we to do in
the face of such figures: express scepticism about the claims made for the euro or
shut up?
The answer for many on the pro-euro left is that the aid agencies, the greens, the
anti-globalisers and the Keynesians should pipe down. Yes, they say, Europe has its
faults, but there are good reasons for the left to support it.
These are serious arguments and are worthy of serious consideration. One is
that Europe is the only serious bulwark we have against the Americanisation of the
globe. A second is that European capitalism is gentler than its rapacious AngloSaxon cousin across the Atlantic. A third is that Europe leaves Britain for dead
when it comes to roads, railways and the public realm in general. Finally, closer
integration has meant that half a century of war has been followed by half a century
of peace.
To take the last argument first, the notion that Europe has to move closer
together in order to prevent war has always seemed as dubious as the idea that it
was all due to the bomb. A more likely explanation is that the nineteenth-century
balance of power – which broke down in the first half of the twentieth century – was
recreated in a new form by the post-war US–Soviet Union duopoly.
The problem with the first three arguments is that they all rest on the same
premise, and that is a strong economy. Political clout is a function of economic
clout, and America’s lead over Europe has been widening in recent years. Europe’s
social democracy thrived in an era when the German economy was humming
along at 5 per cent a year and France had the lowest unemployment rate in the
west; it is an unaffordable luxury when the eurozone is growing by 1 or 2 per cent a
year. Gerhard Schroeder and Jacques Chirac know that – which is why they are
being forced to embrace flexible labour markets and welfare reform. Those on the
90 Larry Elliott
left who think that Europe is a refuge from US-style labour markets are living in
cloud-cuckoo-land, because with the ECB and the European Commission eschewing expansionary macroeconomic policies, the only alternative is greater flexibility
and supply-side reform.
Predictably enough, this is causing apprehension, prompting the Germans, for
example, to save rather than spend, thus leading to even lower levels of growth and
even shriller calls for root-and-branch economic reform. And voters are now
starting to ask some searching questions, across Europe and not just in Britain.
In the end, there is a simple choice. There can be a left-wing critique: Europe has
a strong manufacturing base and an impressive stock of human and physical
capital, but needs to grow faster and relocalise power. Or there can be a right-wing
critique: it needs a solid dose of Thatcherism to buck its ideas up. The status quo is
not an option, because clearly Europe isn’t working. Those who pretend it is are in
category-one denial.
9
A post-Keynesian strategy
for the UK economy
Philip Whyman, Brian Burkitt and Mark Baimbridge
Introduction
Post-Keynesians argue that the level of output and employment depends upon the
interaction between total spending and the economy’s capacity to produce. Thus a
crucial problem with market capitalism is that it possesses no mechanism that
guarantees that output and spending decisions always coincide. Therefore
enormous scope exists for government macroeconomic policy to initiate, pursue
and implement stabilisation through the budgetary monetary measures. The
potential to generate a post-Keynesian strategy will, however, be thwarted if the
United Kingdom participates in European Economic and Monetary Union
(EMU) within the European Union (EU). Membership requires the separate
formulation of money policy from nationally determined fiscal policy, leading to a
resultant lack of policy coordination prejudicial to the construction of a postKeynesian economic framework. The resultant slow-growth, high-unemployment
outcome will be further exacerbated by the transfer of monetary policy to a
European Central Bank (ECB), whose sole legal objective is the pursuit of price
stability. This chapter therefore seeks to develop an alternative post-Keynesian
strategy for the United Kingdom based upon a long-term opt-out from the euro. Its
fundamentals are achieving a competitive exchange rate, higher investment, a
social contract to restrain inflationary pressures via planned redistribution, the
reintroduction of exchange control through a transactions tax on dealings
unrelated to trade and the pursuit of an active industrial policy to increase the longrun competitiveness of British industry where it already possesses a comparative
advantage.
A crucial idea introduced by Keynes (1936) into the corpus of economic thought
is that the level of output and employment under market capitalism depends upon
interaction between total spending and the economy’s capacity to produce.
Decisions to produce are made primarily by private profit-making firms;
production, the source of employment, takes place only if companies anticipate a
market in which goods and services can be sold at a profit. If demand is insufficient,
productive capacity will stand idle and people will be without jobs. There is no
automatic mechanism which guarantees that output and spending decisions
always coincide.
92 Philip Whyman, Brian Burkitt and Mark Baimbridge
Imbalances between aggregate demand and aggregate supply require active
government policy to change either its own or private expenditure through
budgetary or monetary instruments. The neoclassical assumption of an automatic
tendency towards market clearing is replaced by the necessity for active government intervention in the economy to secure simultaneous internal and external
balance in the economy.
Such a Keynesian framework is explicitly receded by the monetarist ideology of
the Treaty on European Union (TEU), which laid the basis for EMU. A clear
example of its approach is its reliance upon monetary tests of convergence rather
than examining real variables of output growth and rates of unemployment. Its
convergence criteria include restrictions upon discretionary fiscal policy through
the implementation of maximum permitted budget deficits backed by the
possibility of levying fines on non-compliant economies. The transfer of monetary
and exchange rate policy to an independent ECB, whose sole legally defined
objective is to secure stable prices through the use of a single economic policy
instrument, a common Euroland interest rate, is at complete variance to a
Keynesian approach. The political imperative to comply with this mandarin
platform led to the European Union suffering a prolonged period of slow growth
and high levels of unemployment.
This chapter highlights the incompatibility between the monetarist model, upon
which EMU is constructed, and the possibility of creating an alternative economic
strategy grounded in post-Keynesian tradition. Despite the inability of theorists to
develop a universal post-Keynesian theoretical model, due in large part to the
complexity and dynamic nature of modern economies, it is nevertheless possible to
identify a number of important themes that denote the essence of post-Keynesian
thought. We also outline the framework within which such an independent postKeynesian policy could operate.
The TEU: a monetarist document
The TEU provided the foundation upon which EMU was to be constructed (EC
Commission 1992). Initially drafted by representatives of Europe’s central banks,
the TEU established three stages to the introduction of EMU, namely:
●
●
●
membership of European Exchange Rate Mechanism (ERM);
evolution of the ERM into a ‘hard’ system, with no further devaluation nor
exchange controls, together with compliance with five convergence criteria
prior to entry;
the establishment of a single currency, with all monetary and exchange rate
policy controlled by a single ECB.
The purpose of these stages was to use the ERM to ensure a financial convergence
between potential participants as each had to adapt their monetary policies to that
of the the strongest economy, Germany, or face higher inflation rates eroding
international competitiveness. This element of the strategy worked effectively, as
Post-Keynesian strategy for the UK economy
93
the variance of inflation rates across ERM member economies narrowed, albeit at
the cost of stubbornly high levels of unemployment for many member states. Thus
in January 2001 standardised unemployment across the 11 eurozone countries
stood at 8.8 per cent compared to 5.1 per cent in the United Kingdom.
The evolution of the ERM depended upon the continued belief of the financial
markets in the economic rationale of the ERM project. As soon as this assurance
was questioned – when reunification required Germany to operate a tight monetary
policy at a time when other ERM members required a relaxation of interest rates to
offset impending recession – speculative attacks undermined the validity of a mechanism without exchange controls seeking to ‘discipline’ participating economies to
pursue a monetarist anti-inflationary programme. It has been estimated that the
cost for the United Kingdom of its two-year membership of the ERM was
approximately £68.2 billion in 1992 prices (equivalent to 11.5 per cent of UK
GDP) in terms of lost output plus one and a quarter million more unemployed
(Burkitt et al. 1996).
Prior to the establishment of the single currency, the TEU required member
states to demonstrate their suitability for single currency membership through their
attainment of the five Maastricht convergence criteria (MCC). These were:
1
2
3
4
5
Each country’s rate of inflation must be no more then 1.5 per cent above the
average of the lowest three inflation rates in the EMS.
Its long-term interest rates must be within 2 per cent of the same three
countries chosen for the previous condition.
It must have been a member of the narrow band of fluctuation of the ERM for
at least two years without a realignment.
Its budget depict must not be regarded as excessive by the European Council,
with ‘excessive’ defined to be where deficits are greater than 3 per cent of GDP
for reasons other than those of a ‘temporary’ or ‘exceptional’ nature.
Its national debt must not be excessive, defined as being above 60 per cent of
GDP and not declining at a ‘satisfactory’ pace.
The rationale for similarity of inflation performance is clear, interest rates and
exchange rate strategies; otherwise the stability of the monetary union may be
threatened by the participation of a high-inflation nation which could temporarily
lower its headline rate through deflationary monetarist policies that caused its
currency to appreciate but could not be sustained in the long run. However, the
final two criteria are controversial in terms of their arbitrary maximum rates and
restrictions upon discretionary fiscal policy (Baimbridge et al. 1999a). Moreover,
Article 104c outlined financial sanctions that can be applied to national governments if either variable is above Treaty-specified level. These were subsequently
strengthened by the Stability and Growth Pact (SGP), which clarified the excessive
deficit procedure of the TEU. Its unprecedented power to fine member states
demonstrates the priority given to constraining budget deficits.
Whilst the MCC may be criticised for omitting many of the important tests of
convergence outlined in Optimum Currency Area theory (Baimbridge et al.
94 Philip Whyman, Brian Burkitt and Mark Baimbridge
1999a), the majority of member states had the greatest difficulty in meeting even
these objectives. Indeed one study found only a 10 per cent compliance rate
between 1990 and 1997 (Baimbridge et al. 1999a).
The commencement of the third stage of EMU began on 1 January 1999, when
all participating currencies were permanently and irrevocably fixed in value, and
the sole federal body charged with managing the Euroland economy was created,
namely the ECB, sole aim of which is to achieve price stability. Note that Article 3A
does not mention any other criteria, such as increased economic growth,
maximum employment or the achievement of stipulated welfare targets. Indeed
these objectives can only be pursued when they can be achieved ‘without prejudice’
to price stability (EC Commission 1992). The creation of an independent central
bank, independent of democratic control and given a single target of low inflation
irrespective of the impact this has upon employment and growth rates, is in
complete contrast to a Keynesian approach.
The establishment of a price stability objective for the ECB rests upon the
assumption of a natural rate of unemployment, so that structural supply-side
problems determine the level of unemployment. Therefore government should
concentrate upon ensuring the lowest compatible level of prices. However, there is
sizeable body of evidence challenging the existence of a distinct equilibrium level of
employment (Davidson 1998; Karanassou and Snower 1998; Madsen 1998;
Nickell 1998; Phelps and Zoega 1998). The prevalence of hysteresis, where the
level of unemployment is path dependent, provides one analytical challenge to the
rationale of ensuring that the ECB is more concerned with developing an antiinflationary credibility than providing optimum conditions for industrial expansion. Furthermore, no statistically significant evidence exists that independent
central banks produce lower inflation (Baimbridge et al. 1996b). The ECB is
founded upon monetarist principles, which determine its operational objectives
and over-concentration upon inflation despite the fact that high interest rates
damage investment, thus lowering future produce capacity, employment opportunities and growth potential.
The SGP ensures that this deflationary approach will be maintained once
countries have achieving membership of EMU. Permanently maintaining fiscal
deficits below 3 per cent of GDP require a more intensive ‘reform’ of welfare
provision than has already occurred. It is no coincidence that speculation concerning the unaffordable nature of current levels of public and final-salary company
pensions coincides with the restrictions placed upon government expenditure by
the MCC and SGP. Furthermore, maintenance of a budget balance within the
SGP limits will require further public sector cuts, as large surpluses are necessary in
periods of relatively rapid economic growth to ensure that state finances do not
breach the 3 per cent of GDP limit during periods of recession associated with the
business cycle (Baimbridge et al. 1999a). Therefore self-induced deflation with its
associated historically high unemployment in the run-up to the creation of EMU –
as EU member states sought to meet the MCC – has continued. Consequently it is
no surprise that the initial value of the euro was weak, since Euroland has
Post-Keynesian strategy for the UK economy
95
continued to experience lower growth rates than indicated by their own output
gaps, simply to adhere to these monetarist, anti-welfare targets.
A post-Keynesian alternative
The monetarist bias institutionalised at the core of the EMU project, which will
prove difficult to reverse given its centrality to the TEU, is in sharp contrast to the
theoretical predictions, and policy prescriptions, which emerge from the broad
Keynesian tradition (see Table 9.1).
Table 9.1 A comparison between features of post-Keynesianism and EMU
Post-Keynesianism
Macroeconomic assumptions
Economy tends towards
full employment
Demand side
Aggregate demand level
Aggregate demand
management
Fiscal policy
Monetary policy
Counter-cyclical
Status of central bank
Supply side
What causes
unemployment?
Model of unemployment
Policies to reduce
unemployment
External balance
Exchange rate regime
How to defeat destabilising
speculation?
Globalisation?
Neo-liberal EMU
No, capitalism is inherently Yes
unstable
Vital, but unstable
Essential prerequisite for
full employed economy
Important
Not important, no federal
instrument to manage
demand
Main instrument to
Unimportant, prerogative of
manage AD
nation state
Supportive to fiscal policy; Uniform interest rate – set to
cheap money to stimulate
produce price stability
investment and growth
Yes
Limited by MCC and SGP
on budget deficits
Democratically controlled – Independent – sole target is
given multiple objectives
price stability
Demand deficiency and
supply-side problems
Structural/supply-side
factors
Hysteresis; tendency
towards disequilibrium
Natural rate/NAIRU
Demand management,
Level and duration of benefits
labour market policies,
incomes policy (or wage
bargaining coordination)
industrial policy (including
socialisation investment)
Short-term stability,
Single currency
long-term flexibility
Capital controls, financial
Large single economy less
regulation
prone to destabilisation
National autonomy remains Integrated financial markets;
possible
no room for independent
monetary policy
96 Philip Whyman, Brian Burkitt and Mark Baimbridge
Disequilibrium and cumulative causation
The 1990s decade of deflation amongst EU economies was not a simple ‘one-off’
loss of potential income, but was a long-term process of relative decline fuelled by
cumulative causation. The latter term was first used by Myrdal (1957) to convey
the reinforcing processes whereby patterns of uneven development may be perpetuated and even accentuated. It constitutes a challenge to orthodox equilibrium
theory, which holds that, if divergences in economic phenomenon exist, forces
come into play that narrow these differences and ultimately eliminate them. However, in Myrdal’s model of cumulative causation, markets reinforce inequality, so
that focus on positions of static equilibrium is inappropriate and misleading. The
deflationary impact of pursuing the Maastricht convergence criteria lowers current
sales and profits, which in turn lead to falling investment, thus reducing demand in
the future. By contrast, a post-Keynesian strategy of achieving full employment
with growth, prohibited under the monetarism of Maastricht, will fuel an upward
spiral of rising income, demand, investment and profitability.
There are many factors operating within capitalism that work towards
disequilibrium rather than equilibrium once initial differences in economic and
social phenomena arise. It is the process of change that should occupy the centre of
analytical attention; this process is not a moving series of equilibrium, but a chain
reaction of mutual feedback. The existence of destabilising feedback mechanisms
implies that temporary disturbances may involve substantial social and economic
consequences, which often gather speed at an ever-accelerating rate. Under
cumulative causation, social forces interact with technical, economic and
psychological factors, whilst the evolution of the economy depends upon, and is
reflected by, the institutional organisation of economic phenomena.
Increasing returns to scale and economic growth
Hardin (1982) related cumulative causation to the existence of increasing returns.
The latter jeopardises the existence of standard neoclassical equilibria, but more
significantly it creates dynamic tendencies of uneven development. He concluded
that ‘both comparative success and comparative failure exert self-reinforcing
effects’, whilst the combination of profit-driven production and investment
decisions, free trade and capital mobility produces inherent tendencies towards
asymmetrical growth. Growth is perceived to be an endogenous, cumulative process based on increasing returns activities rather than the outcome of exogenously
given expansion of factor endowments.
Cumulative causation also depends upon technology gaps, which represent the
differences in technical advancement between rival nations, between industries in
different countries or between firms in a given industry in one economy. Such
gaps imply that technology is not uniform and that technical progress is not
instanteously diffused. If these gaps are not simply a function of market failure,
technology is more than an endowment and scarcity does not determine the
resource allocation process. It is the learned ability to innovate and to imitate
Post-Keynesian strategy for the UK economy
97
existing commodities and ways of producing, which is the driving force behind
higher productivity and competitiveness. The rejection of scarcity and of a crucial
role for endowments changes the character of economic policy. In a scarcity-driven
world, the state’s function is to overcome market failure; in a world of technology
gaps, economic policy promotes the innovation process support of research and
development, subsidies, demand management and workplace democracy.
Technical change is cumulative and path dependent; it is neither random nor
predictable. Agents do not usually share identical knowledge or competence.
Moreover, the diffusion of technology requires time; the discontinuity of this
diffusion process implies that, even with a steady rate of innovation (itself highly
unlikely), technology gaps reinforces the conclusion of cumulative causation theory
that convergence is by no means a guaranteed, nor even a frequent, occurrence.
Therefore active government economic policy, restricted by the TEU, is essential
to achieve an upward spiral of cumulative causation.
Aggregate demand, full employment and output capacity
The inherent instability of capitalist economies requires government intervention
to maintain a sufficiently high level of aggregate demand to ensure the full employment of all resources. However, post-Keynesianism emphasises that the level of
aggregate demand simultaneously influences the level of capacity utilisation and
employment in both the short and the long run. The simulation of investment in
the short run will facilitate full employment, but additionally produce additional
capacity for an expansion of production in future time periods (Sawyer 1995). In
the absence of sufficient future capacity, an economy could be ‘too small’ to employ
all resources and expand at its optimum rate.
Socialisation of investment
A strategy to reduce the natural instability of capitalist economies would focus
upon one of the main causes of fluctuations in output, namely entrepreneurial
expectations and their resultant impact upon private-sector investment. The
maintenance of a sufficiently high level of aggregate demand can contribute
towards enhancing expectations of future profitability, whilst simultaneously
facilitating a current budget surplus capable of financing a considerable proportion
of future investment. However, this strategy leaves the investment function in
private hands and therefore dependent upon unstable expectations. Keynes (1936,
1943–44) predicted recurrent problems of market coordination and underutilisation of resources due to a fundamental conflict between industry and finance,
where, in a world of uncertainty, the short run behaviour of rentiers tends to prevail
in the market for financial securities. The ability of rentiers to impose a constraint
on the liquid funds available for the long-term finance of enterprises and their
desire for liquidity results in rates of investment that lie below the level necessary to
achieve full employment.
Keynes’ solution to both these problems was the socialisation of investment.
98 Philip Whyman, Brian Burkitt and Mark Baimbridge
Only the state could remain impervious to speculative financial gain, and therefore
approve sufficient projects ‘so as to preserve stability of aggregate investment . . . at
the right and appropriate level’. When pressed by fellow economists in 1943 how
far he would socialise investment, Keynes replied, ‘two-thirds or three-quarters
would be indirectly influenced by public and semi public bodies’. Thus full
employment could be secured through the establishment of a National Investment
Bank (NIB) charged with the strategic regulation of the aggregate flow of investment. This would ensure ‘an adequate demand for them, partly by making them
available at a rate which would attract a sufficient demand, and partly by stimulating the undertaking of particular investment projects’. More recent proposals of
this type have advocated the democratic control of capital formation through
pension-fund or employee investment-fund socialism (Burkitt and Whyman 1995).
They are only feasible outside the constraints imposed by membership of EMU.
Interrelationship between demand and supply side
The relationship between aggregate demand and aggregate supply is one of the
most significant insights to emerge from post-Keynesian thought (Sawyer 1995).
Whilst a high level of aggregate demand is a necessary precondition for the full
employment of resources, it is insufficient if the economy suffers from supply-side
deficiencies. For example, active labour market policy is advocated where skill
shortages and labour market bottlenecks threaten to destabilise the economy.
Training and educational programmes can match skills to the demand for labour,
whilst employment services enhance the efficiency of the search process (Layard et
al.1991; Meidner 1985; Trehorning 1993). Similarly, incomes policy and/or the
coordination of wage bargaining can deliver a superior trade-off between inflation
and unemployment compared to decentralized, deregulated bargaining in those
economies where trade unions are present.1 Through internalisation of the costs of
imprecise wage levels into the decision-making parameters of all parties to the
negotiations, there is an increased likelihood of reaching a compromise between
labour and capital over their respective shares of national income, without
damaging international competitiveness, growth and employment. Moreover, the
degree to which wage bargaining is coordinated is associated with real wage
flexibility, because centralised structures provide a more flexible adaptation to
market conditions.
UK economic policy outside EMU
The policy imperatives imposed upon the state by cumulative causation and technology gaps are unlikely to be achieved over the whole of the European Union’s
member states, as they possess different trade cycles, economic structures,
histories, languages and cultures. Advanced capitalist economies are inherently
unstable; left to themselves, they cannot maintain full employment resources while
being marred by inequalities in the distribution of market power, income and
wealth. Unfettered market forces via cumulative causation tend to exacerbate these
Post-Keynesian strategy for the UK economy
99
instabilities and disparities. Considerable scope exists for government involvement
in initiating, pursuing and implementing economic policies; on the demand side
insufficient aggregate demand and instability of investment are the key problems to
resolve, whilst on the supply side, planning of prices and incomes, training, and
active industrial measures to direct investment to resolve any balance of payments
problems are central. The prospect of a EU-wide strategy to achieve these
objectives is remote, although supranational directives may prevent the
implementation of effective, national policies.
In order to implement post-Keynesian economic policies, the United Kingdom
needs to avoid the uniform monetary policy and the constraints upon budgetary
measures imposed by the adoption of a single EU currency. A long-term opt-out will
provide the United Kingdom with greater economic flexibility. Therefore, the
crucial issue becomes: what frameworks is needed for the formation of
macroeconomic policy in an opt-out Britain? The initial stage is a national
information campaign to acquaint the public and industry with the opportunities
created by, and the dangers averted through, opting out. It should be supported by a
detailed strategy for each UK government department, enabling them to identify
the trade, financial and investment opportunities arising from the creation of a eurobloc. For instance, the City of London will be able to trade in eurobonds, whilst
British manufacturing and service companies will enjoy competitive advantages
from being free of the costs of converting to, and implementing, the euro.
A decision to reject participation in the single currency restores to national
government those economic instruments essential to the management of its
economy. Therefore, democratic accountability is re-established, because citizens
can once again enjoy the opportunity to choose the economic strategy pursued by
the government of the day, rather than it being dictated by unelected central
bankers. Moreover, governments will be able to develop a balanced economic
programme, pursuing the multiple objectives of full employment, rapid economic
growth and a sustainable balance of payments as well as low inflation. The
opportunities are substantial.
A post-Keynesian economic strategy seeks to achieve both internal and external
balance. Internal balance refers to more than the Maastricht target of price stability.
Accordingly aggregate demand management could reduce unemployment, whilst a
mixture of budgetary and monetary measures, a prices and incomes policy, the reintroduction of credit controls and coordinated national wage bargaining could
restrain inflation. Although direct controls are unpopular with orthodox
economists, who prefer the supposed allocative efficiency of free markets, the reality
of sticky prices within oligopolistic markets creates the potential for governments to
increase employment and growth. Moreover, a majority of the world’s nations still
retain capital controls as part of their economic management, whilst Ireland’s
recent remarkable growth was facilitated by social contracts with the trade unions.
The post-Keynesian approach stresses a positive role for government action to
enhance the competitiveness of UK industry. The analysis by Eltis (2000) of trade
flows demonstrates that Britain enjoys a comparative advantage in financial and
media services, and in those areas of manufacturing which rely upon a high degree
100 Philip Whyman, Brian Burkitt and Mark Baimbridge
of scientific innovation, such as telecommunications, pharmaceuticals, aerospace,
energy exploration and generation, biochemicals and computer-related activity.
The international price structures of these advanced-technology commodities are
almost all denominated in US dollars, so that British firms and exports will suffer in
EMU should the euro depreciate in value against the dollar. Outside the single
currency, the UK government could strengthen the economy’s competitiveness by
enhancing the production potential of already strong sectors through targeted
reductions in corporation tax, research and development, and greater spending
upon education.
What about globalisation?
An argument advanced by advocates of EMU is that the degree of economic
autonomy for the nation state advocated in this chapter is largely illusory due to
globalisation and the international integration of financial markets. To the extent
that national economies fail to insulate themselves from international financial
markets through exchange controls or ‘Tobin taxes’, economies became prisoners
of the neoclassical assumptions held by the majority of economists.2 For example,
an expansionary fiscal policy is seen by orthodoxy as a prelude to an increase in
inflation and a decline in international competitiveness, rather than as a precursor
to a higher level of aggregate demand, increased investment in future capacity and
therefore the creation of a potentially higher future rate of economic growth. Thus
non-orthodox economic policy is penalised by the withdrawal of inward investment, perhaps triggering a currency crisis of a sufficient magnitude to undermine
the entire strategy.
An extension of this thesis argues that, due to financial integration, nation states
can no longer operate a distinct monetary policy. Interest rates will be set
internationally, with a premium equivalent to the degree of the perceived risk of
currency devaluation, problems caused by political instability or threats to foreign
investment. The argument implies that UK membership of the single currency,
together with acceptance of a single Euroland interest rate, will be costless since
monetary autonomy no longer exists. Indeed, the greater anti-inflation credibility
formerly associated with the Bundesbank, and assumed to pass to its successor, the
ECB, should ensure a lower long-term real interest rate than would be possible for
an independent nation state.
The effectiveness of devaluation as a means of establishing an international
competitive advantage is also dismissed, because the preponderance of subsidiaries
of foreign transnational corporations (TNCs) rises as a proportion of the UK
manufacturing sector. Subsidiaries of a parent company will not respond to
devaluation by allowing their prices to fall, which would imply competing with
their own parent company in foreign markets at a lower price. Thus they are more
likely to maintain real prices and take higher sterling profits, thereby nullifying the
effectiveness of the policy.
In essence, the economic case for participation in EMU rests upon the assertion
that the economic effectiveness of the nation state is over, so that only as part of
Post-Keynesian strategy for the UK economy 101
regional economic blocs can governments reassert the use of traditional economic
tools, such as monetary and exchange rate policy. Indeed certain socialist theorists
argue that European economic integration can make possible a form of euroKeynesianism, which can no longer work at national (Holland 1985). However,
the contested ratification of the TEU suggest that there will be little appetite for
renegotiation, whilst the EU Commission’s attacks upon ‘expansionary’ British
and Irish budgetary policy under the auspices pf the GSP indicates that a bias
towards deflation remains at the heart of EU economic policy decision making for
EMU entry.
The overall implication of the argument is easy to dismiss, as the United
Kingdom’s recent experience of being ejected from the ERM demonstrates. The
resultant 20 per cent devaluation of sterling coincided directly with a resumption of
economic growth and a fall in the rate of unemployment, whilst other EU member
states that maintained overvalued exchange rates and deflationary Maastricht
policies suffered stagnating output and persistently high rates of unemployment.
Moreover, although financial integration has, to a certain extent, made an
independent monetary policy more difficult, the United Kingdom was able to first
loosen and subsequently tighten its policy stance during this period – with
predictable results. If its economy were to be protected additionally by exchange
controls, the United Kingdom’s degree of autonomy would rise accordingly.
Our arguments do not dismiss the reality of a shift towards increasingly
globalised trade and financial structures, although it would be more accurate to
describe the process as ‘triadisation’, as the world economy becomes increasingly
dominated by three dominant trading groups – the North American Free Trade
Agreement (NAFTA), the European Union and an Asian block built around
Japan. Many ports of the world, for example almost the entire African continent,
play little or no part in these supposedly ‘global’ markets. Nevertheless, it is true
that an explosion in international movements of financial capital, particularly
associated with speculation rather than with trade in goods and services, has
altered the environment within which national economic strategy is determined.
Nevertheless, the majority of countries in the world continue to operate controls on
the international movement of capital, whilst the financial destabilisation inflicted
upon Mexico, Russia, the ERM and the ‘Asian tiger’ economies has served to warn
world governments of the perils of unregulated capital movements. The policy
prescriptions should not come as a surprise, as Keynes outlined it decades ago
when the post-war economy was based upon the tight regulation of capital to
prevent international economic instability. Therefore the choice is between
membership of EMU, becoming increasingly immersed into a neo-liberal,
triadised system, or pursing an independent, post-Keynesian strategy protected by
a re-regulation of financial capital.
Conclusion
Britain enjoys an effective long-run option concerning its future economic strategy;
it can embrace an essentially monetarist EU identity or, if it decides to opt out of the
102 Philip Whyman, Brian Burkitt and Mark Baimbridge
euro, it can pursue a post-Keynesian policy. The widely held view that Britain
possesses ‘no alternative’ but to participate in European integration is at odds with
the facts (Burkitt et al. 1996). If Britain is decoupled from the EMU’s integrationist
momentum, the outcome will be enhanced economic prosperity and restored
democratic choice to the British electorate. Indeed, if post-Keynesian insights into
the working of the economy in the real world are ever to influence government
policy, they are more likely to be effective outside EMU than if the United
Kingdom is a prisoner of its neoclassically designed institutions.
Notes
1 There is a large literature on this issue, including: Amoroso and Jespersen (1992); Bruno
and Sachs (1985), Cameron (1984); Calmfors and Driffill (1988); Calmfors and Nymoen
(1990); Crouch (1985); Henley and Tsakalotos (1995: 186–9); Marshall (1995);
McCallum (1983); Rowthorn and Glyn (1990); and Sawyer (1995).
2 ‘Tobin Taxes’ are the name given to taxes levied upon the 90 per cent of foreign
exchange transactions unrelated to trade. As some £200 billion daily is currently traded
on the London Forex market, such a tax, even at a low 0.5 per cent rate, would yield
considerable sums if speculators’ behaviour remained unchanged. It could be avoided
by moving transactions to offshore havens, but such a strategy is deferred by exempting
all currency transactions not undertaken through a registered exchange from legal
status. Consequently unpaid, offshore debts would not be backed by the force of law.
The removal of the legal support and the low rate of taxation would prevent most
speculators from decamping elsewhere.
Part II
Employment and social
aspects of EMU
10 The European social model
Myth or reality?
Brian Burkitt
Introduction
Centre-left advocates of the UK’s entry into the single currency argue that, despite
its obvious deficiencies (e.g. the inefficiency entailed in submitting to a uniform,
one-size-fits-all interest rate, given cyclical and structural divergences between
member states’ economies), the euro should be embraced because it would enable
the United Kingdom to enjoy the larger countervailing benefits of participating in
the ‘European Social Model’ (ESM). Much recent work casts doubt as to whether
an ESM actually exists – for instance, Kleinman (2002). However, the case for
embracing it has been deployed most eloquently and most forcefully by Edmonds
(2000), former General Secretary of the General Municipal and Boilermakers’
Union (GMB). This chapter queries the very existence of an ‘ESM’ and establishes
that, if it does exist, Edmonds’ reasons for participating within it are outdated.
Whatever their validity during the Thatcherite 1980s, any centre-left case for
joining the euro has become completely redundant in the twenty-first century.
The ESM proposal for closer EU integration
Edmonds asks: How important is it for British trade unionists that the European
project succeeds, and how important is it to be close to its centre of power? He
answers that it is crucial, because trade unionists identify with the European model
of industrial society, combining high levels of productivity with high levels of social
protection. The ESM is perceived to bring a little security into people’s lives by
making it rather difficult to sack workers. When redundancy occurs, the ESM sets
the safety net sufficiently high to prevent poverty. Jacques Delors outlined this
programme in his speech to the 1988 Trades Union Congress. His message was:
put up with the competitive pressures of a single market, whilst the social
dimension protects from the worst excesses of market capitalism.
The ESM, according to Edmonds, delivers benefits to working people. It
strengthened moves towards equal pay, offered some protection for workers in
corporate takeovers, improved health and safety protection, and has given labour a
small but increasing influence over the strategies of multinational companies.
More importantly, the ESM provides trade unions with a direct involvement in the
106 Brian Burkitt
design of social legislation. The process of collective dialogue means that the European Trade Union Confederation can negotiate agreements with the employer’s
organisation (UNICE) that are given binding effect through the European Union.
Edmonds claims that the advantage of joining the single currency in order to
bind Britain more tightly into the ESM is compelling. However, he also makes
clear that left-of-centre support for entering the euro should be fully conditional on
the European Union’s commitment to the ESM.
Does an ESM exist?
Underpinning the arguments of Edmonds, and those of left-of-centre europhiles, is
the assumption that a distinct, indefinable ESM currently exists. However, the
weight of evidence from recent social policy research is that such an assumption is
problematic. Most commentators accept that each EU member country possesses
a welfare state that grew in size over the twentieth century, but they believe that
these welfare states differ significantly from each other and that they can be
classified into separate ‘clusters’. In the seminal social policy works of the last
generation, Esping-Anderson (1996) distinguished different types of welfare state,
based on the concept of ‘decommodification’. Where markets become universal
and hegemonic, workers’ material living standards become entirely dependent on
the sale of their labour. The development of a welfare state involves a loosening of
this commodity status, thereby diminishing financial and psychological insecurity.
Decommodification occurs when a good or service is provided as a matter of right,
so that a person can maintain a livelihood without reliance on the market.
Esping-Andersen’s work generated considerable debate, documented by Arts
and Gelissen (2002). It has become accepted that all welfare states decommodify
labour but to different degrees. On this basis, four different kinds of welfare state
have been identified within the European Union; the social democratic (occurring
in Scandinavia – ‘the northern model’), the conservative-corporatist (located in
France, Germany and the Benelux countries – ‘the central model’), the Mediterranean (found in Greece, possibly Italy, Portugal and Spain – ‘the southern model’)
and the uniquely hybrid UK system (‘the offshore island model’). To which of these
models, does the ESM, so extolled by supporters of British entry into the euro,
relate? It might be thought that the social democratic version of Denmark and
Sweden, with its explicitly redistributive objectives, would appeal most to
democratic socialists. However, the Scandinavian countries were late entrants into
the European Union and have exerted little influence upon its central policy goals.
Therefore, the ESM model, to which centre-left advocates of the euro aspire, is the
conservative-corporatist variant, implemented by the six original signatories to the
Treaty of Rome (with the possible exception of Italy). These countries are now a
minority within the European Union, but their long-standing and founder status
gives them an influence far greater than their numbers would suggest.
The European social model: myth or reality? 107
The ESM of the original six
The ESM developed in five of the original members contained many discrete
national characteristics, but essentially possessed two dimensions:
1
2
social insurance;
labour market regulation.
Contributory social insurance is at the heart of this system. Benefits are mostly
financed by contributions from employers and employees, so that social occupational and income differences are reproduced in the pattern of welfare payments.
Consequently, unlike in Scandinavia, there is little emphasis on redistribution as an
objective of social policy.
Service organisation and delivery tend to be pluralistic, i.e. non-state or parastate organisations predominate in the administration and distribution of insurance funds, and in providing services. They reflect the influence of Catholic social
teaching, particularly the principle of ‘subsidiarity’, which claims that welfare
arrangement should be provided by the nation state in the absence of adequate
measures at some lower level, be it the family, the local community, the church,
occupational groups, businesses or trade unions. There exists a hierarchy of
solidarities, the lowest being the most important. Therefore the ESM reflects and
supports an organic, hierarchical and integrationist view of society, whereby
family, church and occupational forms of welfare are supplemented by the state,
but not replaced by it.
Germany is generally taken to be the paradigmatic case of the ESM, where
welfare measures are underpinned by the social market economy. The state’s
general commitment to providing income and employment is complemented by
an emphasis upon the obligations of employers, trade unions, families and
individuals to support themselves. Redistribution through the ESM is largely
horizontal, within occupational and status groups, rather than vertical, from rich
to poor. Pensions and welfare benefits reflect income differentials. The short-term
unemployed with a full contribution record receive 68 per cent of previous takehome pay. Those not eligible for this comprehensive insurance apply for social
assistance, which is means-tested; if the means test is passed, applicants obtain 58
per cent of net pay. A third group, having failed the means test, are dependent on
much smaller levels of flat-rate benefit, whilst 15 to 25 per cent of the registered
unemployed are currently not in receipt of any benefit.
Although core social insurance is relatively generous by international standards,
social assistance is not only heavily means-tested but also carries considerable
stigma. Such aspects of the ESM became increasingly important in the 1990s and
2000s, with the rise in unemployment and the growing numbers of those who, due
to a lack of attachment to the labour force, did not possess contribution records.
These developments led to a rapid increase in social exclusion under the ESM,
with the creation of a ‘2/3 society’, from which approximately one-third of citizens
are excluded.
108 Brian Burkitt
New pressures are mounting upon the ESM, but, until Gerhard Schroeder’s
recent proposed reforms, the response has been to adapt the system of social
insurance rather than to pursue radical neo-liberal or democratic socialist changes.
Unemployment and pension insurance schemes were relied upon to cover the
social costs of unification and of meeting the deflationary Maastricht Convergence
Criteria. Moreover, a new compulsory insurance scheme was introduced to
finance the costs of long-term care in old age by providing non-means-tested
benefits in cash or in kind.
Social insurance has traditionally been underpinned by a corporatist system of
industrial relations. In particular, European Works Councils cover companies,
whose headquarters or subsidiaries are situated in countries within the eurozone.
They provide trade unions with a positive, albeit marginal, role in the industrial
relations process.
Problems associated with the ESM
The traditional ESM requires large welfare expenditure backed by public support
for a positive state presence in social policy, but tensions exist within the model
from a democratic socialist perspective. These are sufficiently serious to undermine
centre-left arguments for UK membership of the euro.
The last two decades of the twentieth century witnessed a broad process of
increased social differentiation in the ESM member states. Unemployment and
social exclusion grew and regional differences intensified, whilst populations
became more ethnically diversified. The ESM in France and Germany was based
upon a high rate of economic growth; in the words of Ludwig Erhard (1963), ‘the
best social policy is an effective economic policy’. Over the four decades after the
Second World War, the German ‘economic miracle’, supported by a consensual
political system and the ‘realpolitik’ of the Cold War, delivered both rapidly rising
living standards and a generous, socially inclusive ESM. Since 1989 the German
social model was confronted with a series of challenges, primarily reunification
and the deflationary EU integration process. Economic growth fell, whilst
unemployment rose to almost 12 per cent in 1999, before falling to 10.6 per cent in
September 2004 (compared to 4.8 per cent in non-eurozone Britain). Consequently, the ESM provides a number of minor micro pension and workplace
benefits within a failing macro framework. One of the many problems with the
draft EU Constitution is that it leaves intact the existing eurozone system of
economics policy, which is failing. Currently 19 million people in the European
Union are unemployed.
The European Central Bank (ECB) has consistently pursued monetarist
policies, based upon competitive disinflation. Its sole legal objective is the pursuit of
price stability. This strategy, aimed at domestic competitiveness, low inflation and
the attainment of the Maastricht Fiscal Convergence Criteria, has been adhered to
despite the human and political costs of permanently high unemployment plus
stagnant living standards for the majority of EU citizens. It is reinforced by the
restraints upon budget deficits imposed by the Stability and Growth Pact. The
The European social model: myth or reality? 109
deflationary Maastricht programme created a differentiated social polity under the
ESM where three kinds of citizens exist:
1
2
3
the employed in secure jobs, covered by comprehensive insurance schemes
and ensuring additional cover from contributions to mutual societies’
occupational pensions;
those working in less secure jobs without additional schemes to top up benefits;
the long-term unemployed, or never employed, dependent on social assistance
for a minimum income, who fall through the insurance net.
The whole philosophy of the contemporary ESM is summarised by the statement
of the former French Finance Minister Strauss-Khan (2000), which explains why
democratic socialists can never accept it:
No one now contests the free market, but we still need rules and institutions.
We say the free market is okay, but it is still not okay for society to be organised
only by the market.
This verdict condemns the whole EMU initiative, but can it be embraced, as a
wider social project, by democratic socialists?
Conclusion
The traditional ESM is a doomed strategy for the centre-left. It replicates the
inequalities of the workplace in retirement, redundancy and sickness. Moreover,
the ESM fails completely unless full employment can be ensured because:
1
2
it becomes more costly to finance with a sizeable pool of people out of work,
when demands upon it simultaneously grow;
the process of labour market regulation is undermined by large-scale
unemployment, because it shifts the balance of power from capital to labour.
The obvious solution to the EMS’s unemployment, and hence fiscal, problems is
the adoption of an aggressive budgetary and monetary strategy to secure full
employment and to promote economic growth. Aggregate demand management,
rather than supply-side ‘reforms’ that impose the costs of structural adjustment
upon the most disadvantaged citizens, is the key to creating a future socially
inclusive community. However, the ECB’s sole legal responsibility to control
inflation and the restrictions upon government budgets imposed by the Stability
and Growth Pact preclude these solutions, which can only be pursued within a
national, democratically accountable framework. The ESM is obsolete and dying,
the current ‘reforms’ to it in France and Germany are actually cutbacks, whilst the
European Economic and Monetary Union is based upon deflationist principles
and is, therefore, anti-labour. The EU integrationist process is thus one that the
British labour movement should avoid.
110 Brian Burkitt
Fortunately, recent trends indicate that disillusion about the European Union’s
integrationist momentum is spreading amongst the UK left. In September 2004 a
new think tank, The Centre for a Social Europe, was launched to develop the
centre-left case for EU reform. Its first publication was titled, Why the Left Should
Reject the Constitution. With six labour MPs on its advisory board, as well as a
representative of the Labour Party National Executive Committee, such
movements of opinion will disturb Tony Blair and his europhile support. A similar
awareness exists amongst the new wave of union leaders. Thus Bob Crow, the
General Secretary of the Rail, Maritime and Transport Union, was greeted by
cheers at the 2004 Trades Union Congress when he declared: ‘The Constitution
will intuitionalise privatisation and the neo-liberal economics that have helped to
wreck industries in Britain.’ Such a change in opinion from the early 1990s, when
to be ‘left’ was assumed to be ‘pro-EU integration’, is to be warmly welcomed.
However, this is not a time for complacency. The left must continue its traditional fight for democratic accountability and equality, which under contemporary
conditions involves refusing the lesser benefits of the ESM in order to remove the
greater threat to progressive policies posed by the draft EU Constitution and by the
single currency.
11 Voting no – the euro and
Labour voters1
Matthew McGregor
“This is what happens when you let women and truckers vote.”
(Unnamed European Commission official reacting to the Danish ‘no’ to the
euro, October 2000)
When Labour came to power in 1997, it was on a landslide unprecedented in
modern British politics. Although it is hard to believe seven years on, Tony Blair
was one of the most trusted and liked politicians the country has ever produced –
and respected in other European countries as much as by voters in the United
Kingdom. Coming to power on such a wave of popularity, the Blair government
has been able to implement almost any policy it saw fit, be it on welfare reform,
devolution or the minimum wage. But Tony Blair has failed to come anywhere
near implementing one policy he cares about very deeply – the euro.
The euro debate in Britain has been framed by many in the media as a left versus
right battle – a straight fight between the little Englanders of the Conservative
Party and their media allies and the modern, forward-looking New Labour
machine. This thesis explains the position of the most of the newspapers – with the
press of the right firmly against the United Kingdom scrapping the pound and the
liberal media firmly on the side of joining the euro.
However, this argument has always had one serious flaw – the voters. Labour
voters have consistently opposed the United Kingdom’s membership of the euro
during the period of the current Labour government – and show no sign of
changing that stance. Why is it that Labour voters want the United Kingdom to
retain the pound? It seems strange that voters who are usually happy to give their
vote to Labour politicians, have refused to listen to them on this one particular
issue. The Labour government, the Labour Party, the TUC, liberal news outlets
and high-profile figures across the left have campaigned hard since 1997 for early
membership of the euro, but they failed to persuade their natural core supporters.
In this chapter I will set out the extent to which Labour voters have opposed
scrapping the pound, before examining the touchstone policy issues that led to this
position, with a particular emphasis on their role in the campaign for public
opinion. I will conclude by suggesting that in referenda normal political affiliations
become less important to voters, who have genuine choice over a single issue – thus
party loyalty is almost totally removed.
112 Matthew McGregor
The government and the Labour leadership had a firm pro-euro policy going
into the General Election in 1997. Before the 2001 General Election, the Labour
Party was widely seen as favouring UK membership, and offered a referendum in
an attempt to deflect any political damage that stance would have. By 1999 Tony
Blair was in a position to make his position clearer than ever. A Downing Street
source said at the time: ‘Now is the time to start moving off the fence. . . . Business is
clamouring for the single currency and Tony will make clear that we are singing
from a similar song sheet.’ 2
This level of rhetorical enthusiasm continued through Labour’s first term and
into the second, despite the lack of any obvious campaigning at a grass-roots level.
In 2001 Tony Blair went out of his way to give the impression that a euro
referendum would be held within the 2001–5 parliament. Furthermore, it has not
only been the government that has been campaigning for Britain to join the euro.
The Britain in Europe campaign group, which was launched in 1999 to make the
case for euro entry, was labelled a ‘front organisation’ for the government’s euro
policy from day one, and was reported as such by the media.3
It has been an inescapable fact that the Labour leadership has consistently
supported euro membership. But where have the views of grass-roots voters been?
Opinion polls have, time after time, shown that Labour voters are against Britain
joining the euro. Before the 1997 election, polling by MORI showed that Labour
voters erred against the euro4 and the polls haven’t moved since then. Polling for
the Guardian since the 2001 election has been particularly illuminating. In
September 2001 Labour voters opposed EMU participation by 52 per cent to 38
per cent, whilst in June 2002 opinion stood at 48 per cent to 35 per cent against
membership, and in June 2003 this opposition had toughened with the polls
indicating 53 per cent against with only 28 per cent in favour.5
The ‘headline’ questions used in these polls highlights the views of Labour voters
on the general issue of euro membership, but they don’t necessarily reflect voter
behaviour during an actual referendum. It is fair to say that in the event of a
referendum campaign the pressure on Labour’s voters to follow their normal party
preferences would be intense. Party figures would campaign at the grass-roots and
in the media, and identification between opinions on the euro and normal party
support would increase. However, track polling from Barclays Capital6 has highlighted the extent to which Labour supporters would be willing to diverge from
the Party on the issue of scrapping the pound. Asked how they would vote in a
referendum on the euro if the government recommended entry, Labour voters have shown
a high level of desire to vote against the party line in a referendum. Since the middle
of 2002, polling shows that the number of Labour voters willing to vote against an
explicit recommendation from the government hasn’t fallen below 35 percent.
Those who say that they would reject a government recommendation have
outnumbered loyal party supporters three times in the last year.7
It isn’t just a straight ‘yes’ or ‘no’ polling question that shows where the views of
Labour voters lie. Polling by ICM in 20028 showed that only 3 per cent regarded
the euro as a priority – ranking bottom of the 11 issues offered in the questioning.
This compared with the NHS (88 percent), education (61 percent) and crime (41
Voting no – the euro and Labour voters 113
percent). The poll even showed that Labour voters considered cutting red tape a
higher priority than joining the euro. So it is clear that Labour voters plan to vote
no if a referendum is held in the near future.
The normal processes of decision making, whereby voters tend to share support
for policies with the party they support in elections, has clearly broken down. But
why would that be? The key answer lies in the fact that working-class voters are
much more opposed to the single currency than middle-class voters because the
economic effects of joining the euro far outweigh any political considerations.9 The
key issues for Labour voters are jobs, public services and the welfare state. On all
three issues, the euro falls down.
On the issue of jobs, the ‘yes’ campaign and the government have faced a real
difficulty in persuading voters that scrapping the pound for the euro would be a
good idea, and its not hard to see why – unemployment in the eurozone is almost
double that in the United Kingdom. A report for the European Commission highlighted this in its ‘Jobs, jobs, jobs’ report of November 2003.10 Of the European
Union’s member states, the only countries to meet targets for job creation were
Sweden, Denmark and the United Kingdom – the three EU15 countries not in the
euro. There are, of course, many reasons why the United Kingdom has a good
record on employment over the last ten years. To simply say that it is because we
are not in the euro would be simplistic. But to discount the deflationary bias of
eurozone monetary policy when looking at the economic problems of the countries
which have joined the euro would be ridiculous.
Social democrats believe that it is vital for a government to be able to manage the
direction of the economy so as to ensure that wealth, power and opportunity are in
the hands of the many, not the few. To that end, social democrats think that there
are a range of economic tools that the government needs to serve these ends. One
of these tools is the ability to set interest rates, but in the euro interest rates are set by
the European Central Bank. Despite the popular media perception that ordinary
Labour voters are not educated in the ways of the market, focus groups11 have
shown that it hasn’t gone unnoticed that the eurozone has one interest rate for the
whole area, meaning that many countries have a rate that is wholly inappropriate
for their economy. As a report examining the Chancellor’s five economic tests, for
investment bank UBS Warberg, stated:
In some countries, interest rates appear to be too low, contributing to aboveaverage rates of inflation, while in others monetary conditions appear to be too
tight, contributing to below-average rates of inflation and low rates of
economic growth.12
Labour voters think that the Labour government has a good economic record,
so it shouldn’t come as surprise that most of them decline the offer of swapping a
successful framework of economic management for one in the eurozone that isn’t
working. Peter Mandelson touched on this when he made his first speech as an EU
Commissioner at the Confederation of British Industry. He said that anti-euro
sentiment was an ‘unwanted by-product’ of the United Kingdom’s record on
114 Matthew McGregor
employment.13 It may be an unwanted by-product for Peter Mandelson, but
it hardly seems like a good reason for Labour voters to change their mind on
the euro.
The euro would also attack the foundation upon which the social model is based
– security at work. The flexibility that economies need has, in Europe at least, been
based on regional and national planning accompanied by fiscal and monetary
policy to ensure strong growth. In the euro, these levers are taken away and
governments are unable to react quickly and effectively to economic shocks. The
only reaction to a sharp downturn of demand in the economy is through flexibility
in the labour market – and workers have learnt the hard way that ‘flexibility’
doesn’t usually mean pay rises or more job security. One of the architects of the
euro has argued as much. Otmar Issing, the Chief Economist of the European
Central Bank has made this case plainly: ‘The most obvious [danger to the euro] is
the lack of flexibility in the labour market . . . this poses an almost lethal threat to
monetary union.’14 There is a case to suggest that economies will be more
successful if labour markets are more flexible, with wages able to fall more easily
and companies able to sack staff more quickly. However, it is not a left-wing case,
and it is not a case that appeals to working-class people.
During its period in government since 1997 the Labour Party has built its
electoral appeal around increasing spending on public services, particularly on
education and health. But joining the euro would mean that investment could be
put at risk. The rules of the euro, including the Stability and Growth Pact (SGP),
were created in a way that imposes a straitjacket on countries during times of
economic downturn. The SGP limits members of the euro to running a budget
deficit of 3 percent or less year on year. The problem is that when a country faces
economic problems and its budget deficit rises, the only recourse is higher taxes or
lower public spending. In the short time since the introduction of the euro
Portugal, France, Ireland, Greece, Germany and Italy have announced or
implemented plans to cut public spending in response to the SGP. Portugal was
first in 2002, when the newly elected government of José Manuel Barroso, now the
EU Commission President, put in place a severe austerity package in response to
the country’s breach of the SGP. The package included public spending cuts and
VAT tax rises, and the opposition socialists responded to the package saying: ‘We
cannot afford to sacrifice our future for the sake of blind adherence to a set of
quantitative criteria.’15 In Germany, the country’s budget deficit remains stubbornly above the limit allowed and measures to bring it down have included cuts to
welfare and public services. Along with a proposal to scrap one of Germany’s bank
holidays, German Finance Minister Hans Eichel unveiled a plan to impose a
€1billion cut on all ministries and freeze public sector pay increases.16
It isn’t just countries in the eurozone that have had public services threatened. In
2002 the European Commission suggested that the United Kingdom’s spending
plans could need to be reined-in as if we were members of the euro. The Prime
Minister’s spokesperson was quick to react, saying: ‘The UK has no intention of
reducing public spending by £10billion as the Commission seems to imply. . . . As
we are outside the single currency we are not subject to its sanctions.’17 Advocates
Voting no – the euro and Labour voters 115
of early entry to euro membership have pointed to the fact that many European
countries have better public services than the United Kingdom. It is undoubtedly
true that countries like France and the Netherlands have good public services. But
it hasn’t escaped voters’ notice that their public services were built up over decades
with large-scale investment, the sort of levels of investment that may not be possible
in times of economic downturn.
Given that public service investment has formed the backbone of Labour Party
campaigning over the last few years, it is hardly surprising that opponents of early
UK membership of the euro have highlighted the issue in debates. Ian Davidson of
the Labour Against the Euro group of MPs said at its launch that: ‘We are neither
criticising nor contradicting government policy. We are simply saying that Mr
Blair’s priority should be public services.’18 Sir Bill Morris, the then General
Secretary of the Transport and General Workers’ Union explained the Union’s
decision to campaign for a ‘no’ in the event of an early referendum on the euro by
saying: “Entry at this particular point would be a major diversion from the policy of
the government to increase public expenditure and reform public services.’19
It is jobs, public services and welfare that Labour votes are interested in, and it is
the jobs, public services and welfare policy spheres that offer the most convincing
case for staying out of the euro in its current form. And it isn’t just the United
Kingdom where this case holds – the evidence from the euro referendum in
Sweden in September 2003 is remarkably similar. Exit polls (or VALU )20 from the
referendum show that the largest group of ‘no’ voters were social democrats,21 and
broken down on class, the largest group of ‘no’ voters was blue-collar staff.22 Five
out of the seven top reasons to vote ‘no’ (i.e. those reasons cited as being of ‘very
great importance’) were economic reasons, particularly public services and
welfare. The evidence from Sweden is all the stronger given that the overwhelming
majority of the Social Democratic Party leadership campaigned hard for the ‘yes’
campaign. One senior Swedish ‘no’ campaign staffer has described the situation by
saying: ‘The Party leadership were focused on the political capital to be won in
Brussels, and they forgot that our voters care most about everyday issues.’23
As in Sweden, the evidence in the United Kingdom points to a significant
rejection of the party line by voters who normally support Labour. But despite the
fact that so many Labour voters seem willing to buck their normal party
preferences and vote ‘no’ in a referendum on the euro, the usual media reporting of
the debate is one of left versus right. Journalists are genuinely interested in stories
about left-wing opposition to the euro because it is outside the norm and therefore
deemed to be interesting. There is, to some extent, a simple misunderstanding
about the nature of referenda in this reporting. Voters are sophisticated enough to
understand that voting ‘no’ in a referendum doesn’t mean that the government will
change, but reporting of the euro debate still focuses on the views of parties and
party political figures. Equally, there is some bias in the media, not least from an
unnamed BBC reporter who infamously told a campaign staffer that they favoured
joining the euro because, ‘we like cappuccinos and we don’t like racists’.24
However, the main cause of the failure to notice and understand the opposition
from Labour voters has been the nature of that opposition. To most people who
116 Matthew McGregor
favour joining the euro, the economics comes second. As Labour voters tend to
oppose euro entry on economic, not political, grounds, they don’t show up on the
media radar.
In the referendum on the north-east assembly in autumn 2004, the ‘yes’
campaign tried to turn the poll into a Labour versus Tory contest. The ‘no’
campaign won with 78 per cent of the vote. There are many people in the political
world who have not grasped the different nature of referendum politics. When
Labour voters cast their ballot in elections, they usually look down the paper in
front of them to find the Labour candidate. In a referendum on the euro, they will
be looking at a paper that offers them the choice of voting ‘yes’ or ‘no’. It is a simple
fact, but one that has vital implications for the campaign.
The party loyalties that voters often feel in elections, because of hugely complex
and overlapping factors, are downgraded, if not eradicated, in referenda. Given
that in the event of a referendum on joining the single currency, there would be
campaigners from the labour movement on both sides of the debate, voters will not
face the concerted party effort to bring them to one particular conclusion. That
brings voters to a simple choice: vote ‘yes’ to join a club where unemployment is
high, growth is low, and where the tide is turning against the left; vote ‘no’ to
protect the advances the Labour government has won, and keep our ability to
continue building our corner of social Europe secure. It’s no wonder Labour voters
are against the euro.
Labour voters are against joining the euro because it is not in the economic
interests of people in this country. They have not changed their mind on this since
1997, and they are not likely to do so in the near future. Despite the popular
impression of the euro debate being one which pits left versus right, the different
nature of referendum politics mean that Labour voters will buck the Party line if a
vote is called. No wonder Tony Blair has gone from a position of seeing the euro as
a ‘destiny’25 for the United Kingdom, to saying: ‘The argument about the single
currency – the position has never changed there; there has got to be a clear case for
joining it, and at the moment there isn’t.’26
Notes
1 I would like to acknowledge the help of Graham Copp in the writing of this chapter.
2 Unnamed Downing Street source, quoted in the Mirror, 6 February 1999.
3 There are dozens of examples of this. See, e.g., ‘Pro-euro group “a front for labour”’,
Robert Shrimsley, Daily Telegraph, 9 November 1999.
4 MORI poll survey commissioned by the European Movement, August 1996. 12 per
cent of Labour voters supported joining the euro in principle with 27 per cent against.
Labour voters against in principle and ‘generally opposed’ versus Labour voters in
favour in principle or ‘generally in favour’ split more evenly – 44–5 against membership.
5 Regular ‘euro tracker poll’ by ICM for the Guardian, http://www.icmresearch.co.uk/
reviews/polls-archive.asp. The question ICM used was: ‘If there were to be a referendum, would you vote to join the European Single Currency, the euro, or would you
vote not to join?’
Voting no – the euro and Labour voters 117
6 I would like to thank Barclays Capital for providing with me their polling statistics
going back several months. Barclays Capital’s polling is conducted by MORI.
7 A majority of Labour voters replied that they would reject the euro despite a
recommendation from the government in October 2003, August 2004 and September
2004. The figures were tied in June 2004, and the results were within the poll’s margin
of error in three other months.
8 ICM poll for the ‘no’ campaign, 27 September 2002. Respondents were asked: ‘Which
two or three of the following do you think are priorities for the government to address in
this parliament?’ The options were (in order of popularity): the NHS, crime, education,
terrorism, public transport, the economy, environment, social security, income tax,
defence, fuel tax, controlling inflation, getting rid of red tape, the euro.
9 Opinion polls have consistently showed stronger opposition to the euro from workingclass voters. For example, an ICM poll from September 2002 had opposition to the
euro from social classes A and B at 45 per cent, and opposition from social classes D and
E at 67 per cent. www.icmresearch.co.uk
10 http://europa.eu.int/comm/employment_social/publications/2004/ke5703265
_en.html
11 I am grateful to the no-euro campaign, and the Vote No group for access to records of
their focus group research.
12 Preparations for EMU, UBS Warburg, October 2002
13 Peter Mandelson, speech to CBI conference, 8 November 2004. For the full text,
see http://www.cbi.org.uk/ndbs/press.nsf/0363c1f07c6ca12a8025671c00381cc7/
577abfebe84c762880256f4600325c6a?OpenDocument
14 Professor Otmar Issingwas speaking at the ‘Forum Dialogue’ organised by the Banque
central du Luxembourg on 8 February 2000.
15 Luis Nazere, a member of the Socialist Party’s national leadership, quoted in ‘Austerity
measures aim to close the EU gap’, Financial Times, 7 October 2003.
16 ‘German package aims to put budget back into line with EU fiscal rules’, Financial
Times, 5 November 2004.
17 Prime Minister’s official spokesperson, 31 January 2002.
18 Quoted in ‘Put services before euro, say MPs’, Daily Telegraph, 22 January 2002.
19 ‘T&G will work for euro no vote’, Guardian, 5 February 2003.
20 Exit polls conducted by SVT, the state-owned Swedish broadcaster.
21 This figure is for all voters and does not represent proportions. As Social Democrats
represent the largest group of voters, the number of Social Democrats voting ‘no’ was
greater than the number of any other party supporter group voting ‘no’.
22 Blue-collar workers voted ‘no’ by 69–29, compared to farmers (65–35). White-collar
workers and the self-employed narrowly voted ‘yes’.
23 Peter Gustavsson (Director of Organisation for Socialdemokrater Mot EMU – the
Social Democrat ‘no’ campaign) speaking at seminar in Uppsala, January 2004.
24 Quoted in Sunday Business, 7 November 2004.
25 In his speech to the Labour Party conference in September 2002 Tony Blair said:
‘That’s why the euro is not just about our economy but our destiny.’
26 Tony Blair, speaking in a media briefing at Downing Street, 29 November 2004: http://
www.number10.gov.uk/output/Page6679.asp
12 What future in the European
Union?
Joe Marino
Introduction
Many myths have been spread about the trade union approach to the European
Union. To read the messages coming from Congress House and reported in the
media, one could be forgiven for believing that the trade union movement was a
wholehearted cheerleader for the European Union. This is part and parcel of the
old misconception that sees the trade union movement as a monolithic whole.
Nothing could be further from the truth. The issue of the European Union divides
trade unions and their members as much as it divides all political parties and
British society as a whole. There is nothing new, nor is there anything wrong with
that. Is it not called democratic debate? Does this not make us stronger than those
who would preach unanimity at any price no matter what the cost?
Nor is this division new or never changing. Some individuals change ‘sides’ as
their stances move with what they would call ‘events’. One has only to look at the
two main parties to see that. Initially the Conservatives were the main champions
of EEC membership, pushing it for all it was worth. The labour movements initial
stance was one of healthy scepticism, with many in the labour movement
campaigning for a ‘No’ vote in the referendum for EEC entry. True, some of those
opponents are now cheerleaders for the European Union, for example Neil
Kinnock, an EU Commissioner. And the Tories are a mainly eurosceptic party
(without, of course, daring to ask the $64,000 question on continued membership).
How times change. Individuals and parties can, of course, change their views.
Nothing wrong with that, nor need such changes be a matter for criticism.
However, I would argue that the questions that hung over the original membership
of the EEC are writ large over the current debate on Britain’s future in the
European Union.
There is no doubt that a sea change came over the views of many trade unions in
relation to the European Union during the period of the Conservative governments of 1979–97. Those governments were so anti-trade union and working class
that anything was seen as better. However, even in those halcyon days some of us
were warning about greener grass in the next field. At union conference after union
conference I remember warning – both internally and externally – that membership of the European Union only looked good because the Tory government was so
What future in the European Union? 119
bad. What mattered was our own control over our own democracy – and that
meant trade union and labour movement democracy not nationalistic claptrap.
The counter-argument was always on the ‘benefit’ of European Union legislation that was favourable to workers set against the anti-trade union approach of
the then Conservative governments. That, we were told, was what made membership of the European Union attractive. I never believed that was a sustainable
argument. The brief history of New Labour shows that it is untenable. With Tony
Blair bragging about the United Kingdom having the most restrictive labour laws
in the developed world, and the New Labour government seeking opt-outs and the
watering down of any EU issues that benefit working people and trade unionists –
after all we must not upset the CBI must we? – one has to seriously question the
future of what has been described as ‘social Europe’. Indeed, New Labour is
leading the charge to sweep away or, at worst for them, water down any social gains
the European Union boasted of in the past.
Several points have now become clear regarding the position of our union in the
debate over the future of the European Union:
Club rules
If Britain is to be part of the European Union it is clear that, sooner or later an EU
constitution is necessary. In the short term, the issue is not the production of a
constitution but what is in it. There is also the longer-term view in relation to
control over changes in the constitution. Trade unions know only too well that
agreements struck on amalgamation or transfer of engagements are temporary
affairs that, in the fullness of time – often much speedier than that – are overtaken
by reality.
There is a lot in the proposed ‘constitution’ that makes sense for a club. The
replacement of the rotating presidency by a chair of the council; the reduction of
commissioners to one per state, and then restricting that number to two-thirds of
member states on a rotation system; increased powers for MEPs (although these go
nowhere near far enough for democratic responsibility); a single EU Foreign
Ministry etc. All these steps recognise the basic fact that a club must have one set
of rules.
Yet at the same time we are asked to believe that other areas of the workings of
the European Union will not be part of the constitution; that the so-called red lines
have not and will not be breached. Such a claim beggars belief. There can be no
guarantee that these areas will remain ‘free’ from the constitution, and it is naive to
think so and dishonest to claim so. Put simply, the European Union cannot work in
the long term with differing rules for different member states. Once the economy is
centralised all else must and will follow. In such a case the present democratic
deficiency will multiply and Britain will, like others, be left at the margins of a
Union it cannot influence.
Here the central issue is economic management, and the fact is that the isolation
of the European Central Bank from reality – not to mention any kind of democratic
control and accountability – is central. There is not space here to argue this case in
120 Joe Marino
detail; others will do that. Yet it is a fact that even pro-European Union economists
despair about the role and lack of accountability – not to mention the policies –
of the ECB. There can be no green light for the European Union constitution until
the ECB is brought under that democratic control. Even the ‘independent’ Bank of
England faces the final political control – its very independence can be reversed by
a political decision of the House of Commons. No such sanction is there for the
ECB and there is a fundamental flaw in the structure of the European Union. Of
course, it can be argued that powerful governments can just ignore the ECB – as
Germany and France have done recently. That, of course, begs the question of how
long the very structure of the ECB, the single currency and the Union itself can
survive unilateralist, individual state decisions. By themselves the actions of the
German and French governments show the sham of unity.
Single currency
The same is true of the single currency. We believe that membership of the single
currency would be a disaster for Britain and that the issue of the level of joining – at
what exact exchange rate – is a red herring. We would be bound by the rules of the
euro and our economic independence would be gone for good. All that would be
left is tinkering at the edges. Nor is it tenable to suggest that once we join we could
then influence events – that boat has already left the harbour. Democratisation of
the euro and the ECB is essential – but much harder to achieve once let go. And no
one can seriously doubt the democratic deficiency here.
Of equal importance are the so-called budget rules. The Commission president
may well hail the recent European Court of Justice ruling that EU governments
had acted illegally in ignoring a call to punish France and Germany for violating
budget rules, but the fact is they did. And in doing so they highlighted a major
failing in those rules. Of equal importance are the inflexibility of the euro rules and
the role of the ECB. Even the most ardent supporters of the single currency do not
disagree that Gordon Brown’s investment plans for the NHS and education would
fall foul of these rules. In such inevitable circumstances Britain would have to face
the same ‘dilemma’ faced by Germany and France. Do we heed the euro rules or
meet the demands of the British people for investment in health and education? I
know my choice – but I doubt that of some British political parties. One has only to
look at the mess the Schroeder and Chirac governments are in over the euro/state
funding/stability pact issues to see the writing on the wall. Both German and
French governments are taking the axe to social provisions, especially pensions, in
order to minimise their busting of the euro rules – and, despite those savage cuts,
still failing. It seems the only ‘positive’ in the euro is not having to pay commission
on holiday exchange rates – I can live with that if it means making our own
decisions on investment in British public services.
The constant bleating that being outside the single currency – indeed outside the
European Union – equals job losses is so far off the mark one gets surprised that it is
still being made. To quote the ‘Labour Euro-Safeguards Campaign Bulletin’ of
November 2003:
What future in the European Union? 121
We constantly have a trade deficit with the other EU countries, currently
running at well over £10bn per annum. Nor is Britain dependent on the EU
for jobs. The claim that 3m jobs would be lost if we were not in the EU is
nonsensical. In fact, Britain’s economic performance has been considerably
better recently than most other EU Member States, largely because we are not
in the euro and thus not bound by the Stability and Growth Pact and the
deflationary dictates of the European Central Bank.
It is not a long-term tenable position to support membership of the European
Union but oppose the single currency. The issue here is not just timing and the level
at which Britain joins the single currency if it stays in the Union. There is also the
issue of democratic accountability in relation to the European Central Bank and
the need for flexibility in economic management to take account of differing needs
in different parts of the single currency area. These issues are far from settled and
until they are our view remains one of opposition to single currency membership.
As set out above, the weakness shown by the present EU institutions does not bode
well for the success of the constitution. If economic sections of EU policy can be
ignored, then why not others? And it is not just the German and French governments who claim this right of different treatment.
I have argued that membership of the European Union only looked good to
British trade unionists because of the anti-union stance of the Thatcher and Major
governments. I remember warning at the time that, should a Labour government
wish to pour money into the social fabric of Britain – in particular the NHS and
schools – then it could well fall foul of EU rules. Sure enough, as Gordon Brown
belatedly began the rebuilding of our neglected public services, the ECB issued its
warnings against his spending plans for breaching EU rules. Of course, being
outside the single currency the Treasury quite rightly ignored those ‘suggestions’. It
would, of course, be a different matter if we were strangled by the single currency
rules – as France and Germany found. Yet to brush these problems aside by either
following the French and German example – unsustainable in even the medium
term if the single currency is to survive – or by saying we never will join the single
currency unless it is on our own terms is disingenuous. The single currency is the
lifeblood of the European Union and, sooner rather than later, all member states
will have to join if they want to stay in the club –there can be no dispute about that.
The only point of disagreement for pro-Europeans seems to be the level at which
we join. Important as that is, it is dishonest to give any other signal. Membership of
the European Union must mean at some stage membership of the single currency.
Let’s at least be honest about that.
Therefore the argument about the democratic deficiency in economic matters is
vital but is avoided by those who wish to shove us into the European Union by the
back door. As with other aspects of the European Constitution, at the end of the
day it is all or nothing.
122 Joe Marino
Diluted membership
The issue of detail is also one that drives our current view on the constitution and
on continued membership of the European Union. If a constitution is to be agreed,
it must be the same for all member states. That is far from the position of the British
government which continues to seek opt-outs of that EU legislation favourable to
working people in the United Kingdom. How the government can hope to win a
referendum on the constitution whilst it takes such an anti-worker stance beggars
belief. And why should we support such a stance that is clearly against the best
interests of our members? If the perceived gains of ‘social Europe’ are to be denied
us, what are we in it for? Indeed our conference was clear on one thing: the
government need not seek our members’ assistance in getting a ‘Yes’ vote whilst it
takes this stance.
Cherry-picking at the constitution is not an option. If that is to be allowed then
the constitution itself will be a farce and would not deserve support.
Thus the claim is made by some that trade unions must support the constitution
because it embraces the European Charter of Fundamental Rights. This goes right
to the heart of the debate for us – because the claim is spurious. How can we
campaign for such a laudable aim if, at the same time, the New Labour government is opting out of that same Charter all over the place. This is the problem with
the guarantees given to the CBI and other employer organisations. In effect, British
workers are being told: here is what the rest of the European Union workforce is
getting but we are ensuring they don’t apply here in Britain. Vote for a constitution
that makes you the poor relations of the Union. What a farce – and one we, at least,
are not prepared to take part in.
Resistance to full information and consultation for British workers; opposition to
full implementation of the working-time directive; refusal to grant British workers
the same rights to defend themselves through the right to take industrial action; the
failure to guarantee employment protection rights from day one of employment;
the ease with which British workers – one of the least protected workforces in the
advanced economic world – can be dismissed . . . The list is endless. Whilst perhaps
we should not be surprised by New Labour’s anti-worker stand in these areas, it is
surely simplistic of them to expect our support for a constitution that leaves British
workers as the poor relations of the European Union in any referendum. The
question is ‘what’s in it for us?’ And the answer is ‘very little’.
It may well be claimed that membership of the European Union creates jobs in
the United Kingdom. I don’t accept that – at the very least the jury is still out on
that question. But what is the use of job creation if, due to the weakest labour
protection laws in the advanced economies, those same jobs can be taken away at a
mere whim with no comeback or protection?
Conclusion
Our current view was one of opposition to membership of a club that stacks the
rules against our members and their families. However, we do believe that
What future in the European Union? 123
membership of the European Union must mean acceptance of a constriction of
some sort; and that any attempt by the UK government to opt out of workerfriendly clauses of the constitution or other EU laws and directives would lead us to
campaign for a ‘No’ vote in any referendum. It would simply not be worth the
candle.
Membership of the euro and support for the European constitution are
inextricably linked. The Conservatives and their supporters on the right, such as
the UKIP, wish to see the European Union as a free market for big business with
little or no protection for workers or consumers. Hence, for example, their opposition to strengthening labelling laws or the strict control on GM foods. The Tories’
problem is that they cannot take their opposition to current trends in the European
Union to its logical conclusion – that of leaving the Union. The UKIP is against
anything that smacks of Johnny Foreigner and wants to see Britain return to preElizabethan days when the world was much smaller and we were blissfully ignorant
of anywhere past these shores.
Our opposition to the euro must be and is based on more than little-Englander
prejudice. This idea that economic super-blocs are the answer is riddled with
contradictions that will inevitably burst them apart. Who, outside Washington that
is, seriously believes that NAFTA is anything but an economic extension of the pax
Americana and a vehicle for the export of US capitalism? From where we stand the
current state of the European Union is one inevitably linked to and supporting
capital against labour. That becomes more and more apparent as worker
protection and social advancement are abandoned in favour of flexible markets.
We want no part of that.
13 Hooked to the falling stars
Doug Nicholls
Slow motion coup d’état
It has been described as the biggest slow motion coup d’état in history. The drive
towards one legal and political entity under one constitution, known as the
European Union (EU), has reached a crossroads. However, its momentum is
fragile. Britain, Denmark, Poland and possibly even France – now that large
unions like the CGT and FSU have opposed the Constitution – could upset the
apple cart. This is why we really need to be thinking beyond the latest Federal plans
and critically re-examine our entire membership of the European Union. The
publications of the campaigning organisation Trade Unionists Against the
European Union Constitution make a powerful contribution to the debate.
The multinationals and bankers want ultimate power over a superstate in which
nations cease to exist. Practically every constituency you care to name, short of the
multinationals and gravy train politicians, is opposed to a federal Europe. Any talk
of welcoming a stronger European Union as a progressive counterweight to the
United States is in fact a spine-chilling acceptance of the growing economic conflict
that is brewing between the great blocs based around the dollar, the Deutschmark
and the yen. The difference between a Republican US President and an EU
President could, as their tensions continue, be no more than that between Pepsi
and Coke. Britain’s schizophrenic position, one minute obedient servant of Bush,
next of Brussels, makes it an increasingly important battleground for the idea of the
next century. Will we have comprador governments or national ones? Governments of the people or of the power blocs?
And what would be the consequences of an EU Foreign Minister getting in the
way of the United States of America on any issue of substance? Tensions between
the European Union and USA are increasing over trade and the world’s resources,
which is one reason why the European Union desperately wants its centrally
controlled foreign policy and armed services. Whatever the political complexion of
the USA and the European Union, as competing blocs they are on collision course
and will battle it out over the resource war. The USA is also deeply alarmed that
the European Union is developing its own independent satellite navigation
networks that can break the current US monopoly and have considerable military
Hooked to the falling stars 125
applications. Strangely enough, we are in the middle, with a Foreign Office
currently doing splits over the Atlantic and the English Channel and never looking
at its own people beneath.
Fragments not nations
A more domestic reflection of this huge centralisation of power is the pressure for
further regionalisation of Britain. The European Union is a highly centralised,
inefficient superstate fragmenting its territories into economic zones with little real
power but to beg for handouts from Brussels. With Peter Mandelson there, the
European Union becomes a giant Dome, monument to gambling, fraud and poor
planning and the Smilesian greed of the billionaires. It cannot even be described as
a gentleman’s club any more. The traffickers in human life, destroyers of fertile fish
stocks and agricultural land, and sharpeners of swords, are not exactly gents.
Indeed Mandelson is one of only six Commissioners who can be described as
coming from centre-left parties – and remember, under the Constitution the
unelected Commissioners have exclusive power to initiate legislation.
These vast developments are not socialist, nor can they be subject to a
programme of reform from within by socialists. They represent the very opposite of
what trade unionists and socialists wanted after the Second World War. Our
forebears’ vision was of peacefully coexisting independent nations capable of
putting their own people first without the need for mass migrations of labour.
Current EU plans represent more what the defeated German generals planned in
their immediate post-war document Winning the Peace, when they advocated a single
government, currency, tax system, foreign policy, industrial and agricultural policy
for the entire Continent, with a renewed Drang nach Osten (drive to the east) to
incorporate those now joining the European Union.
International solidarity has two sides to it, theirs and ours. The drive to one
political legal entity in the European Union is clearly their form of solidarity, the
regional arm of globalisation – that is an imperialist bloc. The handlebar
moustaches of the competing capitalist nations at the outset of the twentieth
century have gone. In exhaustion and desperation, the boardrooms are now
huddling together for a final breath of life. The EU Constitution is like their lifesupport machine; it is not a harbinger of a brave new world. I argue here that the
best thing to do is to switch the whole thing off, and I tackle some of the reasons why
we should do this and outline the outdated thinking, especially in trade unions, that
is holding us back.
Self-determination
Trade unionists have always supported others in their struggles for national
independence. In Britain we have been slow to apply this principle to ourselves.
You could argue that we haven’t had to since 1939. We are used to applauding the
heroism of others in liberating themselves from imperial domination, apartheid
126 Doug Nicholls
and colonialism. It comes as a shock therefore to recognise that now we are being
taken over and we have an external power seeking to remove our national powers
and democratic structures.
It is more of a problem when the political party most in favour of this takeover is
the one originally created to represent trade unions in parliament. Affiliated trade
unions, by default, are complicit in a form of political denationalisation on a scale
never known before. This does not reflect the views of the majority of trade union
members, nor the majority of workers generally. When some trade unions lose
themselves in this level of embroilment with an undemocratic process, they
become incorporated in what can be a sinister way and act undemocratically
themselves; hence the unpleasant recent history of suppression of the EU debate in
some unions. The so-called European Social Model encourages this incorporation
around the table and the failed policies of partnership, and invites are made to
various ETUC-sponsored trade union figures to sit round the tables of the
Bildeberg Group and the Round Table of Industrialists. This is a real betrayal of
the purpose of trade unions, which are about skill and power at the workplace.
Nothing could be further from both than the European Central Bank and the
European Commissioners, which run the euro and European Union currently and
which would be further empowered under the new Constitution.
The TUC’s recent spin and misinformation about the euro and EU Constitution has represented the very shoddiest of thinking in the Labour movement. The
TUC’s fawning to the European Union has not brought us the goods they
promised and there doesn’t even seem to be any embarrassment.
For example, the General Council’s 2004 report said ‘the European Union is a
full employment economy’. This doesn’t explain why unemployment in the EU
zone is double ours at 9 per cent and why at one stage, as the Maastricht criteria
struck, unemployment in the European Union was equivalent to the entire
populations of Belgium, Denmark and Ireland being out of work. Furthermore, the
2004 report said ‘the Constitution gives legislation protecting public services’. It
doesn’t. The terms of convergence for the euro remain, and the legislation they are
in fact proposing opens up the richest prizes – health and education – to
privatisation. The Constitution does the opposite of what the TUC said it does.
Often the significant thing about TUC General Council reports is what they
leave out. There was no mention of the subsequently agreed General Council
statement on manufacturing. Under the EU Constitution we could not have an
independent national industrial strategy to rebuild domestic energy supply and
factories. Our ability to do so now is very limited within the Amsterdam and
Maastricht terms. Even government procurement will have to be subject to even
more competition. Imports will continue to flood in, and our historically disastrous
balance of payment deficits will continue.
But the General Council was, pre-Congress 2004, most silent on the very biggest
issues tied up in the proposed Constitution: the economy and governance. We are
the fourth biggest economy in the world. This means that in real terms only 48 per
cent of our exported goods and services are with the European Union. But if we
look at what we produce and buy and sell as a whole we trade 10 per cent with the
Hooked to the falling stars 127
European Union, 11 per cent with the rest of the world and 79 per cent within our
own domestic market. As the Chancellor continually warns us, the European
Union is still the lowest growth area in the world. Putting all our eggs in the basket
in which only 10 per cent of our production is involved could be fatal.
But an economy has to be managed, and the General Council is not getting to
the political heart of the matter. Even proponents of the Constitution describe it as
the political capstone of the EU federal state. In a federation, nation states lose the
basic right of self-government. This is a right that our predecessors and many of
our guests as trade unionists to our own conferences and to the TUC Congress this
year, have fought in blood for.
Until now independent governments in Europe have been relating through
various treaties. But the proposed Constitution is a new instrument of government
with power over all member states. Westminster becomes a subsidiary conveyor of
laws exclusively initiated by unelected commissioners and subservient to economic
policies made by the unelected bankers and invented by Chicago School
monetarists.
Trade unions want a third term of a government we elect and help direct. An EU
Constitution would not allow this. It would return Thatcherite economics
indefinitely. If trade unionists fail to fully explore the fundamental principle and
purpose undermining the Constitution they will let us down. The 900 pages of the
Constitutional Treaty come down to a simple question: who rules Britain, those we
elect, or those who we do not elect? If trade unions are to have a future they must be
seen to advocate for democracy the loudest of all.
Much of the slovenly thinking in the trade unions relates to the seductive
illusions of European legislation. Without ‘Europe’ Thatcher would have killed us,
goes the argument. The general pragmatism of trade unionists born of continually
negotiating between a rock and a hard place, has dulled the sense of what could
really be achieved. It has also led to a serious over-egging of the European
employment law pudding – and, in fact, many of our substantial problems, such as
pensions, detailed below, originate in European employment law. Whether any
legislation is good or bad is however entirely secondary. All legislation is temporary
in any event. What matters is what you do to make the legislation. If you rely on
others to make it because you can’t deal with your own bad lawmakers, you are
giving up on one of the fundamental rights of democracy and active citizenship.
For trade unionists to give up the ghost in this way has been shameful and
worrying. It is as if the fundamental trade union principles – that you only get what
you fight for and that as soon as you step into the court room you have lost – have
been conveniently forgotten.
Pensions and the European Union
Trade unions have, rightly, been quick to condemn the pensions crisis, the huge
£57 billion shortfall to meet needs and the closure of final salary schemes, but they
have been slow to recognise that the origin of this problem lies in the European
Union. Other European nations have not had the tradition of final pension salary
128 Doug Nicholls
schemes. Pensions, like any other regulation, had to be harmonised in the European Union. But the end of final salary pension schemes has its origins in the
restrictions demanded by the Maastricht criteria on public spending.
In stark contrast to the euro countries, Britain has a potential source of finance,
which, if utilised in a prudent manner, could act as a springboard to rebuild the
country. It has 75 per cent of the European Union’s total occupational pension
scheme assets, amounting to approximately £750 billion.
This occupational wealth, created by past and present generations of British
workers, has been put aside to pay present and future pensions and represents the
equivalent of 81 per cent of Britain’s GDP. By comparison, occupational pension
provision in Germany represents 16.3 per cent of its GDP, with equivalent figures
for France at 6.6 per cent, Italy at 2.6 per cent and Belgium at 5.9 per cent.
This perspective has so far not been part of the discussion surrounding pensions,
which has largely consisted of articles in the British press panicking about pensions
in crisis, but without any context. At the same time, nothing at all has been said in
the press about the Occupational Pension Funds Directive, discussed by EU
finance ministers. In the words of European Commissioner Frits Bolkstein, the
directive will ‘mobilise capital in the order of trillions of euros and this will save
companies millions in the cost of running employee pension schemes’. It is
apparent from this statement that the whole of Britain’s pensions capital is under
threat. The idea is that our pension assets could be shifted by international
companies and placed elsewhere in Europe.
Already, Britain’s pension funds hold record levels of overseas stocks and shares.
The average fund now has 28 per cent of its assets invested elsewhere, with some
funds having as much as 50 per cent. In the meantime, our country is in desperate
need of investment. Now the European Union wants to grab the rest by further
liberalising national investment rules for pension funds and enabling multinationals to provide unified pension plans for their staff, reducing costs by millions
per year. The directive, by enabling a financial institution in one member state to
manage company pension schemes in other member states, will simply result in the
exit of more capital from this country.
The European Union mask slips again when you look at why the cost of
occupational pensions has increased by some 50 per cent over the past eight years.
This has not come about by accident or because workers are living a couple of years
longer during retirement, but because it has been planned by the Treasury.
In 1995 the Treasury, then run by the Tories, decided that to help meet the EU
convergence criteria, the issue of government debt through the UK financial gilt
market should cease. At the time, the government said that it was reducing the
national debt. What it really meant was that the government was no longer able to
help finance its revenues through the issue of new gilts because it would contravene
the parameters laid down by the European Union on borrowing. The result was
that the supply of new gilts ceased, whilst the financial demand for gilts increased,
especially for 15-year and 20-year government gilts, which have always been ideal
financial instruments to underpin occupational pensions whilst in payment. This is
because people retiring at age 65 tend to go on living for a further 15 to 20 years.
Hooked to the falling stars 129
So gilts with a 15- or 20-year term are ideal security to underpin the financial
liability of an occupational pension becoming payable over the same period.
Unsurprisingly (supply and demand) the price of the remaining gilts issued in the
market prior to 1995 have since rocketed, to the extent that the cost of, for
example, a subsistence level of pension of £7,500 per annum payable to a male
aged 65, now requires at least £100,000 of capital to match the financial liability
whilst in payment.
The policy of no longer issuing new government gilts has continued since 1997
and so it is small wonder that the cost of pension final salary guarantees has
increased in the manner they have. Evidence of this comes from what is known as
the Minimum Funding Requirement (MFR) introduced by the Tories in April 1997
but conceived in 1995 at the time the Treasury decided to dry up the gilt market.
Some sense emerging
Despite the propaganda barrage by the TUC and some unions who have lost their
industries because of the European Union, they still seem to see it as the answer to
their prayers. Although the TUC, goaded no doubt by the European Trade Union
Confederation (ETUC), has sought to avoid this issue, at Congress 2004 a note of
concern crept into even the General Council’s statement, the effect of which is to
open a wide debate in every trade union. The statement reads:
Congress welcomes proposals for a referendum on the proposed Constitutional treaty for the European Union. At long last a genuine and
constructive debate can take place in Britain on the issue. However, it would
be inappropriate to take a formal position for or against the Constitutional
treaty until unions and the General Council have had the opportunity to
consider it in depth and assess its impact on key issues such as the rights of
working people to decent work, the national democratic rights of member
states, public services and equality.
At the very least, over the coming months we would expect all trade unions to be
debating the issue in a calm and collected way and trying to get to the facts of the
issue. Accept the EU Constitution and you have to accept the single currency,
single tax system, single legal authority and single foreign policy. The British
Parliament becomes no more than a cipher, a parish pump administering laws and
finances determined by those we do not elect. The unique relationship between the
British trade unions and the Labour Party would be totally irrelevant. No British
government would have any meaningful authority and would have to listen to
Brussels more than the brothers and sisters.
From economic to political subservience
Thatcher sought to destroy the basis of national independence by lifting export
controls on capital and running down manufacturing. In particular, energy supply
130 Doug Nicholls
had to be broken up. We will shortly be dependent almost exclusively on importing
foreign-sourced energy from often unstable states, with pipes running across the
European Union. We wasted our own gas and oil on paying for unemployment.
There has been no let-up in the decline in manufacturing, but it has a new twist.
The EU-dominated regional strategies, mean that no country is permitted to
produce a balanced range of manufactured products to enhance its independence.
Industries are focused in particular zones throughout Europe. This is why we have
lost key staple national industries like textiles, clothing and footwear, and ceramics.
Britain is not on the European Union’s list to have these. The destruction of our
agriculture and fisheries is just a foretaste of what is to come to our remaining
manufacturing base under a more integrated European Union. You can’t be a
friend of manufacturing and the European Union; you will have to choose. Nations
must be dependent on the market, not self-reliant and productive. All this, of
course, has profound implications for environmental policies. Making and
consuming as locally as possible becomes almost impossible. At a cultural level,
national cultures are reduced to the uniform market in American pulp and
Eurotrash.
Once your wealth-creating base becomes foreign owned and skewed to a wider
strategy, so your need for a national government capable of planning and
enhancing a domestic economy becomes redundant. And that is where we have
been taken now. The Constitution replaces national governments. You become
governed by those you do not elect.
The lost of democracy is the biggest cost of the EU Constitution, but, regardless,
EU membership is leeching our wealth incredibly, and the majority of collective
trade union aspirations would be met by saving the money wasted on EU
membership. The Nazis who first dreamed in the modern epoch of a single
European government were master liars, and much of the pro-EU propaganda
here is based on pure lies.
So here are some true economic facts which should encourage us to see we have
a prosperous future outside the regardless. Equivalent to about 4 per cent of our
Gross Domestic Product is spent on EU membership. That could be redirected
here. Every authoritative report has shown that if Britain left the regardless it
would have minimal impact on jobs.
The benefits of independence and the agenda of the trade unions in command
could be enormous. Not only would there be huge capital reserves to re-invest in
manufacturing renewal and public services, there would be an ability to plan our
economy for ourselves. An independent energy policy could be envisaged.
Industries could be brought back under state control. A plan for creating production across a variety of manufacturing areas could be developed. Government
procurement could be exclusively British based. Employment laws could be
regulated to fit our circumstances. Taxes and interest rates could be levied to suit
our pace of change. The import and export of labour and capital could be
regulated also. So much could be done.
It’s time for trade unionists to think ahead, leave the European Union and create
our own democratic alternative. Such vision will attract members. Continuing
Hooked to the falling stars 131
compliance with the status quo will not. The national question has now become
dominant in Britain and, no matter who else shares the view, trade unionists should
be unashamed in leading the battle for democracy and national independence.
The intellectual challenges, particularly for trade unionists, are going to be
demanding. They have become used to not thinking big. We are told there is only
the American model red in tooth and claw or the softer European model. Used to
making the best of two bad options at work, we forget that there is truly a Third
Way. If we don’t create this, then national chauvinists, the extreme right and others
will. Nationalism coupled with socialism can emerge in a creative and positive way;
otherwise there will emerge a new form of National Socialism – neither nationalist
nor socialist – led by the unelected.
14 A safe European home?
Billy Hayes
Whatever view is taken by the left towards the European Union and the euro, one
thing is certain: there is as yet no ‘left strategy’ in Europe. By this I mean a common
path of action which socialists across Europe pursue to achieve the type of
hegemony which the neo-liberals have gained in the United States. Instead we see
various national ‘à la carte’ menus pursued in relation to the European Union.
Taken together, the various proposals for achieving greater democracy, transparency, accountability, etc., may be considered very good. But where do they lead
and how do they reflect key facts of international existence?
In the period 1989–91 capitalism was restored into eastern Europe and the
Soviet Union was dismantled. The dominance of the United States of America in
the world reasserted itself. The 1990s should have been a period when the left in
Europe also reasserted itself. Certainly this was vital if the overwhelming selfconfidence of the ruling circles in the USA were to be challenged. Yet in this time
the European left has failed in restraining US ambitions to reshape the world in its
desired image. Instead the left has found itself compromised by flirtations with neoliberalism. The prospect of a second term for President Bush ought to force the
European left into a period of coherent and united action. A precondition for this is
a new debate on the future of the European Union.
The USA and the European Union
It is only in the world context that the future of Europe can be resolved. As a
General Secretary of a trade union, I will be delighted if the CWU’s problems
could simply be solved in negotiations with employers, or with the British government. But I know that the future of, for example, the postal industry, is being
defined by GATT negotiations, by European directives on postal liberalisation and
by the broader development in the world economy. The practical question is then
how to secure the most favourable development of the European Union in the
context of contending international forces.
There are two key contending forces to register. First, there is US imperialism
which is in an age of remaking an empire, utilising aggressive political and military
means. Second, there is the dominant class forces in Europe continuing to use neoliberalism to achieve an European Union capable of competing with the USA.
What is not sufficiently registered by the left is the fact of US intervention in the
A safe European home? 133
European process – an intervention which is decidedly hostile to the success of the
EU project. Divisions on Iraq have sharpened this hostility. For example, it is not
simply nostalgia for an independent role in the world that drives the Tories’
opposition to the European Union. It’s that the Tories favour the USA’s role over
the European Union. Margaret Thatcher supported the Single European Act. But
her government came into conflict on the European Union when it became clear
that European ruling circles were driving towards a single market in order to
compete more effectively against the USA. Or take the example of the role of the
new ascension countries. The division of Europe into ‘old and new Europe’ by the
White House is a slogan for a real policy. The US administration is determined to
use its leverage with countries like Poland in order to limit the independence of the
European Union from US policy goals.
We can assume that hostility from US ruling circles to the European Union is
not an ideological quirk. Rather it is a recognition that the size of the European
Union offers not just protection for EU countries against a rampant American
economy, but also an attractive poll for developing countries at present in traction,
financially and politically, to the US-dominated World Bank, IMF, WTO, etc.
The context of the debate about the euro and the
Constitution
Once understood, I believe it is essential to place the frame of US intervention
around the debates of the future of the European Union. It is mistaken to assume
that all that we require is analysis internal to the Union, let alone a single country.
In my view an appreciation of the current discussion relating to both the euro and
the proposed European Constitution must demonstrate an awareness of the
advance of US imperialism. The urgency of achieving some alternative is hardly
academic. One of the decisive reasons for the assault upon Iraq was a decision of
Saddam Hussein to transfer the settlement of oil transactions into euros and away
from dollars. In the world today the borders between trade wars and real wars are
constantly permeable. So let us examine the issue of the euro and the Constitution
in this light.
The critique of deepening European integration initiatives (i.e. EMU and the
Constitution) from the left tends to centre on the neo-liberal character of its
economic policy. Thus:
In an era of growing global challenges, the EU is attempting to push out-dated
1980s neo-liberal politics. The European Commission is putting pressure on
member states to liberalise their labour markets. The Euro zones inflexible
rules mean that Governments have privatised public services to balance their
budgets. The European Central Bank has short-termist obsession with
inflation, rather than creating jobs. As a result the European economies have
now suffered years of very high unemployment. The need for change should
be clear, but the Constitution commits the EU to the same old policies.
(Centre for a Social Europe 2004: 9)
134 Billy Hayes
What is notable about the quote is the absence of contrast. If the European
Commission policy had been contrasted to a single national government, we will
be able to measure the difference but it is not contrasted for a good reason. There is
no national government pursuing a qualitatively better policy. Neo-liberalism is
the foundation of European national governments at present. It can hardly be a
coincidence then that both a single currency and a Constitution negotiated by
these governments are neo-liberal in nature. Moreover, it is not particularly
convincing to claim that this contrasts with the policy of the British government.
The fact that the British government is not participating in the euro is apparently
the reason why unemployment is less in the United Kingdom than in Europe. Yet,
this is not, however, the rationale behind the British government’s action. The
critique of the European Union by the British government is that it is insufficiently
neo-liberal. The EU countries have not liberalised their labour markets in a
comparable manner to the United Kingdom. Gordon Smith believes the US
labour market is a more effective engine for job creation than the European Union.
The United Kingdom will adopt the euro once there is a sustainable convergence
between the United Kingdom and the eurozone economic cycles. This, the first of
the five conditions for entry, will be most practically tested when the single
currency demonstrates a positive long-term effect on jobs, the fifth criteria. In other
words, for the British government, the single currency can be entirely neutral, or
supportive, on job creation. It is the unliberalised character of the labour market,
apparently, that is definitely antagonistic to job creation.
This critique demonstrates parallels between the position of the United States of
America, the Tories and Gordon Brown. Recently Brown deepened this parallel
when he told the CBI Congress that there was the need for a new transatlantic
alliance based on ‘entrepreneurial flair’, which apparently the US economy
demonstrates. Clearly Brown’s opposition to the euro is generally posed as a shortterm piece of pragmatism. But much of the left opposition to the euro operates on
an identical premise. That is that there is a demonstrable immediate gain to the
UK economy by staying outside.
The difficulty the left faces is not in the immediate period. Brown’s policy
demonstrates that it is not involvement in a single currently that is decisive. What is
decisive is a basis for capital accumulation over an extended period. The US
economies extended capital reproduction has been premised on a thoroughly
liberalised labour market in the USA, and borrowing capital from the rest of the
world to sustain US living standards. The weakness of the US labour movement
and the US hegemonic international position makes such a stance viable.
For the European Union to carry out such a policy would require the destruction
of the welfare state, massive extension of working hours, etc. The incoherence of
Gordon Brown’s position is the assumption that comparability with the USA can
be achieved in any other manner. Unfortunately, the left critique of the single
currency has yet to suggest an alternative in which the extended capital reproduction can be demonstrated. Whilst defending the ‘social gains’ of the European
Union the left has yet to demonstrate what pan-European economic policy can
deliver the material basis for sustaining these gains.
A safe European home? 135
Opposition and reform
British trade unions are generally taking a very caution stance on both the single
currency and the EU Constitution. I would number the CWU amongst these. We
are yet to be persuaded, and have yet to finalise our tactics. But what is finally
persuasive must be coherent. Some lines of thought in a British trade union have
individual merit, but exactly lack overall coherence. Some trade unions oppose the
EU Constitution because of inadequate guarantees of employment rights. Given
the contribution that the European Union made to employment law in Britain
during the Thatcher/Major years we can understand this preoccupation.
But really does this add up? What if the EU Constitution guaranteed a
‘European right to strike’ rather than its definition by national law. Would the left
then support both EMU and the Constitution with its priority of price stability as
the primary economic goal? Surely the failure to overcome the national limits of
employment law is not more important than the fact that member state government deficits cannot represent more than 3 per cent of GDP. The latter, of course,
has substantial significance for any expansionary welfare programme by a national
government.
A European statute on the right to strike does not amount to much in a deflated
economy. It must be clear that pressing the particular social employment rights
only makes sense with a simultaneous pressure for an expansionary economy. Yet
immediately this poses the issue of which economy is to be expanded, a member
state economy or that of the European Union.
There is one line which answers this dilemma. At its most abstract track it runs as
follows: against EMU and the euro/Constitution and for the United Socialist
States of Europe. Such a prospect is very pleasant but also not in view. What such a
line suggests is no immediate prospect of power and a long period of isolation. This
is chilly indeed. It accepts that neo-liberal forces would hold sway for many years to
come. It accepts that the European Union cannot, for any foreseeable time, act as
any sort of counter to the new US empire. And it suggests that progressive forces
are confined to the margins of the labour movement in Europe.
This cannot be the basis for a left strategy. To suggest that the best that socialists
can do at the start of the twenty-first century is to make propaganda is genuinely
infantile. A left strategy would outline a course of action which starts from the needs
of hundreds of millions of people in Europe and billions across the planet. It must
act as a rallying point to those opposing the construction of a new American
empire.
The question to be answered rests on the viability of the European Union acting
as a coherent block in the world. To establish this we must achieve clarity on the
following issues: First, on the outline of an alternative economic policy to neoliberalism which operates in the member states and the European Union. The
argument about EMU and the Constitution must not duck the fact that both
replicate the prevailing orthodoxy in at least the most influential member states.
The limits of the single currency and the EU Constitution are to be found in
Raffarin’s reforms, Schroeder’s reforms and Blair and Brown’s advocacy of
136 Billy Hayes
‘flexibility’. Supporting or opposing the euro and the EU Constitution changes this
not a jot.
Second, a large expansionary economic block is an essential precondition for a
‘social Europe’. The left must aim to gain hold of national governments in Europe
in order to promote a growth of the national and European economy. Confining
ourselves to making propaganda may seem comfortable, but it would be a
capitulation to neo-liberalism.
Third, that the combined economic weight of the nation states of Europe offers a
sufficient enough basis to carry on a common foreign policy independent of the US
government. For the left this is one potential route to improve the bargaining
position of developing countries against the US domination of the WTO, IMF,
World Bank, etc. The left in Britain should not be a bridge between the USA and
Europe. It should aim to be a defender in Europe of the developing countries
against the USA.
Finally, a left policy for the European Union will be coherent across the Union
and within the member states. This would indicate the tendency towards greater
integration and coordination for the member states. ‘Enhanced cooperation’ is
possible from a left, as well as a right perspective. So whether such cooperation is
correct depends on whether it assists the struggle and needs of the workers and
oppressed.
15 British trade unions and EMU
Natural supporters or conflicting
interests?1
Philip Whyman
Introduction
The establishment of Economic and Monetary Union (EMU), amongst (currently)
12 European Union (EU) member states, has great significance for European
working people and their families. This initiative involves the introduction of a
common currency (the euro), with both exchange rate management and monetary
policy having been transferred from national to super-national control, exercised
by the European Central Bank (ECB). The United Kingdom has to date remained
uncommitted to this initiative, preferring to rely upon an opt-out clause, ostensibly
until economic cycles coincide and five economic tests indicate that participation is
in the national interest. Leading members of the Labour Party and prominent
trade union leaders have indicated their personal support for further European
integration, despite the consistent hostility of the electorate as reflected in opinion
poll data. The current political position, where the majority is committed to further
integration whilst the majority of the Conservative Party firmly opposes the
deepening of economic integration, is a reversal of the balance of opinion two
decades ago.
This ‘report’ will therefore seek to answer two main questions: first, why the
labour movement altered their previous critical stance towards European economic integration and became amongst its staunchest supporters; second, whether
this new enthusiasm towards further integration, and particularly membership of
EMU, is in the national interest or that of working people.
Evolution of labour movement opinion
The British labour movement was initially opposed to EU membership on the
grounds that it was designed to benefit multinational capital at the expense of
workers. The free movement of goods and capital enhanced corporate profitability
through economies of scale, but also provided transnational capital with the
opportunity to threaten national workforces with disinvestment and the relocation
of production abroad if wage concessions were not made or strikes abandoned.
Furthermore, the free movement of capital undermines government policy autonomy, thereby weakening democratic self-determination and full employment
138 Philip Whyman
strategies, thereby potentially reducing the strength of nationally located labour
movements (Nairn 1973: 7, 66–73, 147).
The leadership of the Labour Party abandoned this policy in 1974, and
successive leaders have become increasingly favourable to further integration,
pledging the intention to keep Britain at ‘the heart of Europe’. Prime Minister Blair
emphasises this policy shift to distinguish ‘new’ from ‘old’ Labour Party politics,
whilst magnifying differences with an increasingly eurosceptic Conservative Party.
Labour MPs have largely adopted the new strategy, with only 16 per cent opposed
to EMU entry, despite 29 per cent believing EMU would institutionalise neoliberal economic policy in Britain and therefore severely constrain the ability of a
Labour government to successfully govern the country (Baker et al. 1996). The
explanation for this apparent contradiction may be found among the 88 per cent of
Labour MPs who believe globalisation makes membership of EMU a necessity.
Euroscepticism within the labour movement therefore appears to be concentrated
amongst the ‘old’ left, thereby forming a ‘declining legacy of Labour’s past’ with
the party’s ‘centre of gravity . . . shifted decisively in favour of Europe and EMU’
(Strange 1997: 15).
The Trades Union Congress (TUC) was more reluctant to abandon its position
to EU membership, and only did so after a 1975 national referendum produced
two-thirds support for continued membership (Strange 1997: 16). However, it was
only a decade of Conservative government, determined to marginalise trade
unions politically and undermine their industrial strength through legislation and
the toleration of a high level of unemployment, that led to the 1988 TUC Congress
enthusiastically greeting the alternative presented by Jacques Delors as a ‘social
Europe’ which embraced labour rights as core elements (Strange 1997). Concern
that economic integration may create unemployment, particularly expressed by
TGWU and the public sector unions, became more muted over time due to the
preference for a ‘European’ social democratic model rather than an ‘American’
version of neo-liberalism. Furthermore, this position was reinforced by:
1
2
3
4
Labour movement discipline – the desire to secure the election of a Labour
Party government led to self-imposed avoidance of contentious issues.
TUC advocacy of European Exchange Rate Mechanism (ERM) membership
– the acceptance of the loss of monetary policy sovereignty, dismissal of
devaluation as ‘anti-worker’ due to the usual reduction in living standards, and
substitution of low inflation over full employment as the prime goal of
government policy all meant that membership of EMU would not imply a
significant shift in trade union economic strategy.
The European Trades Union Congress (ETUC) securing a commitment from
the EU Commission to emphasise employment policy (Monks 2000: 186–7) –
this diffused criticism that EMU was simply concerned with financial interests,
but unfortunately has done little to resolve the persistence of mass
unemployment across most EU member states.
EMU being ‘part of the European Social Model (ESM) package’.
British trade unions and EMU 139
European Social Model (ESM)
Although an ESM may be more variable in practice, and more comprehensive
than the current approach taken in the text, a good basis for definition may be to
consider it as a variant of the post-war German ‘Social Market Model’, whereby a
successful, competitive market economy has been counterbalanced by generous
welfare provision and labour protection. The rights available to German employees and citizens remain amongst the most extensive of any capitalist economy
throughout history (Glasman 1997: 134). The emphasis upon the inclusion of
workers and their unions in the working of the economy facilitates an expression of
‘voice’ rather than ‘exit’. This, in turn, leads to cooperation in adapting to change,
superior morale resulting in enhanced productivity and lower employee turnover,
and, finally, the prevention of low-skill, low-investment competitive alternatives
stimulates productive investment and innovation. Moreover, it provides the
European social democratic labour movements with an alternative model to the
neo-liberal prescription of market superiority to social institutions and the
commodification of worker-citizens.
An ESM offers British trade unions the possibility of realising four distinct types of
objective. First, it provides a bulwark against the renewal of radical Conservatism
intent upon weakening trade unions as part of a pro-market strategy, since EU
Directives supersede national legislation and cannot therefore be easily changed.
Second, trade unions are incorporated as legitimate social partners and
counterpoints to organised business organisations, thereby promoting employee
involvement in relevant aspects of working life at both the local and the supernational level. This provides a role for unions to fulfil and thereby justifies continued
membership. Third, comprehensive welfare provision promotes income redistribution and labour de-commodification, thereby enhancing trade union power
resources. Even the present, minimalist EU social measures have delivered
additional protection for British workers, thereby insulating them from ‘the worst
excesses of laissez-faire capitalism’ (Edmonds 2000: 194). Fourth, material support
provided by the EU Commission to facilitate social partnership represents fully 13
per cent of ETUC income, in addition to travel subsidies and technical assistance
(Abbott 1997: 472). Thus, the ETUC has a direct financial interest in supporting
further European integration.
The combination of material support for a beleaguered trade union movement
and the possibility of the European Union establishing its distinct variant of an
ESM, provided powerful reasons for the union leadership to overlook a degree of
scepticism concerning the European integration project and to embrace EMU.
Admittedly, the case for joining EMU would appear more compelling had an ESM
actually been established and not remained an unrealised aspiration. Hence,
although the British trade union movement supports EMU membership, for
influential members this position remains conditional upon the promotion of an
ESM (Edmonds 2000: 198–9).
140 Philip Whyman
Contradictions within the trade union case
The stance taken by leading figures in the trade union movement appears to be
consistent with their traditional aims and values only as long as certain key assumptions hold. These are: that EMU proves to be an economic success outweighing the
costs of transition: and that the unions are correct to believe that the EU Commission will ultimately create an ESM for Euroland which will prove consistent with
the requirements of EMU. Unfortunately, there is a considerable body of evidence
to cast doubt upon both of these assumptions. Consequently, the trade union case
for supporting EMU must be subjected to rigorous evaluation to ascertain which
elements are likely to prove unreliable and, therefore, whether the strategy
followed by most leading trade union figures is fundamentally flawed.
Economic impact of EMU
The net economic effect of EMU membership is understandably uncertain
because it has no historical precedent. Optimists argue that greater exchange rate
stability, reduced transaction costs, enhanced competition deriving from price
transparency and low real interest rates resulting from a successful anti-inflation
strategy pursued by the independent ECB will all combine to provide a virtuous
cycle of increased business confidence, trade, investment and growth. Sceptics
point to the loss of monetary and exchange rate policy instruments as being likely
to increase economic instability amongst countries which are incompletely
converged and are therefore more likely to suffer from asymmetric external shocks
which the ECB will be incapable of moderating by use of its only policy instrument:
interest rates. Furthermore, the ECB may itself represent a second source of
instability, as its desire to establish anti-inflation credibility with the financial
markets may result in over-tightened monetary policy, resulting in unemployment
and a stagnant economy. The rigid convergence rules, reinforced by the Stability
and Growth Pact (SGP), oblige participating member states to limit budget deficits
to 3 per cent of GDP in all but the deepest recessions, necessitating an approximate
7 per cent in boom periods. These restrictions have already contributed towards a
decade of high unemployment and stagnant European growth (Holland 1995).
Responses have ranged from austerity packages, including Germany’s largest
fiscal entrenchment in post-war economic history (£30 billion, DM70 billion), to
the conclusion of tripartite social pacts (i.e. Italy and Portugal) to legitimise fiscal
retrenchment (Strange 1997: 13–14; Teague 1998: 119–20). Unlike traditional
corporatism, these agreements offer organised labour nothing in terms of
enhanced redistribution, but rather promise to reduce the social wage in order to
meet the convergence rules. However, many trade unions defend them as providing the best strategy to ensure they remain influential actors in a single-currency
Europe (Teague 1998: 120). Nevertheless, public sector unions will experience
increasing pressure to moderate pay, to maintain international competitiveness
and to meet fiscal restrictions, but at the cost of exacerbating pay differentials
between public and private sectors. This will ultimately lead to industrial unrest or
British trade unions and EMU 141
recruitment problems – already evident in the British health and education sectors.
It is for this reason that those unions with the greatest reservations about EMU are
generally to be found in the public sector (Strange 1997: 16–17).
Wage formation – crucial for successful EMU
Pay determination will become increasingly important within EMU to ensure that
aggregate wages grow in line with productivity and to facilitate acceleration of
industrial restructuring. The difficulty for government, employers and unions, is
that there may be a conflict between a macroeconomic definition of flexibility of real
wages, and a microeconomic objective of rapid adaptation to diverse patterns of
industrial change. The former may be best achieved through coordinated wage
bargaining, where all parties can internalise the inflationary implications of their
decisions, whilst a solidaristic wage structure should minimise social conflict and
encourage self-restraint in exchange for increased employment opportunities.
Indeed, the Netherlands, Germany and Ireland have sought to promote wage
bargaining moderation through national or sector-level pay bargaining structures
to facilitate the transition to EMU (Teague 1998: 119–20). However, microeconomic objectives may be best advanced via decentralised bargaining and
flexible contracts (Pissarides 1997).
An additional consideration derives from Keynes’ observation that relative wages
are at least as significant as real wages when formulating negotiating objectives.
Thus, the transparency resulting from a single currency facilitates wage
comparisons within the EMU area, stimulating demands for wage equalisation.
This strategy may be supported by union confederations in high wage areas, as this
will reduce the threat of wage competition undermining their preferential labour
market position. However, if attempted in the absence of an equalisation of
productivity, this will lead to job losses in the less productive region. The 1989
German reunification occurred at exchange rate parity, whilst considerations for
equal citizenship and prevention of large-scale migration led to a considerable
increase in former East German wages, despite productivity remaining less than
half the western level. Accordingly, gross wages in manufacturing in the east rose to
138 per cent of net value-added, resulting in output falling by 67 per cent in the first
year after unification and leading to 25 per cent of the entire labour market losing
their jobs (Buechtemann and Schupp 1992: 95–7, 102–4). Hence, the German
unification case represents a stark warning of the dangers of mishandling a rapid
movement towards EMU.
Europeanisation of industrial relations?
The desire for real wage flexibility within EMU may facilitate the creation of new
forms of national labour market coordination between social partners, perhaps on
corporatist lines. Pan European TNCs may encourage an embryo European
system of industrial relations through the harmonisation of pay and conditions for
employees irrespective of the location of production. The European Works
142 Philip Whyman
Council (EWC) initiative is considered to further strengthen cooperation and
the pooling of information between EU trade unions, potentially leading to
euro-bargaining to establish universal minimum standards of training, antidiscrimination practice and promotion procedures (Rhodes 1992: 45).
It is equally possible, however, that the creation of a European labour market
may be limited to certain key groups of workers, who possess specific technical and
managerial skills, and to particular categories of highly mobile labour, notably
managers, construction workers, labourers and young people. In this scenario, the
higher incomes that are commanded by key employees may disrupt national labour
markets by increasing income inequality or by low-wage countries losing skilled
labour to higher-wage member states. Furthermore, while the advent of eurobargaining could provide new opportunities for trade unions and their members, it
could equally fragment unions along supranational company lines, thereby
undermining class solidarity. Accordingly, unions risk becoming ‘partners . . . of
regional capital trying to survive in inter-regional free market competition’ rather
than ‘agents of inter-regional redistribution’ (Streeck and Schmitter 1991: 55).
The intensification of international competition may additionally cause
companies to focus upon internal rather than national labour markets (Marginson
and Sisson 1996: 177–8). Trade unions therefore face marginalisation due to
employer preference for company-level ‘productivity coalitions’ rather than
centralised concentration or sectoral bargaining. According to this viewpoint,
euro-bargaining is irrelevant to the needs of post-Fordist flexible production
(Rhodes 1992: 28). The divergent tensions, threatening to further complicate
European industrial relations, are likely to persist into EMU because current
arrangements show no clear evidence of converging to a uniform pattern across
Euroland (Rhodes 1992: 43–4).
Social policy and labour regulation
The EU Commission proposes that the creation of a ‘Social Europe’ is sufficient to
counterbalance negative features emanating from competition and restructuring
stimulated by EMU. Whilst unfair to dismiss such achievements as meaningless, it
is nevertheless grossly insufficient for the EU Commission to portray this as a
distinct ESM. The high fragmentation of social policy within, and between, EU
member states implies that European regulation is only possible for noncontentious issues, issues on which nations share common interests and goals, such
as health and safety matters. Otherwise, social protection occurs at the lowest
common denominator. Thus, the presentation of the European Union’s social
dimension as the basis for a social citizenship is premature. It remains little more
than an ‘eclectic body of employment law’ with a ‘hollow core’ (Leibfried and
Pierson 1995). It may have been successful in enticing trade union support for
further European integration. Nevertheless, Streeck (1992: 218–19) considers the
‘retarded advancement of European-level political rights’ and the ‘almost complete absence of a European system of industrial citizenship’ as indicating that there
is little reason to anticipate that these initiatives will prove particularly successful.
British trade unions and EMU 143
Of course, it is possible that the European Union’s social dimension may
progressively evolve into an ESM. However, this ignores the increasingly vocal
neo-liberal critique that ‘excessive’ welfare expenditure causes ‘eurosclerosis’ and a
decline in economic performance. It is claimed that labour regulation and taxation
reduce work incentives and that government borrowing crowds out more
productive private investment, whilst social security transfers reduce private saving
and therefore the stock of capital. However, the evidence is rather mixed. Welfare
expenditure is an automatic stabiliser, whilst labour market policies and social
insurance facilitates risk-taking and acceptance of industrial restructuring. Indeed,
British Prime Minister Tony Blair has pointedly rejected the ‘old social model’ in
Europe, arguing ‘our welfare systems and labour markets will require fundamental
reform’.2 Similarly, the ECB’s senior economist, Otmar Issing, blamed the poor
performance of the euro on ‘the adverse impact of minimum wage and employment protection legislation’, which can only be overcome by a ‘comprehensive
programme of structural reform’.
In practice, this consists in creating what Cerny (1990) describes as a transition
from welfare state to ‘competition state’, one in which policies are determined by the
perceived demands of survival in the global economy. Consequently, it appears
paradoxical that British trade union leaders are relying upon the completion of an
ESM to provide them with a preferable system of social protection and employee
participation in the work process when EU governments are increasingly
questioning the future of this very model.
Conclusion
Trade union support for EMU relies upon its association with the establishment of
an ESM within the ‘New Europe’. However, analysis of this assumption highlights
significant contradictory indicators. The economic evidence is balanced over
whether membership will deliver any significant dynamic gain, as cost savings are
counter-balanced by the deflationary impact of the SGP and ECB. Public
expenditure restraints threaten public sector national pay bargaining whilst
acerbating differentials between public and private wage growth, thereby fuelling
recruitment problems and industrial unrest.
Predicted developments in industrial relations and wage formation hold as
many problems as solutions for unions and their members. Trends towards eurocorporatism seem weak, and where they do exist the value to government’s lies in
the possibility of securing lower real wage growth – hardly a long-term strategy to
appeal to union members. The tendency for TNCs to concentrate more closely on
internal labour market arrangements than on national wage formation implies that
any emergence of euro-bargaining may be company-orientated and undermine
class solidarity. Moreover, after two decades of construction, the European
Union’s social dimension is a poor reflection of an ESM of the type favoured by
trade unionists. The acceptance of the neo-liberal critique of welfare states by
influential EU actors is inconsistent with the trade union belief in the ultimate
creation of a fully fledged ‘Social Europe’.
144 Philip Whyman
In short, the trade union case for supporting EMU is fatally flawed and its
current leadership is basing its support for EMU upon a number of questionable
assumptions. A deflationary, neo-liberal Euroland, whose economy is managed by
a ECB charged with the sole objective of producing stable prices, is inconsistent
with the development of an ESM capable of guaranteeing social citizenship based
on generous welfare provision, protection at work and employee input into their
working lives. Trade unionists should, therefore, reconsider their strategy of
uncritical support in order to calculate the possibility of mobilising sufficient
European public opinion behind their vision of a ‘Social Europe’ to secure a shift in
government policy, thereby modifying the constraints imposed by EMU and
supporting an extension of social policy, labour regulation and the promotion of
full employment. The only other realistic alternatives involve the rejection of EMU
and preference for implementing the desired policies in individual nation states, or
the uncritical acceptance of EMU and hope for the creation of an ESM, against the
balance of the evidence. Neither strategy will appeal to a trade union leadership,
which has invested considerable political capital in its current position. Nevertheless, a new strategy is urgently required. The only remaining question is
whether the current trade union leadership have the courage and vision to reexamine these issues and develop a new approach to avoid future damage to the
movement and its membership.
Notes
1 An earlier version of this paper was published in Industrial Relations, 41 (3): 467–76.
2 A. Blair, ‘Managing change: a national and international agenda of reform?’, speech
given at the World Economic Forum, Davos, Switzerland, 28 January 2000.
16 The European social model
Between a rock and a hard place?
Matthew Watson1
Introduction
The British debate about European economic integration displays many peculiarities. Prime amongst them, I suggest, is the following. Whilst the party political
right in Britain has tended to opt into the debate about integration, albeit primarily
as a means to opt out of the institutional arrangements established to guide the
integration process, the party political left has increasingly opted into the
institutional arrangements having previously opted out of the debate. I attempt to
use this chapter, first, to explain the limited nature of left political mobilisation
around the preferred form of Economic and Monetary Union (EMU) and, second,
to show that the institutional apparatus established at Maastricht to guide the
integration process further constrains the political space for viable left strategies.
I focus my discussion around an analysis of the ‘European Social Model’.
Influenced by repeated Commission assertions that the development of a
supranational ‘social dimension’ would run parallel and be given equal weight to
the process of economic integration, the European left has tended to vacate the
ostensibly technical economic debate concerning increased market interdependence in favour of the more overtly political debate concerning the ‘social
dimension’. Yet, as the outcomes of the technical economic debate have been
embedded both as Community Law and as everyday member state practice, it has
become increasingly clear that they create an institutional apparatus within which
the defence of existing national social models has become ever more problematic,
and the development of a supranational ‘European Social Model’ all but
impossible.
My conclusions are threefold. First, I argue that it is important to distinguish
between the impact on the ‘European Social Model’ arising from the formalised
constraints on policy autonomy introduced alongside the euro, and those arising
from changes in the business culture of European firms triggered by the creation of
a single capital market. I call the former the macroeconomic impact of EMU and
the latter the microeconomic impact of EMU. Second, I argue that the space for
viable left political mobilisation within the context of EMU has been narrowed
most particularly by the establishment of an active cross-border market in
corporate control, which has served to undermine the traditional ‘European’
146 Matthew Watson
model of corporate governance. As such, I conclude that the microeconomic
impact of EMU outweighs the macroeconomic impact. Third, I suggest that the
form of corporate governance to which Europe appears to be gravitating is, in
many ways, relatively similar to that already in place in Britain. Consequently,
such a process is likely to have least effect in Britain.
Market ideology, European institution-building and
the macroeconomics of EMU
It is only relatively recently that the extension of the ‘European Social Model’ has
been identified by the left as a means to use European institutions to construct a
progressive counterweight to an increasingly pervasive global market ideology
(Kenner 2000). Indeed, much of the early discussion of the potential benefits of
economic integration, from both left and right, focused on expectations of social
gains resulting from an increasing exposure of everyday life to market relations
(Gordon and Thirlwall 1989). For many authors, the concepts of integration and
marketisation are reasonably interchangeable in the history of ever closer economic union within Europe.
Moreover, if this is true of the process of integration, it is even more true of the
debate which has preceded key moments of that process, and which has focused on
the necessary institutional developments for facilitating integration. According to
Grahl and Teague (1990), at every stage of accelerated integration, one condition
has dominated the debate above all others: to what extent will future institutional
arrangements provide enhanced incentives for economic agents to create increased
cross-border market interdependencies? As a consequence, the institutional
arrangements which have set the parameters for the socio-economic status quo
within the European Union have typically been subjected to reform at precisely the
point at which their potential to increase the scope of market relations has been
exhausted. The ideal of extending the ‘European Social Model’ in order to create a
supranational zone in which citizens’ rights might take precedence over market
ideology may well be an active part of contemporary left political discourse at the
EU level. However, the history of European institution-building would suggest that
a more pressing reality is the defence of existing national social models against
the encroachment of market ideology originating from within the European
Union itself.
This is not the way in which threats to the ‘European Social Model’ are usually
presented in the popular political discourse of the left. It is more typical for
European integration to be promoted as the means through which national social
models may be defended, rather than that which they must be defended against. A
simple ‘Europeanisation’ versus ‘globalisation’ dichotomy tends to prevail, in
which global economic integration is identified as a force that serves to undermine
existing levels of social protection, and European economic integration is identified
as a potentially progressive palliative to such pressures. However, this line of
reasoning would seem to owe more to an unquestioning faith in the necessarily
progressive nature of European integration than it does to an awareness of the
The European social model 147
practical operations of the institutional arrangements in which the integration
process is currently embedded. Perhaps most significantly, it allows us to understand little about the way in which the institutions of EMU are likely to exert
similar political pressures to those which are more commonly described as ‘effects’
of globalisation (Hay et al. 1999). The Stability Pact, for instance, formally legislates
away governments’ ability to engage in deficit-financed growth, whilst the
persistence of global economic forces is merely assumed to make such a strategy
‘inadvisable’.
The left has generally been quick to highlight the negative social consequences of
globalisation, but much more reticent in attributing similar consequences
to European integration. Yet, it is clear that the decision to pool monetary
sovereignty will only be socially costless under certain macroeconomic conditions.
Moreover, such conditions are so extreme – perfect synchronisation of business
cycles, perfect symmetry in the transmission of monetary policy, perfect flexibility
in wage adjustment, perfect mobility of labour (Healey 2000) – as to suggest that
they are logical abstractions rather than situations which could ever be expected to
arise in practice. In the absence of such conditions, EMU has been buttressed by a
number of policing mechanisms designed to prevent internal economic instability
from undermining the political sustainability of monetary union.
If we consider the macroeconomic constraints imposed by the European
Central Bank and the Stability Pact, the suggestion of Dyson (1999) that the
procedures of EMU generate a ‘bound Leviathan’ may be particularly apt. The
intellectual justification for increasingly circumscribing the scope for autonomous
policy initiatives with a series of binding commitments is rooted in the economics
literature on ‘policy credibility’ (De Grauwe 1996). Without such commitments, it
is assumed that rational market actors would interpret the absence of costless
adjustment mechanisms to monetary union as a sign of its inherent political
contradictions. Moreover, in acting in line with that interpretation, it is further
assumed that by their own actions they would make the prediction of an
unworkable EMU come true in practice. As Stanley Fischer suggests, arguments
for both an independent European Central Bank and a Stability Pact are drawn
from an explicit acknowledgement of a ‘second-best’ world. In a ‘first-best’ world of
costless adjustment, we could expect that monetary, fiscal and labour market
policies would be perfectly coordinated, and that there would be no need for
European institutions to impose a series of binding commitments as a substitute for
market coordination (Fischer 1996).
There are a number of ironies in this situation. First, EMU has been constructed
in elite EU discourse as a ‘necessary’ condition of successful integration, in that it is
only through monetary union that the success of the internal market can be
ensured (Gros and Thygesen 1998). In other words, EMU has been identified by
Europe’s political leaders as the means to embed further market rationalities within
the European economy. Yet, on the basis of a reading of the ‘policy credibility’
literature, we could be forgiven for concluding that existing market rationalities
would render EMU unworkable were it not for the range of institutional
procedures which have been introduced alongside the single currency to restrain
148 Matthew Watson
certain forms of policy autonomy. Second, the academic literature on EMU
contains a number of empirical analyses which attempt to assess which member
states may be least disadvantaged by the transition to monetary union because they
have appropriate adjustment mechanisms which enable them to minimise the
social costs of transition (Garrett 1998). This literature tends to conclude that the
existence of encompassing labour market regimes is likely to be the best predictor
of an efficient macroeconomic transition to monetary union (Golden 1993; Hall
and Franzese 1998; Soskice and Iversen 1998). However, these are the very labour
market conditions that EMU’s constraining institutional procedures will make it
more difficult to reproduce. In general, the macroeconomic stance privileged by
EMU is seen as antithetical to the ability to maintain the fiscal base of encompassing labour market regimes (Esping-Andersen 1996; Stephens et al. 1999).
With monetary union likely to erode all but the most liberal of labour market
regimes, the logic of EMU is for the European Union to accept responsibility for
mitigating the adverse social consequences of economic shocks (Begg and Hodson
2000). Yet, it is clear that no such mechanism exists to act as a supranational ‘social
shock absorber’. As Kenner (2000) suggests, social policy continues to operate very
much ‘in the Community’s “twilight zone”’. Despite all the Commission’s recent
rhetoric about a supranational ‘European Social Model’, this has yet to be
translated into the world of lived experience. Indeed, whilst the Commission’s
sympathetic pronouncements on EMU view monetary union as the context within
which the construction of a supranational ‘European Social Model’ becomes
possible (Commission of the European Communities 1993a; Ross 1994), its more
immediate impact has been to undermine governments’ ability to fund progressive
social entitlements at the national level.
However, it has to be recognised that the debate about the macroeconomics of
EMU is rather more complex than the above analysis may suggest. The social costs
of monetary union must be understood in relation to the social costs of viable
alternative monetary arrangements. It is clear that such alternatives would also
have significant implications for the persistence of European social models, and it
would be somewhat misleading to imply that the rejection of EMU would be a
necessarily costless exercise.
The most common argument against EMU in the transition to monetary union
focused on the desirability of a flexible exchange rate regime within Europe. But, to
what extent would this be a costless option? First, it is necessary to note the political
costs that would almost certainly have resulted had leaders of the left become open
advocates of such a position. To have supported the continued floating of
European currencies in opposition to monetary union would have required an
acknowledgement that market relations provide the preferred means of macroeconomic adjustment to destabilising shocks. This perhaps goes some way to
explain the relative silence of the left in the economic debate on EMU. Market
ideology was so pervasive in that debate that the left found itself in the potentially
‘no win’ situation of either supporting EMU as a means of extending the scope of
market rationality within the developing internal market programme, or opposing
EMU on the grounds that more suitable market-based solutions to the problem of
The European social model 149
economic coordination existed outside the context of monetary union. Either way,
it would have been in the position of having to affirm a ‘market-enhancing’, rather
than a ‘market-correcting’, option.
Second, there are social as well as political costs arising from a flexible exchange
rate regime. Whilst EMU seems sure to impose significant social costs through
economic restructuring, it is far from obvious that the social costs of the most viable
alternative would have been any less pronounced. A flexible exchange rate regime
provides an efficient means of economic adjustment only in circumstances in
which currency prices reflect nothing more than underlying economic fundamentals. Yet, there is no evidence that this is an appropriate characterisation of the
way in which currency markets actually work in practice (Frankel 1996). These
markets are now exceptionally liquid, having a daily turnover in excess of US$2
trillion (The Economist 2000). Such high levels of liquidity enable market trading to
remain profitable, even at prices which bear little correspondence to economic
fundamentals. Indeed, much of the activity within the currency markets is now
aimed at deliberately driving prices away from their fundamental value; for it is in
these moments that market trading is able to deliver substantial gains on the back of
self-fulfilling dynamics (Watson 1999).
Exchange rate variability implies significant social costs as it destabilises
productive sectors of the economy. As Daniel Gros and Niels Thygesen (1998)
suggest, we must therefore hold open the possibility that the relative costs of
economic restructuring under monetary union may be lower than under conditions in which productive sectors constantly have to adjust to the destabilising
effects of ‘momentum trading’ within currency markets. ‘If the alternative is a
prolonged period of exchange rate variability’, they argue, ‘the benefits [of EMU]
could be substantial’.
The welfare effects of the macroeconomics of monetary union are thus
somewhat ambiguous. However, it may well be that the welfare effects of the
macroeconomics of EMU are less important than those of the microeconomics of
EMU. The existing academic literature is heavily weighted towards the former set
of concerns, but it is these latter concerns that I will seek to address in the remainder
of this chapter.
The microeconomics of EMU and changing forms of
corporate governance within Europe
The institutional impact of EMU extends beyond the formal apparatus of the
European Central Bank and the Stability Pact and, as such, beyond the constraints
which this apparatus places upon government policy. EMU impacts also upon the
behavioural traits of economic actors within the private sector and, in particular,
firms. The single currency has been introduced on the back of wider changes
within the European economy, and these changes have altered the incentives faced
by firms to continue to reproduce their existing mode of corporate governance. It is
at the microeconomic level that the effects of EMU on the ‘European Social
Model’ are likely to be most pronounced, because national variants of that model
150 Matthew Watson
are rooted in distinct types of corporate governance. It is therefore necessary to
assess the major structural economic changes which formed part of the transition
to monetary union, with a view to understanding their effects on the continued
viability of the ‘European Social Model’ through their effects on European
business culture.
Perhaps the most significant change in this respect has been the formal
elimination of all internal barriers to financial flows. This has yet to produce a
perfectly frictionless capital market at the EU level, as significant transactions costs
remain as a continued disincentive to cross-border investment (Watson 2001).
Nonetheless, European capital markets are today more integrated than at any
previous time, and this has created larger pools of liquidity from which to finance
investments in existing companies.
This additional liquidity has had an important influence on existing modes of
corporate governance within the European Union. First, it has made it easier to
raise large sums of money in a relatively short space of time, and this in turn has
created an active market for corporate control at the European level. Second, the
fact that financial managers operating within that market are faced with similar
profit constraints has led to an increasing homogenisation of firm behaviour
with regard to corporate risk. Third, the desire to appear ‘takeover proof ’ in the
presence of potentially hostile investors has focused the attention of company
executives on internal restructuring designed specifically to maintain buoyancy in
share prices. All three of these changes can be traced directly to single capital
market legislation, and all three can be argued to be evidence of an emergent
business culture somewhat at odds with that which typified the earlier post-war
period. Indeed, according to The Economist (2000) ‘so pronounced is the recent
change that one may even question how distinctively “European” the [political
economy of] Europe will seem in, say, another five years’. Whilst this is surely to
exaggerate both the extent and the nature of current restructuring dynamics, it
would be equally misleading to deny significant change in existing modes of
corporate governance throughout Europe by virtue of the integration process.
In early 2000 Vodaphone launched a successful hostile takeover bid for the
German telecommunications company, Mannesmann. It had used the enhanced
liquidity of the European Union’s integrated capital markets to raise sufficient
short-term capital to buy a controlling stake in Mannesmann against the wishes of
the latter’s management. This was both the world’s largest-ever hostile takeover
(demonstrating the potential for structural economic change contained within the
single capital market legislation), and also the first ever to succeed in Germany
(suggesting, perhaps, a new tolerance of aggressive capital market behaviour).
Moreover, this should not be viewed as an isolated incident. In each year since the
single market was completed in 1992, the size of the European Union’s mergers
and acquisitions market has increased. Yet, this is no simple linear expansion;
market growth has accelerated markedly since the beginning of stage three of
monetary union. Whilst the overall market value of European mergers and
acquisitions rose to almost four times its 1992 level in the six years to 1998, in the
next year alone it rose to over seven times that level (The Economist 2000). A similar
The European social model 151
acceleration is visible in the value of hostile takeovers. More than US$400 billion of
successful hostile takeovers were conducted in the European Union in 1999, a
figure which was over four times that for the rest of the 1990s put together (The
Economist 2000). From being an inconsequential feature of the European mergers
and acquisitions market at the beginning of the 1990s, hostile takeovers accounted
for well in excess of 40 per cent of that market in 1999.
The fact that the most significant changes in the European market for corporate
control occurred in the year that the single currency was introduced is surely more
than merely coincidental. Much of this increase in mergers and acquisitions
activity was financed through euro-denominated bond issues (Financial Times
2000). In the absence of EMU, this market would quite clearly not have existed.
Moreover, in the absence of the additional liquidity created by the prior integration of the European Union’s capital markets as part of the transition to EMU, its
capacity to have financed such a dramatic increase in mergers and acquisitions
would presumably have been more limited.
Arguably the most significant aspect of this increase in mergers and acquisitions
activity is the related tendency for the banking sector to be progressively crowded
out of the European market for corporate control. This is particularly important,
because many comparative political economists have identified closely networked
relationships between firms and banks as the defining feature of a distinctively
‘European’ model of corporate governance (Pollin 1995). These close relationships
have tended to allow firms a certain ‘breathing space’ to adjust to changes in external market conditions. In general, this is an adjustment time which is markedly
constrained when the firm is subjected to the constant short-term evaluation of a
capital market-based financial system.
If an increasing number of European firms find themselves operating within a
market for corporate control more readily typified by capital market-based rather
than bank-based financial relations (The Economist 2000), this is likely to have
significant effects within the European labour market. Existing empirical data
indicate that those European countries which have higher exposures to capital
market-based corporate governance also have labour markets which adjust more
quickly to adverse demand shocks (Barrell et al. 1996). To put this somewhat
differently, firms operating within bank-based corporate governance systems have
found it easier to implement a labour market strategy which acts as a form of social
protection in times of economic downturn.
Changes in the market for corporate control would therefore seem to have
significant implications for the future viability of the ‘European Social Model’. If
firms find that they are less able to operate a labour market strategy which also acts
as a form of social protection, responsibility for such provision is likely to pass solely
into state structures. Should this prove to be the case, it is possible that the
microeconomics and the macroeconomics of EMU will combine to form a
reinforcing double bind on the ‘European Social Model’. For, at the very moment
that member states may be required to increase their social provision because firms
are faced with more exacting labour market pressures due to changes in the market
for corporate control (the microeconomic impact of EMU), they may discover
152 Matthew Watson
that their ability to reproduce current levels of social protection is increasingly
constrained by the fiscal criteria of the Stability Pact (the macroeconomic impact of
EMU). In such circumstances, it is unclear to what extent the defence of existing
national social models is a viable political strategy under conditions of monetary
union. Prospects for the creation of a truly supranational ‘European Social Model’
appear fanciful indeed.
Conclusion
The microeconomic effects of EMU are already an established feature of the
context in which all European firms operate. However, the current British debate
on euro membership would appear to be almost entirely oblivious to this fact. As a
consequence, I suggest that this debate is significantly weakened by two factors:
1
2
the lack of formal acknowledgement that the microeconomic pressures of
EMU are brought to bear on firms irrespective of whether their governments
are committed to full participation in the final stage of monetary union; and
that they imply a form of corporate governance which is already the
established model for firms in Britain.
Even in the highly unlikely circumstances that political conditions changed within
the European Union in such a way as to persuade member states to unlock their
exchange rates and re-impose their national currencies, this would be no guarantee
that governments would be ‘freed’ from all of the economic constraints of
monetary union. The microeconomic impacts of EMU and, in particular, changes
in the market for corporate control influenced by the single capital market
legislation, are not as closely tied as the macroeconomic impacts of EMU to the
physical existence of the euro. Institutional changes which have begun to erode the
‘European’ model of corporate governance have already become part of the
everyday practice of European capitalism and, as the notion of path-dependence
suggests, institutional changes are considerably more difficult to undo than they
are to initiate in the first place (Pierson 1996). The route back to the past is almost
always blocked by the development of new political coalitions with a vested interest
in preserving existing institutional arrangements.
In terms of the present discussion, this means that governments currently
deciding whether to extend their opt-out from the single currency are not choosing
between whether to experience all or none of the impacts of EMU. The formal
decision only extends to whether to become a full participant in the macroeconomics of monetary union. The microeconomics of monetary union will tend
to be experienced irrespective of that decision, because the institutional changes
which have created new market-based incentives for firms to reject the traditional
‘European’ model of corporate governance are already firmly entrenched.
If, as I have suggested in this chapter, it is the microeconomics of EMU that pose
the most pronounced threat to the model of corporate governance that underpinned post-war patterns of social protection within Europe, then the ‘European
The European social model 153
Social Model’ may well be trapped between a rock and a hard place. Whatever the
final impact of the euro, welfare-corrosive effects rooted in the microeconomics of
EMU are likely to be a persistent feature of the broader European context. In terms
of political outcomes, then, the debate currently dominating British politics about
the desirability of euro membership may be less significant than the prior debate
concerning the institutional arrangements within which the euro would be
embedded. On account of its relative silence in that debate, the British left may
have contributed to the experience of the social costs of monetary union,
irrespective of its final decision of whether to support full participation in the euro.
If there is one last irony to be observed in this situation, it is surely that the form of
corporate governance to which Europe would seem to be headed is pretty close to
that which Britain already has. As such, the microeconomic impact of EMU is
likely to have less effect on Britain than elsewhere.
Note
1 Along with his Birmingham colleagues, Colin Hay, Jonathan Hopkin, David Marsh and
Daniel Wincott, Matthew Watson holds an ESRC award under the ‘One Europe or
Several?’ programme, entitled ‘Globalisation, European integration and the future of
the European Social Model’ (award number: L213252043). I would like to thank the
ESRC for its continued contribution to the funding of my research, and to these
colleagues for their helpful suggestions on an earlier draft of this chapter.
Part III
Sovereignty and political
determination
17 How the euro threatens the
well-being of the planet and
its people
Molly Scott Cato
The decision to join the euro is essentially a political one. The economic consequences are likely to be very negative. If you want the EU to be a superpower, it’s
essential. If not, then stay out.
(Richard Douthwaite (Green economist))
Introduction – hope to create a green oasis of sanity
The green perspective on the euro shares some common threads with the critique
of other radical and left-leaning groups. However, it has certain distinct features.
Greens have always been foremost critics of globalisation, arguing instead for an
agenda of localisation: local self-reliance and trade subsidiarity (see Hines 2000;
Cato 2003). Along with other critics we identify the provenance of the euro with the
corporate globalisers, primarily the European Roundtable of Industrialists (ERT).
Greens call for a reversal of the process of globalisation for the benefit of people and
the planet; for greens, trade has few economic advantages to balance the major
environmental costs and global injustice it generates.
The Green Party has been able to lend more balance to the No Campaign
against the euro since joining the coalition in 2001. The anti-euro position has
been seen as both business dominated and xenophobic, and the green involvement
has been able to counter both these unhelpful stereotypes. The No Campaign does
have considerable involvement from the business sector, but it tends to be more
from the SME sector compared with the corporate domination of the Yes
Campaign. The international basis of the green movement, with parties in most
countries of the world, also gives the lie to the equation of opposition to the euro
with a Little Englander position. The fact that many of the European green parties
support the euro, particularly the most politically powerful party in Germany, does
not undermine the international image of the green movement.
In the remaining sections of this chapter I explore the source of green concerns
about the euro. First, I identify its origin in the corporate world and its close link to
the process of globalisation. Second, I explore the constraints of a single currency
and the reasons why greens favour a world with more currency diversity. Next, I
widen the debate to consider the negative impact of the euro on the south and on
158 Molly Scott Cato
the planet as a whole. Finally, I give a green angle on the criticism of the public
spending limits inherent in the Stability and Growth Pact.
Champagne supernova: who wants the single currency?
It is now accepted that the proposal for a single currency for Europe originated
with the European Roundtable of Industrialists, a self-selected group of 45 chiefs of
European multinationals who have been setting the European agenda for the past
20 years. Table 17.1 shows how for a number of issues the ERT internal agenda
became over time the EU agenda. It is no coincidence that the decisions taken by
our politicians, avowedly for our benefit, were already on the wish-list of this
powerful group of businessmen. The ERT is proud of this level of influence and
lists these EU developments as ‘achievements’ on its self-congratulatory website.
The advantages stemming from euro membership are advantages for multinational corporations. Businesses trading within the United Kingdom – and the
majority of employment in the United Kingdom (52.7 per cent of the workforce:
Government Small Business Service) is found in businesses with fewer than 500
employees – will see few advantages. For citizens, the best that we are offered is that
travel to European countries for holidays will be more convenient. But for the
corporations that dominate the globalised economy there will be major advantages. They will see reductions in their menu costs (the costs of exchanging across
currency boundaries, and the costs of setting prices in different currency areas as
exchange rates change). It will be easier for them to move from country to country
at the slightest dip in environmental protection or labour costs. They can also use
the interest rate restrictions of the Stability and Growth Pact to reduce employment conditions and wages – exactly the process that is causing the demonstrations, strikes and civil unrest in France and Germany, as explored below. The
Table 17.1 ERT sets the agenda for the EU
Issue
Single market
ERT interest
‘Pressure to complete the
single market’
Central and
‘Europe without borders’;
eastern Europe
‘management seminars’
in Hungary, Poland,
Czechoslovakia
Single currency
ERT lobbied Madrid
summit for single
currency and ‘named the
currency’
Enlargement
‘Work started on the
enlargement’
ERT date
EU summit discusses
1985
Maastricht Treaty, 1992
1991
Essen Summit, 1995
1995
Arrangements completed
by Luxembourg summit,
1997
1997
Nice Summit, 2000
Sources: Websites of EU Commission (europa.eu.int/comm) and European Roundtable of
Industrialists (ert.be); Balanyá et al. 2000; Artis and Nixson 2001.
How the euro threatens well-being 159
demonstrators identify the threats to their security from ‘flexibility’, but few have
identified the source of that threat as the euro.
European politicians seem to suffer no embarrassment in discussing how the
single currency has resulted from corporate pressure. In a 1999 working paper
discussing the use of the euro as a parallel currency the authors state that:
For its part, the corporate sector had started lobbying in favour of unrestricted
access to the euro during the transitional period. Its motives for doing so were
obvious. Many European-based corporations with production and servicing
units scattered in a number of Member States had an interest in stopping the
use of the various national sub-units of the euro, and adopting the euro unit
itself as their ‘base’ currency for the whole of their operations: pricing,
invoicing, payments, accounting, salaries, tax reporting and payments, and so
on. The rewards would be greater transparency and efficiency, time and cost
savings.
(European Parliament 1999)
The document continues by pointing out the problems facing the corporations
in meeting their need to trade in the same currency throughout the European
Union. But they have no need to worry because:
The national authorities willingly obliged and proceeded – some to a greater
extent than others – with the appropriate changes. Consequently, on 1 January
1999, the existing national laws and regulations, instead of imposing the
continued and exclusive use of the national currency units, offered the choice
between this unit and the euro unit in a wide range of uses.
(European Parliament 1999)
The rest, as they say, is history. It appears that in the field of currency, as in much
else, business gets what business wants.
Given the source of the proposal for a single European currency and the
destination of any possible benefits, there is no surprise that the public pressure
for the United Kingdom to enter the euro comes from exactly this quarter. We
have heard a string of corporate executives making dire warnings about the
consequences for Britain of remaining outside Euroland. One of the most voluble
supporters of the Britain’s entry into the euro is Will Hutton, chief executive of the
Industrial Society. The chairpersons of two major British corporations – British
Telecom and British Airways – are members of the governing council of the
Society. Toyota, which has a car assembly plant employing 300 people on Deeside
in North Wales, is a foremost example. It has long pressured for the United
Kingdom’s entry into the eurozone and even went so far as to pre-empt the
democratic decision by requesting its UK suppliers to do their business with the
company in euros rather than pounds in August 2000. However, in January 2001,
as the rest of Europe abandoned its currencies in favour of the euro, Toyota
actually increased its investment in Wales and elsewhere in the United Kingdom
(information from BBC website).
160 Molly Scott Cato
Corporate pressure for the United Kingdom to join the eurozone is frequently
couched in threats to further investment if we were to remain outside. These
arguments are disingenuous, since the real reason for the falls in inward investment
are the contraction of the global economy and the poor trading conditions in the
eurozone, partly as a result of the euro itself. They are undermined by the fact that
inward investment is also falling in France where, according to the government
inward investment agency, the number of jobs created by inward investment fell by
10 per cent in 2002 compared with 2001. The number of projects fell from 558 to
438. A report by management consultancy Arthur D. Little in 2003 showed that
companies are leaving Germany because of the failure of economic growth and the
tax regime. They favour two non-eurozone countries: Switzerland and the United
Kingdom, with 18 per cent choosing to relocate in the latter. The real reason for
corporate lobbying in favour of the single currency has more to do with the
downward pressure the single currency exerts on wages and employment conditions, as well as the tight monetary controls it entails, creating a climate of so-called
‘flexibility’ that is ideal for maximising profits.
Evidence of the close link between globalisation and the euro was to be found in
the Chancellor’s pronouncement in June 2003 that Britain was not yet ready to
join the single currency, which was softened for euro enthusiasts by his up-beat
assessment of its potential impact on UK trade (Treasury 2003). Yet the claims
about the extent of trade increases were evidence of the vacuity of the econometric
models and the paucity of Treasury thinking rather than any proof of a boon from
entry into Euroland. The headline figure was an increase in UK trade of between 5
and 50 per cent, for which the woman on the Clapham omnibus might more
frankly use the phrase ‘I don’t have a clue’. Proponents of the euro have pounced
on the 50 per cent upper limit as if it were unadulterated good news. But the
document informs us that this includes imports and exports, which are likely to be
balanced even on an optimistic view, thus underlining that the only definite
increase in economic activity will be in the very sectors that are most environmentally damaging, especially transport. The assessment also makes no mention of
who are likely competitors within the European Union will be, and ignores the fact
that those included when the Union enlarges to 25 members have much lower
wage levels than the United Kingdom. Even if such a trade increase were to
generate increased cash flow, the distribution of this money is not discussed. In
reality the gains are likely to accumulate with the corporations, while the costs,
especially the environmental costs, are likely to be borne by the poor here and in
developing countries and by the planet (see Cato and Dawe 2003).
Why single currency, not common currency?
There is a glaring anomaly in the public debate about entry into the euro: the
arguments are always cited in terms of a ‘single currency’, whereas all the advantages that are touted could equally be achieved by a common currency. This
anomaly looks rather different from the perspective of green economics, which has
always argued for diversity in currencies as much else. It is unsurprising, therefore,
How the euro threatens well-being 161
that several green commentators on the euro have independently arrived at a
position of welcoming the euro but denying the need to face the strictures of having
it as a single currency (Cato 2000; Robertson 2002; Boyle 2002).
Robertson (2002) identifies all the usual risks associated with a single currency,
such as loss of political control and the inappropriate interest rate. He concludes
that we should use the euro alongside the pound and while developing a range of
local currencies:
The role of alternative currencies at the local level, co-existing with the euro in
the Eurozone and with national currencies elsewhere, is growing. This points
towards the future evolution of a multi-level system of parallel currencies – in
tune with the increasingly supra-national and increasingly devolved features
of 21st-century society. In addition to its immediate benefits, experience of
using the euro as a parallel currency alongside the pound will help to keep the
UK at the forefront of monetary advance.
Boyle (2002) identified the inappropriate interest rate as likely to lead to an
increasing gap between rich and poor in the eurozone, as it has done in the regions
of the United Kingdom. He shares Robertson’s conclusion that more diversity of
currencies is the sustainable and just response. In his alternative Mansion House
speech on behalf of the New Economics Foundation in June 2002, Boyle predicted
that there would be 2,000 complementary currencies in the United Kingdom in
the next decade, and up to 10,000 in Europe.
There are developments towards creating alternative currencies within the
eurozone, especially in Germany (see Kennedy 2003; some of the currencies that
are already functioning can be seen at the Moneta website www.monneta.org or at
www.appropriate-economics.org). In the United Kingdom, developments such as
the Institute for Community Currencies, which is setting up time-based local
trading systems in the depressed economy of the valleys of south Wales, is a
grassroots response to the failure of the pound to provide sufficient liquidity for a
thriving economy. Money is drawn out of the local economy to gain more interest
elsewhere, a problem that will only be exacerbated for peripheral economies of the
United Kingdom once they are part of the larger eurozone economy (for an
explanation of this process, see Ward and Lewis 2002).
For those developing these currencies they have two main functions: dealing
with the low level of liquidity in depressed local economies; and creating a
geographically limited currency that is protected against global speculation and
offers security against the possibility of a collapse in the global financial market.
This latter experience is illuminated by the experience of Argentina, which,
following the collapse in the value of its currency in 2001, froze citizens’ bank
accounts to prevent them translating money to safer financial havens overseas.
This had a disastrous effect on liquidity in the economy, making economic
exchanges impossible. In response the people developed a system of barter clubs,
while the local authorities in the different provinces created local currencies to
allow them to pay their employees and facilitate economic activity (see Pearson
162 Molly Scott Cato
Figure 17.1 Example of token from an Argentinian barter club.
2003; Ambito nacional 2002). The response to a decade-long recession in Japan has
been much the same, with work-exchange schemes and local currencies allowing
life to thrive outside the damaging global financial system.
What will be the impact on the poor world?
From the view of the corporations, a view shared by our Chancellor, the euro will
support globalisation and an increase in international trade, which, it is implied as
though it needs no explicit argumentation, will benefit us all. This is dealing with
the forecast trade increase in conventional terms. From a green economics
perspective, an increase in the volume of trade is not an answer to our problems;
quite the reverse it will exacerbate the problems generated by globalisation both for
the poor of the world and for the planet itself.
Trade has done little for the poor world. An UNCTAD report in 1997 showed
that out of a sample of ten Latin American countries, in nine of them the differential
in earnings between skilled and unskilled workers had increased as a result of
opening up markets to international trade, and that in most of the countries the real
purchasing power of the least skilled workers had actually declined, in several cases
by more than 20 per cent. In 1999 a paper from the World Bank reported on data
for a sample of 38 countries between 1965 and 1992 to show that opening markets
up to trade had reduced the incomes of the poorest 40 per cent of the population
while increasing those of the richer groups. Developing countries have spent these
30 years on the economic roller coaster of international trade, because of the dogma
from international bodies suggesting that this will end poverty, while at the same
time the richest people in these societies have used this international game to
increase their own wealth while the poor in the same societies have grown poorer.1
The overall gains from trade are minimal to the countries producing agricultural
products: between 1986 and 1996 Ghana increased its exports of cocoa by nearly 80
per cent but only earned 2 per cent more in return.2
How the euro threatens well-being 163
250
200
150
Trade index
Total CO2
100
50
1998
1994
1990
1986
1982
1978
1974
1970
1966
1962
1958
1954
1950
0
Figure 17.2 Relationship between increase in world trade and global carbon dioxide
emission.
Sources: Carbon dioxide data from Oakridge Research Laboratory, California; trade data are from
the World Trade Organisation.
Note: The trade figures are calculated as an index based on 1990 = 100 and including agricultural
and mining products and manufactures. The CO2 emissions are for solid, liquid and gas fossil fuels
divided by 33 to achieve appropriate scaling.
A report from the New Economics Foundation in 2000 made clear the costs of
trade to both the poor world and the planet. OECD data show that carbon dioxide
emissions from Indonesia, Malaysia, the Republic of Korea and Thailand while
they were positively regarded as Asian Tigers because of their rapid development
increased by between 100 and 278 per cent (Simms 2000). Figure 17.2 shows how
the increase in total global trade is matched by the increase in carbon dioxide
emission.
In the context of our national or continental interest we should also consider the
distortionary effects of having national economies based on the world’s dominant
currency. This has increasingly been the situation for the USA since the Second
World War and has been at best a mixed blessing. The use of the dollar for world
trade has led to the creation of huge amounts of US dollars, for which the US gains
seigniorage. In return it is able to import a practically infinite quantity of foreign
goods, enabling the lavish lifestyle of its citizens. The immediate impact of this in
terms of obesity and related overconsumption is clear, not to mention the USA’s
excessive impact on global climate change emissions (around 25 per cent of CO2
for its 4 per cent of global population). From the economic point of view, living with
a huge trade deficit and national debt is fine as long as it lasts. But what about if the
bubble bursts?
Being the progenitor of the world’s trading currency has certainly offered the
United States advantages in the arena of military power, too. Richard Douthwaite
argues that the USA’s influence in the Far East is, in a broad sense, an exchange of
military might for consumer goods. Not only does the possibility of running a huge
164 Molly Scott Cato
deficit enable the purchase of military hardware, leading to the situation where the
USA spent as much on arms last year as the next 20 economies combined. It also
allows the United States to pull Japan and the East Asian economies into its orbit
(China is a rather different case), trading military security for goods that it can
never actually pay for.3 Those who are unconvinced by this case should ask
themselves why it is that Argentina with vast natural resources, an area of 1 million
square miles and a skilled workforce can be considered bankrupt when carrying
only $128bn worth of debt (Palast 2001), while the United States can maintain an
external debt of $6 trillion apparently effortlessly, approximately 47 times the size
of that of Argentina (figures from US Treasury). Table 17.2 gives figures for
external debts and GDP for several of the world’s ‘problem’ economies compared
with those of the USA. The trade system as currently structured under dollar
domination has increased debts for all developing countries, as illustrated in
Figure 17.3.
European bankers looking enviously across the pond have seen the geopolitical
strategic advantage of being the world’s banker. The USA’s increasing unpopularity as its imperialist adventures in the Middle East proceed apace has led several
countries to switch from the dollar to the euro for their foreign trade exchanges and
their national currency reserves. By the end of last year the share of Russia’s foreign
exchange reserves consisting of euros had expanded from 10 to 20 per cent, while
the dollar share had fallen to below 75 per cent (Fairlamb 2003). Cuba has
switched to the euro for international trade, while OPEC is discussing the
possibility of denominating world oil prices in dollars.4 The powerful and growing
economies of Russia and China are also working their way around US currency
domination: from this year they will be settling their external accounts in rubles
and yuan.5 This role of the euro in a hegemonic power struggle between the two
main western trade blocs should not be ignored. It not only threatens certain
environmental destruction but probable conflict too.
In apparent ignorance of these threats, the move to develop the euro is
supported by some radical commentators, including George Monbiot and Susan
George. They see de-dollarisation as an opportunity to push the USA over the
brink. This is a short-sighted and highly risky reason for supporting the euro. First,
it is based solely on political considerations, ignoring the negative effects of a strong
currency on domestic economies and the single interest rate straitjacket. Second,
Table 17.2 Comparison of size of external debt and size of GDP for a range of countries
Country
GDP ($bn. PPP)
External debt ($bn.)
Debt/GDP ratio
Argentina
Russia
South Korea
USA
$476
$1,120
$764.6
$1,360
$154
$163
$764.6
$9,963
0.32
0.15
0.18
0.60
Source: The data are taken from the CIA datafile, apart from the size of the US external debt, which
the CIA rather coyly only reports the 1995 figure. The figure used is from the US Treasury website.
How the euro threatens well-being 165
Debt
2500
$US billions
2000
1500
1000
500
0
7
19
1
7
19
3
7
19
5
7
19
7
7
19
9
8
19
1
8
19
3
8
19
5
8
19
7
8
19
9
9
19
1
9
19
3
9
19
5
9
19
7
Figure 17.3 External debt of developing countries (1971–97).
Source: Benjamin Holt, Global Policy Forum, New York.
it fails to take account of the almost universally negative consequences of
catastrophic economic collapse. Counter-examples are welcome, but within my
knowledge base it seems clear that economic disaster is always more likely to result
in right-wing authoritarian government than the radical political leaders these
commentators would favour.
Pressure on the welfare state in the eurozone
The countries within the eurozone have suffered disastrous consequences since
abandoning their domestic currencies. This is the result of two factors: the
inflexibility resulting from the imposition of inappropriate interest rates (discussed
elsewhere in this book) and the use of that policy to reduce labour standards and
public expenditure. The citizens of continental Europe have withstood the
ideological pressure towards ‘flexibility’; they are now being subject to economic
pressure via the euro. The European Social Model is even now being defended by
street demonstrations.
Economists could have predicted just these sorts of problems from a single
interest rate for 12 diverse economies and many, including most prominently
Nobel Prizewinner Joseph Stiglitz, did just that. Exactly these types of problems
arose during the period when the pound was pegged to the mark, resulting in Black
Wednesday; and in more extreme form during Argentina’s financial collapse in
2000. According to Larry Elliott writing in the Guardian:
166 Molly Scott Cato
Argentina in 2001 was like Britain in 1992, when the John Major administration insisted that the pound would remain pegged to the German mark even as
unemployment edged towards three million and record numbers of people
lost their homes and businesses.
It is the memory of these devastating times that has propelled many small businessmen in Britain to oppose entry into the euro; they cannot forget the experience of
laying off good workers because of bad economics.
France, and most strikingly Germany, are in deep recession but the strict rules of
the Stability and Growth Pact, administered by bankers rather than politicians,
prevents them from taking action. The dangers inherent in this have been
identified by Stiglitz:
There does need to be a commitment to fiscal responsibility. In the long run,
governments should run balanced budgets, with surpluses in good years
making up for deficits in bad years. But to insist on an arbitrary budgetary
position in an economic downturn is to ignore everything we have learned
about economics in the past 70 years, risking the well-being of millions who
are thrown out of employment.
(Stiglitz 2003)
Whether the determination to stick to inappropriate monetary targets results
from bureaucratic lack of imagination or the corporate desire to undermine the
social model, it is risking a deep and lengthy recession in Europe’s largest economy.
Dieter Hundt, head of the German Employer’s Federation has said that Germany
is in a ‘massive recession’ (in Frankfurter Algemeine Zeitung), with 2003 being the third
year with growth barely above zero. In a typical response, Wim Duisenberg,
President of the ECB, called for economic reforms in the eurozone in order to spur
growth, while maintaining that monetary policy could not help the situation
(according to Reuters).
The human costs of policy fossilisation are seen in the huge rise in German
unemployment. In May 2003 the German Federal Bureau of Labour admitted that
unemployment in Germany might reach 5 million by the winter from its current
level of 4.4 million, breaking the previous pre-unification record of 4.8 million.
The report, published in Die Welt on 30 May, found there were 475,000 more
unemployed people than in the same month in 2002.
While the battle between economists, bankers and politicians continues
Europe’s citizens are suffering hardship and losing rights to employment conditions and social security that they had felt were secure. This is resulting in high
levels of strikes and civil unrest. The economic ‘reforms’ that Schroeder is
desperately trying to implement to slim the economy sufficiently to fit into the
interest rate straightjacket include relaxing redundancy laws and reducing the
length of eligibility for unemployment benefit. Figaro reported a demonstration of
10,000 people against these proposals in Berlin in late May. Those who live in the
How the euro threatens well-being 167
eurozone must regret the decision by their politicians to give away their power in
economic decision making.
Conclusion
For those of us who have worked to oppose the onward march of globalisation,
opposition to the euro comes easily. The development of the single European
currency fits so neatly into the pattern alongside the North America Free Trade
Agreement (NAFTA), which the globalisers won, and the Multilateral Agreement
on Investment (MAI), which they lost, that we can easily identify its provenance, its
purpose and the need to oppose it. For those who do not share this perspective the
whole debate can appear somewhat unreal, since there are very few obvious
advantages to joining the system. From the viewpoint of conventional economics,
Britain is functioning well with a flexible interest rate regime and ultimate political
control over its own economy. Whatever the strength of arguments against the
euro coming from the anti-globalisation and green movements, it is the combination of British scepticism and xenophobia that will ensure Tony Blair will never
win his referendum.
Notes
1 UNCTAD report on trade (1997), Part Two, chap. IV, sect. B.1; World Bank report:
M. Lundberg and L. Squire, ‘The simultaneous evolution of growth and inequality’,
December 1999. Grateful thanks to Richard Douthwaite for both these references.
2 Data from an unpublished report by Nick Robins called ‘Taming world trade’, cited by
Simms, 2000.
3 See R. Douthwaite, ‘Defense and the Dollar’. He cites Professor Thomas Barnett of the
US Naval War College, as follows:
We trade little pieces of paper (our currency, in the form of a trade deficit) for Asia’s
amazing array of products and services. We are smart enough to know this is a
patently unfair deal unless we offer something of great value along with those little
pieces of paper. That product is a strong US Pacific Fleet, which squares the transaction nicely.
See: ‘Asia: The Military-Market Link’, The US Naval Institute, January 2002, pp. 53–6;
http://www.nwc.navy.mil/newrulesets/AsiaThe Military-MarketLink.htm
4 Saudi Arabia’s Prince Muhammad Bin-Turki Bin-Abdallah Bin-Abd-al-Rahman
suggested this as a protest against US and Israeli actions in the Middle East according to
an article ‘Protest by switching oil trade from dollar to euro’ published in Oil and Gas
International (15 April 2002).
5 ‘Goodbye dollar! Goodbye euro!?’, Pravda, August 2002. See: http://english.pravda.
ru/world/2002/08/22/35049.html
18 EMU and British sovereignty
Brian Burkitt
Introduction
The UK economy is insufficiently integrated with, and too structurally different
from, the EMU12 countries to benefit from participation. The United Kingdom
suffered heavy losses of jobs and production due to its following an inappropriate
monetary policy during membership of the Exchange Rate Mechanism (ERM).
All the evidence indicates that a single currency would generate similar consequences, except that having lost an independent pound sterling, there would be no
escape. The conclusion is unequivocal; Britain should not join EMU, which is
prejudicial to its economic interests. However, the issues raised by the single
currency are not simply economic; participation would pose problems for the
operation of British democratic self-government. A loss of national independence
and a weakening of democracy are profound threats arising from the essential
character of EMU.
An analysis of these threats must start with Gordon Brown’s statement to the
House of Commons on 27 October 1997. Its key passage was:
It must be clearly recognised that to share a common monetary policy with
other states does represent a major pooling of economic sovereignty. There
are those who argue that this should be a constitutional bar to participation in
a single currency, regardless of the economic benefits it could bring to the
people of this country. That is an understandable objection and one argued
from principle. But in our view it is wrong. If a single currency would be good
for British jobs, business and future prosperity, it is right, in principle, to join.
The constitutional issue is a factor in the decision, but is not an overriding one.
That statement was unclear; did it mean that the end of the pound sterling will
exert no serious impact upon British self-government or did it mean that the
impact would be serious but that the British government is willing to tolerate its
effects? As early as February 1970, Enoch Powell, in a speech to the House of
Commons, defined the crucial question as ‘the issue we are deciding is whether we
can and will enter a political unit that deals with major matters of political life
affecting the daily lives of people in this country’.
EMU and British sovereignty 169
Gordon Brown dismissed this issue without even saying what it was. It is
incredible that the permanent and irrevocable loss of self-governance could be
treated with such disregard. The principle at stake, which Brown failed to address,
is nothing less than the loss of national, democratic self-determination. The
question is whether Britain still desires to be a sovereign nation or whether it is
driven by its fears of the spurious dangers, fuelled by EU-financed propaganda, of
staying out of EMU.
If EMU operates for more than a short period of time, a single currency will be
created without a government accountable to an electorate operating it. In the
absence of a responsive democratic institution, the workings of the ECB and the
committee of finance ministers will, particularly in times of economic stress, be
dangerously alien from the public. In such a gap, indifference at best, and extremism
at worst, thrives. Any response that strengthened the European Parliament would
mean an inevitable growth in its scope and ambitions. Therefore, in joining a single
currency, Britain would be participating in a political process for which monetary
union was a staging post, i.e. an EMU that survives for more than a few years will
underpin a developing European state.
The federalists are trying to build a United States of Europe from the top down.
Institutions to manage monetary union have now been constructed, and political
institutions to manage these monetary union institutions will follow. Such a process
of building a federal union is the opposite of how every other nation has been
created. It will be disastrous, because it will deploy exchange and interest rates as
weapons of nation building. EMU converts economic into political institutions to
build an ever-more integrated European Union, thus distorting their real purpose
and function. Moreover, the operation of EMU will lead to calls for further
harmonisation of laws and customs, culminating in a single fiscal policy, which will
diminish still more Britain’s ability to take fundamental decisions in its own
interests.
Hence, EMU is not simply, nor even mainly, an economic project. It constitutes
a major step towards political integration, transferring power from accountable
national institutions to bureaucratic, unelected EU-wide institutions.
Democracy
The parliamentary democracy developed and established in Britain is based upon
the sovereignty of the people, who by exercising their vote lend their sovereign
powers to MPs, to use on their behalf for the duration of a single parliament; these
powers are returned intact to the electorate to whom they belong, to return again to
the MPs they elect at each subsequent General Election. Five basic democratic
rights emerge from this process, each of which is fundamentally diminished by
British membership of the European Union.
First, parliamentary democracy means that every person over 18 is entitled to
vote to elect his or her MP to serve in the House of Commons. The consent of the
House of Commons is necessary before Parliament can pass any Act laying down
new laws or imposing new taxation upon the people. British membership of the
170 Brian Burkitt
European Union subjects all its citizens to laws and taxes, which their MPs do not
enact. Such laws and taxes are implemented by EU institutions that they do not
directly elect, and cannot dismiss, through the ballot box.
Second, parliamentary democracy means that MPs, who derive their power
directly from the British people, can change any law and any tax by majority vote.
British membership of the European Union prevents EU laws and taxes from
being changed or repealed by the British Parliament. They can only be altered or
abolished by EU bodies not directly elected by the British people.
Third, parliamentary democracy requires that British courts and judges must
uphold all laws passed by Parliament. If Parliament changes any law, the courts
must enforce the new law because it has been passed by Parliament, which is
directly elected by the people. British membership of the European Union forces
British courts to uphold and enforce EU laws, which have not been passed by
Parliament. Nor can Parliament amend or repeal them, even when they conflict
with laws passed by Parliament, since EU law overrides British law.
Fourth, parliamentary democracy means that all British governments, ministers
and civil servants under their control can only act within the Laws of Britain. They
are accountable to Parliament for all their public actions and, through Parliament,
to the electorate as a whole. British membership of the European Union imposes
duties and constraints upon British governments not deriving from the British
Parliament. Therefore, in discharging these duties, ministers are not accountable
to Parliament or to the British citizens who elect them.
Finally, parliamentary democracy is vital because it entrenches the right of the
people to elect and dismiss MPs, secures their continuing accountability to the
electorate, obliging them to listen to the views of British citizens between as well as
during General Elections. It thus offers the possibility of peaceful change through
Parliament to meet the voters’ needs. British membership of the European Union,
by permanently transferring financial and legislative powers to EU institutions not
directly elected by the British people, insulates those institutions from the control of
British voters. who cannot dismiss them and whose opinions, therefore, need carry
no weight with them and whose grievances they cannot be compelled to remedy.
These five rights have protected British citizens from the worst abuses of power
by the state, safeguarded them against the excesses of bureaucracy, defended their
basic liberties, offered them an opportunity for peaceful change, reduced the risk of
civil strife and created a national framework of consent for the law-making process.
However, the powers of the British electorate, through their direct representatives
in Parliament, to levy taxes, to make laws which the courts must uphold and to
control the conduct of public affairs have been substantially ceded to the European
Union, whose Commission and Council of Ministers are neither collectively
elected nor collectively dismissed by the British people, or by the peoples of the EU
countries put together.
Hence, the European Union, through the fundamental character of its institutions and their behaviour, severely curtails the operation of British parliamentary
democracy. This process, undermining the rights of the British people, will be
accelerated by participation in EMU.
EMU and British sovereignty 171
Sovereignty
Such a major change in the operation of the UK constitution carries profound
implications for the exercise of national sovereignty. The concept of ‘sovereignty’
has been much disputed in recent debates, particularly with respect to the
relationship between Britain and the European Union. Therefore it is appropriate
to analyse its essentials in detail.
Malcolm (1996) defined sovereignty as constitutional independence, i.e. the
exercise of plenary and exclusive political authority in a legal order. A sovereign
state possesses independent authority, e.g. a small country may be dwarfed by a
powerful nation, but so long as it is not legally subordinate to that neighbour, it
remains sovereign. Sovereignty rests upon authority rather than power; in a
famous opinion on the Austria-German customs union in 1931 Judge Anzilotti
declared, ‘sovereignty means that the state has over it no other authority than that
of international law’. An independent state must possess full competence to act
internationally; it acts under its own authority not requiring authorisation from
any superior state. If a state is constitutionally independent, it is sovereign; if it is
not, it is not. There are no intermediate stages of sovereignty.
The idea of Gordon Brown’s that sovereignty (constitutional independence) can
be ‘pooled’ is an evident absurdity. Power can be pooled, but authority cannot.
‘Pooling’ is a dangerous concept, because it falsely implies that authority can both
be retained and given away simultaneously. If the sovereign authority of the United
Kingdom is pooled within the European Union, that sovereign authority will cease
to exist, because British laws would become subject to a higher authority. So far
this has not happened; to date, the United Kingdom has delegated a part of its
sovereign authority to some EU bodies on which it is represented. It has also
delegated the exercise of important elements of administrative, jurisdictional and
legislative authority by treaties and by statutes. The latter were expressions of the
UK’s authority. The United Kingdom remains sovereign so long as it retains the
ability to renounce the treaties and repeal the statutes.
However, the character of delegations to the European Union is different from
that involved in any previous treaty signed by Britain. The EU Council of Ministers
is a law-creating body, whose laws possess ‘direct effect’ in Britain, overriding
British laws. With uniformity the whole procedure can (in theory) be accommodated within the UK’s exercise of its own authority. Majority voting, significantly
advanced by the 1997 Amsterdam Treaty, destroys the illusion; whenever the
United Kingdom is in a minority, it becomes obvious that is has given away the
exercise of legislative authority to a body it cannot control. Article 100 of the Single
European Act allows majority voting on measures ‘which have as their object the
establishment and functioning of the internal market’. If the clause focused solely
upon establishment, majority voting would be designed only for achieving a single
task. Unfortunately, the inclusion of ‘and functioning’ ensures that a potentially
large sphere of legislative authority has been delegated in a totally open-ended way.
If most (or crucial) areas of jurisdictional and legislative authority become
subject to long-term delegation, a situation will arise where the United Kingdom
172 Brian Burkitt
would cease to resemble a sovereign state. Each time Britain delegates the exercise
of its authority to the European Union it does not automatically lose sovereignty,
but becomes more likely to do so. Therefore, it comes closer to the moment when
its constitution will be remodelled into a subordinate part of a federal European
Union. EMU constitutes a major step down this route.
In a federal European Union, sovereignty is not abolished; it transfers to the new
EU constitution. If such a federal framework is to be constructed, it requires the
underpinning of political authority. It must be at least possible to make citizens
think that the federal authority is entitled to rule them; if enough citizens do think
so, it will be. To achieve the objective, representative politics on an EU-wide scale
is required, i.e. European parties functioning as a single entity across the European
Union as the Democratic and Republican parties do in the USA. Such a system
operates effectively in an established political democracy, where people share the
same customs, language and traditions. Could this kind of politics operate in the
European Union? Without a genuine political community, any European constitution will remain an artificial construction. Its political role will not derive from any
sense of participation, but from wishful thinking and indifference. Of course, over
time people may come to feel part of a genuine EU-wide political community. It
could happen, but it would take many generations and involve substantial changes
to many aspects of our lives. Therefore, UK membership of EMU (and ultimately
of the European Union itself) depends upon whether the British people will accept
heartily and willingly the voice of the people of the whole European Union as
binding upon them, at first in some, then in more and ultimately in all matters of
economic, political and social determination. Closer EU integration cannot be
effective in the long-run without creating one electorate, one constituency and one
federal EU-wide nation. All supporters of such integration need to answer why
such an enormously artificial, disruptive and risky project should be embarked on.
It is frequently claimed that national sovereignty is undermined by globalisation.
To a large extent the claim is based upon a confusion between sovereignty (resting
on a constitutional independence) and power. However, even within its own terms
of reference, the claim is grossly exaggerated. Since 1945 increasingly freer trade,
the emergence of transnational corporations and the hugely expanded volume of
international capital movements have made the task of national economic management in reconciling full employment, stable prices and rapid growth harder to
achieve. These difficulties created political problems, as electorates became
frustrated with governments of all persuasions failing to meet their demands.
Nevertheless, it remains hard to understand why these developments suggest the
need for a closer association between the United Kingdom and other members of
the European Union specifically; rather they pose the imperative for worldwide
cooperation. The inability of both national governments and regional blocs to
control currency realignments led to the G7 meetings (and if Britain devoted the
ministerial and civil service time to the G7 that it spends upon the European
Union, both it and the world would be more prosperous). It was the G7 rather than
the European Union that became the focal point of decision making during the
1998 global financial crises. The European Union has proved similarly ineffectual
EMU and British sovereignty 173
in the sphere of environmental protection. Only an international forum can
generate effective ecological policy responses. Therefore, those problems that
cannot be completely solved at national level require a broader policy implementation framework than the European Union provides.
Moreover, acceptance of the limitations of national strategy often obscures the
numerous spheres where the European Union remains effective. Voluntary
abandonment of its authority in these spheres is detrimental to the exercise of
democratic citizenship rights and to living standards. Those who believe that
national economic sovereignty is valueless in the modern world need to explain
recent British experience. In the months before September 1992 the requirement
to maintain interest rates at the level needed to defend sterling’s ERM parity
resulted in unemployment rising to three million simultaneously with record levels
of bankruptcies and home repossessions. The months afterwards, with four
percentage point cuts in base rates and when the pound was devalued by 15 per
cent, saw immediate economic recovery. By contrast, France’s determination to
achieve exchange rate stability with the Deutschmark created stagnation, with
unemployment rising to 12 per cent alongside an alarming increase in xenophobia.
National economic sovereignty still exists in substantial measure; all that matters is
the will to use it.
Thus the United Kingdom can still enjoy the advantage of sovereignty, i.e.
constitutional independence, if it resists the embrace of continental integration.
British strategy should concentrate upon developing fully national policy
instruments, whilst cooperating on a global, rather than a regional, basis on issues
beyond national control.
Conclusion
The Maastricht Treaty puts all the emphasis for achieving closer EU integration
upon a deflationary single currency. The project was designed to unleash
economic demands that would lead to political union. The economic–political
imbalance is clear; if the Maastricht Treaty is implemented in full, the European
Union will possess a single currency, whilst levying a proportionally smaller EUwide budget than Boadicea did over pre-Roman Britain! Acceptance of such an
absurdity prevents ruling parties from following an independent economic policy.
It also creates scope for radical right movements, such as the National Front in
France, the Republicans in Germany and the Fascists and the National League in
Italy. Therefore it is essential that the United Kingdom retains its freedom of
manoeuvre to develop discretionary policies. If artificial federalist rules frustrate
this capacity, extremist movements will fill the unnecessary vacuum.
A United States of Europe would be economically disastrous and politically
undesirable. It is a tragic error of historic proportions for the European Union to
try to bond member countries into one ever-more closely integrated entity. Instead
it should extend membership of a looser, free trade grouping to east European
nations struggling through their democratic transition. Britain needs to uncouple
itself from damaging integrationist trends and seize the tremendous opportunities
174 Brian Burkitt
open to it as an internationally cooperative yet independent country in an interdependent world, which requires effective international and national policy
responses (as opposed to regional ones). Such a major change in the direction of
UK strategy, away from current drifting with EU tides, requires determination and
far-sighted thinking. The prize, however, is great: no less than the survival of a
Britain as a worldwide responsive partner yet also as an independent, economically
prosperous, democratically self-governing nation.
Outside EMU, Britain can develop policies for wealth creation, employment
generation and welfare improvement, freed from the EMU straitjacket of continentwide deflation. It is evident that the United Kingdom’s future self-interest lies in
being outside this artificial, inflexible creation.
19 Euro versus the people
Austin Mitchell MP
Sovereignty, the firm base of the nation state, is the issue which dare not speak its
name lying at the heart of Britain’s tortured relationship with the European Union.
Little discussed and regularly misinterpreted, sovereignty is crucial because the
European Union’s lurching drive to ever closer union is a struggle over sovereignty
between members and a collective building its own, European, sovereignty. This is
a zero sum game. The nation state’s loss is Europe’s gain. What the European
Union decides the British people cannot.
The long internal struggle over sovereignty, first who reigns, then who governs,
characterised the long rise of democracy. The answers have been the king, parliament, then the people. Now that struggle is between British democracy and Europe,
and the point at issue is the degree of sovereignty to be surrendered. Europe grows
stronger by taking away the power of peoples and parliaments to decide matters for
themselves. That conflict is fought on many fronts, mostly minor, from pounds and
ounces, the registration of fishing vessels, or a nation’s right to veto, right up to the
running of the economy. The euro is the biggest assault so far.
Lawyers distinguish between de facto and de jure sovereignty. Traditionalists
elevate the argument to a mystical level claiming that EU directives are incompatible with the British constitution, with Magna Carta, the Bill of Rights or the
power and responsibilities of the monarch. Euro-enthusiasts, equally mystical,
argue that by being pooled sovereignty is magnified. Being a lawyer’s term it is
much used by the right who put sovereignty at the centre of arguments with the
European Union while some on the left, who see the issue in economic terms, argue
that it is a delusion in a world of globalisation, multinationals and huge flows of
money which means nation states no longer have the power to manage their own
destinies.
Such arguments are much used but untrue. Pooling sovereignty is irrelevant. We
are minor contributors to EU decisions which bind us more powerfully than our
own. We have only 13.9 per cent of the votes in Parliament and 18 per cent of the
qualified majority votes on European Councils, which is 82 per cent less than in
domestic decisions. Having a dominant influence in the European Union does give
a nation power to advance objectives it can’t achieve on its own, and the French
have been particularly skilful to this end. Yet this isn’t extending their sovereignty
but exploiting everyone else’s for their own purposes.
176 Austin Mitchell
Globalisation may have gone further than when New York bankers dictated
terms to the Labour government in 1931. It certainly means that Britain creates
fewer waves in the world. Yet to assume that the fifth largest economy in the world
has no control over its own destinies, its interest and exchange rates, or in the
management of its own economy, is absurd. The contrast between our own failure
to grow as fast as others, our wider social gaps and the poverty of our public sector
compared to more advanced economies, as well as our higher inflation (in the past)
and lower productivity are our fault, not the world’s. A pathetic performance
compared with Singapore or Hong Kong may be shaming but is neither inevitable
nor the result of impotence before external forces. It merely shows that we have
used sovereignty less skilfully.
Constitutional arguments about sovereignty are equally irrelevant. We don’t
have a constitution. Sovereignty rests with the Crown in Parliament and is
indivisible and untransferable. Elements can be loaned but never abdicated, for
Parliament cannot bind itself. What one has given, another can take back. In the
last analysis the constitution is what governments can get away with. So ultimate
power, aka sovereignty, lies with the people. They make the decisions on what
government can and can’t do. Rather than an abstract entity, sovereignty is living
democracy: the people taking their own decisions for themselves. To lose it
diminishes democracy.
Yet the decisions of the people, unless taken by referendum vote, are more
opaque than a written constitution. Public opinion is malleable, influenced by such
irrelevancies as how the economy is doing or are the people tired of the
government. We live in an age of bamboozlement which the European Union has
turned into a system of government. So judgments are imperfect, manipulable,
even perverse, because they are not made by judges or courts, or in one simple,
single decision, but by public opinion coming to conclusions slowly, and basing
these conclusions on broad feelings not rational assessments. The ‘win some, lose
some’ game which is euro negotiation allows few firm measuring points at which
surrender of sovereignty is clear, unambiguous and can’t be dodged. The euro is
one. What is given up to it is the ability of participating nations to manage their
own economies for the purposes of their own people.
Unusually, for Britain, this decision is to be taken by the vote of the people. The
great majority, those not swayed by euro enthusiasm or euroscepticism, will find it
difficult. Many feel they don’t understand the issue, or don’t have enough information to make their minds up. Some will be swayed not by the argument but by its
presenters, as in 1975 when the hairy men: Tony Benn, Enoch Powell and Jack
Jones fought the smooth and respectable such as Wilson and Heath. That will play
its part next time. So will the media, who are now divided on the euro because they
won’t be fooled again after the ERM. Yet most will make their judgement as they
do between parties at the election: on the basis of the sedimentated arguments,
coupled with instincts about the impact on lives, expectations and well-being of the
then state of the economy. The judgeent on whether sacrifices of sovereignty to
Europe are acceptable or not, whether it is time to say ‘thus far and no further’, or
even whether to take arms against a sea of troubles and, by opposing, make a
Euro versus the people 177
confused situation a bloody mess, will be made gradually, on the basis of ‘What’s
Europe done for me?’
That judgment will be less favourable than those of other European electorates,
for Britain’s relationship with the European Union has always been more fractious.
Original members benefited in the growth phase and have been more prepared to
make greater sacrifices of sovereignty because they went in voluntarily, even
enthusiastically, shaped the institution to suit their national purposes and got more
out of it. The Benelux limpets wanted a rock, the French to be the jockey on the
powerful German horse, the Italians to be governed from anywhere but Rome,
and the newer recruits, lands of the waving palm, demanded and got a generous
flow of the support and subsidy which assuages doubts and buys votes. When the
Irish get 3 per cent of their GDP from Europe they are bound to feel a little different
to the British who pay for it.
Britain joined not from any enthusiasm for integration but because its political
class came to the conclusion that with the empire gone Britain needed a new stage
to strut on. In the eyes of leaders whose skills were imperial not economic and who
had proved incapable of delivering the same economic growth competitors
enjoyed, and modern electorates expect, Britain had failed. Blame is a great
national skill in a class-divided country. so, reluctant to blame themselves, the elite
blamed the people (lazy), the unions (bolshy), management (incompetent) and the
welfare state (spoiling). They wrote off the country and looked to Europe.
Their economic assessments demonstrated just how naive and economically
illiterate the elite can be. Europe would offer the stimulating cold shower of
competition, which their own public school background told them was the best
discipline for naughty boys. It would hitch to the fast moving locomotive of
European growth. Both images were as wrong as they were simple minded. Cold
showers kill the ailing. Exposure to more powerful and better invested challengers
destroys the unready. It was like urging a one-legged man to join a squash club
because the showers would make him fit. When he fell over at the game and
developed pneumonia his pleas for a reduced subscription were likely to be greeted
with an invitation to ‘hop off’. Yet the elite never bothered to think the economics
through (even if they could have done so) because their real object was to transfer
their own unique skills to the bigger European stage. There the natural leadership
ability of a class born and trained to rule was certain to be gratefully received.
Relegated to Lilliput because the country had proved unworthy of them, Britain’s
Gullivers wanted a bigger stage.
All this emerged from Harold Macmillan’s post-1959 assessment of Britain’s
prospects. The feeling of national failure deepened when Harold Wilson’s Labour
government failed to deliver economic growth in one country. So EEC entry
became an obsession for Ted Heath’s Tories, who had no other major policy.
Coming to power in 1970 Heath was ready to accept anything to get in, and much
was forced on us by a Common Market Six determined to strengthen themselves at
Britain’s expense, to punish us for our American leanings and to force us to break
our old Imperial relationships. A Common Fisheries Policy, the betrayal of trading
partners, the Common Agricultural Policy with its high food prices, and a system of
178 Austin Mitchell
contributions designed to make us pay over the odds were all swallowed at one
grateful gulp.
We entered on unsuitable terms and spent three decades in the Sysyphean
labour of trying to roll the stone back up the hill, always lagging in an institution
which did not suit us in the way it benefited others. Europe didn’t deliver on the
promised economic gains which might have made the loss of sovereignty acceptable. Glowing prospects were followed by two decades of the worst economic
performance since the Second World War with low, at times negative, growth,
mass unemployment, the closure of traditional industries and the failure to develop
any new national dynamic, despite being, alone in Europe, oil rich. Much of this
was not Europe’s fault given the oil shock and Tory monetarism. Yet Britain had
taken on a heavy contributions burden, abandoned traditional markets and the
advantages of trading our manufactures for cheap food in order to pay Europe’s
higher prices with a consequent increase in domestic costs.
Manufacturers found it harder to penetrate a large market from a small one.
Much easier the other way because of the costs of distribution networks. European
manufacturing had the investment, productivity, and economies of scale we
lacked. We asked to be clobbered and duly were. Their exports to us grew faster
after entry than before. Ours to them went the other way, leading to a gaping trade
deficit which was a drain of jobs. As for hitching to growth, that stopped. The
striving for monetary union forced France and Italy to deflate to keep their
inflation rates down to the low levels Germany achieves through industrial might.
This deflation was then prolonged by the monetarist requirements of Maastricht.
The damage to Britain from the EEC was not ruinous. God had put oil in the
North Sea to show he wasn’t a Moslem, but membership meant its benefits were
wasted, not used to rebuild for the future. The balance of payments boost went to
pay for imports to destroy jobs, the tax benefits went to support unemployment and
the investment flows were invested abroad.
This combination of high hopes, disastrous reality, produced a culture of euro
lies and half-truths. Failure had to be portrayed as success, damage as benefit. The
electorate had to be told that we were doing well in Europe despite the accumulating evidence of industrial failure, loss of our own market and an industrial base
shrinking faster than anyone else’s. The electorate made its own sullen assessment.
Unemployment, industrial decline and economic growth had all got worse. Europe
had done us no good. Polls showed a constant majority disliking membership after
1975. They didn’t really want to withdraw: that prospect frightened a people losing
confidence. But they certainly didn’t like it.
Confusion is maximised. The people don’t like Europe but no party gives any
lead out, nor does any one offer a brave prospect, apart from Liberals believing in
‘my Europe right or wrong’. Governments come in proclaiming their desire to work
with Europe. They end up alienated and antagonised. Labour proclaimed a new
beginning after its 1975 re-negotiation to end up semi-detached. Margaret Thatcher
passed the Single European Act and finished with ‘No, No, No’. John Major wanted
Britain at the heart of Europe but ended up peripheral with a deeply divided party.
Tony Blair’s naive euro enthusiasm is already losing some of its glitter.
Euro versus the people 179
The issue pollutes politics. No British government can be fully enthusiastic or
totally hostile. Our ‘partners’ are suspicious of us, and we of them, resulting in a
constant diet of lectures on the need for us to be better Europeans, and constant ‘If
only’ admonitions: if only Britain would learn to love its misery and maximise its
surrenders all would be well – even if its government becomes unpopular with its
people. So Britain is relegated to Europe’s sulky periphery, dragged behind
grumbling, claiming euro victories at home but really downgraded in the
European Union, constantly saying one thing to European colleagues and another
to its own people, and making maximum use of the European Union’s Golden PR
rule ‘all must have victories’ at Councils.
Much sovereignty has been conceded with few benefits in return. The people
don’t rise in protest but few are happy and an angry minority have kept alive the
struggle to withdraw. In MORI polls the proportion feeling Britain should get out
was 33 per cent in 1975, 71 per cent in 1980, 48 per cent in 1996 and 47 per cent in
November 2000. In the early 1990s 55–60 per cent thought EU membership ‘a
good thing’ in the EU euro-barometer polls. The latest figure is 25 per cent, while
44 per cent think the United Kingdom has not benefited from membership. This
underlying alienation is a formula not for making the most of membership but for
DIY deadlock. Britain can neither move forward nor backward. The euro must be
seen in this context. To join it, government must make the European Union
acceptable to an alienated electorate. That would require it to swallow a camel
after a long diet of dung. All the problems of our messy relationship come together
in the euro, the latest and greatest surrender of sovereignty with consequences
greater than any before.
The euro is the last stage of a long effort to build unity by monetary means –
starting with the snake, which Britain left after a few weeks, and going on to the
ERM which Mrs Thatcher resisted for over a decade until urged in by the same
interests now promoting the euro: the Labour Party, the TUC and CBI, the
Liberals, euro enthusiasts for whom Europe is a religion and almost all the media.
The results were disastrous. Britain lost over two million jobs, mostly in manufacturing, and the 1992 debacle drove the nail in the coffin of the Tory government,
cost the country £30 billion, alienated the media and ensured that it will be more
difficult to convince the British people that another monetary experiment will be
beneficial.
The euro is a political instrument for building ever closer union rather than an
economic policy. This is openly avowed in Europe. Here the loss of sovereignty has
to be denied and membership sold as an economic benefit. There may be such
benefits for countries which trade largely with each other, and will do so even more
with a common currency. They will be less for one whose trade is divided half and
half with the European Union and outside, and less than half of it with Euroland.
Membership will force us to trade more with the European Union, but that is trade
at a disadvantage, as demonstrated by our large deficit, compared to our trade with
the rest of the world.
The euro is political because it builds union from the top down and without
consent. The European Union’s deep-seated drive for ever closer union comes
180 Austin Mitchell
from the Commission, the vested interests around it and the European elite. That
cannot be achieved by public consent or a federal constitution for electorates won’t
vote for it, nor from agreement between governments, for haggles and deals result
in messy compromises and not a pristine plan. So the only project in town is the
piecemeal building Treaty by Treaty, power by power, of a centralised Europe on
a French design: mercantilist, interventionist, bossy, centralising and regulatory.
Just like France.
The European Union constantly struggles to become something else but is
unable to break away from what it is: building a palace on a cowshed. At its heart
lies a restless conflict between Commission, Parliament and nation states. They are
then further divided by a battle of small versus large, with Britain always nagging
behind. Thus the Union proceeds crab-like to unity without consent. The euro is its
latest instrument. It needs a central bank to manage it, then a common economic
policy and bodies to run that, which need some kind of democratic supervision and
a common tax system to ensure fair competition. So bit-by-bit a stronger Union
can be put together. This has nothing to do with any economic benefits of the euro.
They are minimal and, for Britain, non-existent.
The problems of sovereignty the euro creates are greatest for Britain, the
reluctant European. The processes of deceit, already overused to persuade the
British to accept other European policies, must go into overdrive to sell it. They will
be invoked to a background of alienation and disbelief from an electorate already
inoculated against it by the ERM, through a media now bitterly divided on the
issue, and against a Conservative party now largely united against the euro by a
government almost united on a ‘rock solid’ maybe, as against the cowardly Tory
‘maybe not’.
All this on an issue imposing the biggest loss of sovereignty Britain has so far
been asked to face. The euro takes away the two major tools of economic management available to national governments: interest rates and the exchange rate they
affect plus, eventually, tax policies too. All these tools have been mishandled in
Britain; witness our low growth rate, because of the overwhelming power of
Britain’s lopsidedly dominant financial sector centred on a City which always
prefers dear money and an overvalued exchange rate. In 1997 Finance took power
when interest rates were handed to the Bank of England. According to Geoffrey
Robinson, Gordon Brown did this not to provide a training run for Europe, but to
emulate America’s independent Federal Reserve. If so he was misguided. The Fed
takes account of growth, employment, the state of the economy and the exchange
rate, as well as inflation. The Bank of England, regarded, perhaps rightly, as less
competent, was given only one target: inflation at 2.5 per cent.
However misguided, giving control of interest rates to the Bank of England can
be reversed. Conceding the same powers to the European Central Bank transfers
power more permanently from democracy to plutocracy, from elected politicians
to bankers, from London to Frankfurt. National governments are specifically
precluded from interfering with the Euro Bank which has to fix one interest rate for
all, something the Bank of England hasn’t been able to do for this much smaller
country.
Euro versus the people 181
However incompetent domestic management is accountable in some degree.
The electorate throws out a government which fails. Changes are forced by
argument, persuasion, riot, protest, strike or demonstration, as urban riots ended
Mrs Thatcher’s 1981 deflation and petrol stoppages changed Labour’s tax policy.
Citizens feel that they have influence. They won’t in the euro. Unaccountable
bankers in Frankfurt can’t be thrown out. One interest rate must cover all,
whatever damage it does to some.
This is the ultimate abdication of sovereignty. The state of the economy does
more to determine election results than anything else, but the instruments which do
most to influence it are lost. Labour came in prepared to surrender them. Before
the 1997 election Gordon Brown and Tony Blair persuaded themselves that in a
globalised financial world with enormous and instant financial flows dwarfing
transfers arising from trade, the nation state is outdated and powerless, sovereignty
irrelevant and interest and exchange rates incapable of national management. Yet
once in office Gordon Brown found that he could manage policy perfectly well and
get the growth and stability Labour craved. Instead of fluctuating wildly, sterling it
stayed steady, though far too high. It was the euro which was unstable, falling by 20
per cent. The economy continued to grow, generating almost a million jobs, the
opposite of Europe. Britain’s unemployment rate fell to 4.5 per cent while Europe’s
stuck around 10 per cent.
Gradually Brown accepted reality. A national government can successfully
manage a national economy. He was doing it. He, therefore, decided to postpone a
euro entry, which was impossible anyway, so great Britain’s overvaluation against
European currencies. Would-be members should go in at the rate holding a stable
relationship for two years. Anything like Britain’s since 1993 would crucify the
economy. The exchange rate translates our costs into Europe’s prices so an
overvaluation of around 30 per cent would have been locked in forever by entry,
making the United Kingdom permanently uncompetitive and unprofitable, just
like the ERM before it. Thus the entry issue became a case of ‘Lord make us
virtuous. But not yet.’ The advocates of euro membership (the same as those who
had urged the ERM) were forced on the defensive as the euro remained low –
though whether this was because of inherent design faults, mistrust of Italy, Spain
and, more particularly Greece or because of the all-conquering attractions of the
dollar was not clear.
Such the failures of the euro’s first two years. At its end, America’s prospects look
uncertain as the trade deficit gapes. In Britain, growth is slowing with interest rates
far too high as inflation undershoots the target, and high, too, in historic real terms
and compared to Europe. They prop up the pound at a level far too high compared
to the low euro. Overvaluation makes it unprofitable to produce anything from
cows to cavaliers in this country, transfers production overseas and brings a rise in
imports, a fall in exports and a gaping trade deficit. The third big wind-down in a
manufacturing base, already shrunk too far to pay the nation’s way in the world, is
well under way.
Europe’s economy, long held back by Maastricht’s deflation, benefits from what
amounts to a competitive devaluation. So it is growing again, much of this at our
182 Austin Mitchell
expense, though the rise in the price of British oil exports to them conceals the
consequences for the balance of payments.
Divergence is disguised in Britain by the impetus of what is historically a pretty
inadequate rate of growth, by new job creation (greater than Europe’s) and higher
public spending from the 2000 comprehensive spending review. The hardiest
manufacturing companies survived the last two great deflations and have been
resilient in resisting the third, but others who have kept going by exporting at zero
profit, or even at a loss, by cutting investment, research and design, and all the
other ingredients of long-term competitiveness, in order to keep market share are
vulnerable. These are finite processes. Eventually firms go under, run out of cash or
drop out of the game. Recession is inevitable unless the pound falls substantially
and the euro rises ditto. If it does, the strong argument against membership – ‘if it
ain’t broke don’t fix it’ – weakens.
Success in running the economy has weakened Gordon Brown’s desire to get
into the euro, but its effect on votes is more difficult to measure. Gordon Brown’s
purposely vague five tests can be fudged and fiddled at will, a process already going
on as pundits hail ‘convergence’ just because the British and European economies
are crossing each other, one on the down escalator, the other on the up:
governments, even New Labour, will interpret reality opportunistically, but if the
growth gap widens the advocates of euro membership will begin to stir. The
electorate will be neither as nervous nor as keen to come to a quick decision, but
prolonged British recession while Europe grows will undermine the majority
against the euro that the polls currently show and add to the resigned feeling that
entry is ‘inevitable’.
Economics are a question of image as well as reality. The uninformed see a high
exchange rate as a plus, a weak one as a minus, measuring the performance of the
economy by the cheapness of foreign holidays. Thus if the euro rises because the
dollar is less attractive, even if this weakens European growth, it will build European confidence and give another argument to euro worshippers. A decline in the
pound, welcome to those who want to save manufacturing, will boost British
production but undermine pride – all perverse but confusing to the electorate, and
likely to muddy the economic argument.
The strong economic case against the euro confuses a diffident electorate.
Experience, such an effective teacher in respect of the general consequences of the
European Union, gives more difficult lessons here. People will be baffled by
assertion and counter-claim and as soon as the argument is forced back from the
mystic and from sovereignty onto exchange rate issues it is difficult to make on the
doorstep.
All this was illustrated in a BBC programme on 18 February 2005 giving the
referendum process a trial run in Referendum Street where pro- and anti-euro teams
laboured to persuade 50 households in a north London street over two days. The
end result gave confidence to those who feel the electorate can be persuaded to a
‘Yes’ vote for a 65 per cent to 35 per cent majority against the euro was changed
over two days of intensive canvassing and persuasion into a majority of 58 per cent
to 42 per cent.
Euro versus the people 183
The BBC experiment was, predictably, loaded to the euro. Yet it also showed
that euro enthusiasts have more scope for rosy scenarios, sometimes called lies, by
confidently projecting it as the provider of jobs, low interest rates, economic
growth, stability and collective strength, and all necessary to avoid the terror of
being alone in the world. All this was accepted by electors, particularly women,
who were dutiful about orthodoxies and nervous about Britain’s prospects, even as
the British economy was doing well. Antis were forced onto the defensive and into
difficult economic explanations in which left and right, devaluers and advocates of
strong sterling, stay-ins and come-outs, took different views. Unity comes easier to
the vacuous and those for whom the European Union is a religion.
The political argument of euro opponents did not play well. The sovereignty
argument about running our economy for our purposes does not strike chords with
those who had little faith in Britain’s ability to do that and even less faith in its
politicians. There was a middle-class distaste for assertive nationalism, dismissed as
lower-class ignorance, and a feeling that Europe is idealism, therefore respectable.
It is easier to sell the euro on the basis of idealism, working together, destiny in
Europe etc., even though all this is mobilised to justify a leap in the economic dark
and a huge risk. Similarly the other strong case that the euro is promoted by the
same people and interests, and on the same grounds, as the ERM membership
which proved so disastrous in increasing unemployment and prolonging recession
are all too long ago. Everything before 1997 is ancient history. The past is another
country.
Which creates the sceptics’ dilemma: If our political arguments against what is a
political instrument don’t play, then the debate falls back into the economic arena.
There people are bemused, baffled and lack the knowledge and confidence to make
their own decisions. Here the wording of the ballot becomes important. The BBC’s
was loaded to the euro – as will be the wording in the actual poll – since people were
asked whether they would replace the pound with the euro. No qualifications about
when, in what circumstances, on what conditions or at what exchange rate. All that
will be left to the government to decide on the basis of five tests which are eminently
fudgeable and which say nothing about jobs in manufacturing, the sector of the
economy most affected by exchange rate changes. They also ignore the need for
financial redistribution to compensate areas which suffer from the single currency
because they are less competitive, a problem certain to affect Britain’s manufacturing regions, the industrial north and the Midlands.
Most important of all, the tests say nothing at all about the central problem: the
exchange rate at which Britain enters. We went into the ERM at too high a rate, yet
the pound is now higher still against the euro. Though it doesn’t stop them blaming
every problem on our failure to join the euro, the more sensible euro enthusiasts
accept that Britain couldn’t go in at this level of overvaluation, or anything like it,
because the exchange rate translates our costs into European prices. Today’s
would set high costs and uncompetitiveness in concrete and require massive cuts in
wage, living standards and public spending to even try to compete.
Neither government nor euro supporters have any proposals for getting the
pound down, while the market seems little inclined to do so. Indeed, it never will by
184 Austin Mitchell
the necessary amount because it would require a long period of low interest rates
and sustained competitiveness. Britain’s Financial Interest, which always wants
high interest rates and a strong currency, will strongly oppose that and the need to
lower the exchange rate to join will be difficult to explain to the electorate. The
Maastricht requirement is to go in at a relativity in the ERM maintained for two
years to show that it is sustainable. It would be extraordinary if a government
which has passively watched the overvalued pound inflict massive damage on
manufacturing, steel, cars, engineering and textiles, and lost nearly half a million
manufacturing jobs in the third industrial shrinkage in 20 years, suddenly started
actively managing the pound down to join the euro. It could do so for either
purpose. It won’t.
All this will be compounded in the actual referendum by the weight of euro
propaganda and money, the nature of choice between the smooth men (pro), the
hairy ones (against). The euro argument will again concentrate on creating fear of
being alone, outside, out of the club, or unheeded, creating a strong possibility that
a nervous electorate, confused about the economics, and dutifully disposed to
orthodoxy and government advice, will opt for what it sees as safety.
Such a result could take Britain into the euro at an uncompetitive exchange rate
on the worst possible terms. The price of sovereignty is educating the nation into
what it’s about and how to use it but the British have never even bothered to even
think about either. Governments who have never seen the national self-interest
clearly haven’t exploited independence to pursue it. Indeed, it was because we
couldn’t do this that we went into the Common Market in the first place.
For Euroland, particularly the hard core who want to become an exclusive club
within the union, Britain’s entry to the euro would turn the key. For the British it
locks us in a final subjection to Europe and relegation to the European Union’s
offshore, poor, plangent periphery, lacking the subsidies the others get. Our
trading role with the wider world will be undermined, to force us to trade more
with the European Union, where we sell at a disadvantage demonstrated by the
sustained, never closing deficit. We would lose the ability to run our economy for
our purposes or take the decisions which determine jobs, welfare, taxes and
prospects. Today these decisions may be misguided but they are taken by national
authorities for national purposes, authorities who must bear British interests in
mind. In the euro there can be no such feeling. The result must be alienation, and
the pursuit of selfish self-interest, for there will be no role for the national interest.
What price then sermons about pay, greed, the ‘unacceptable face of capitalism’ or
sectional selfishness? They’re the only game in euro-town. Apart from learning
German.
The euro is the end, not only of national independence, but effectively of the
nation state, the only institution fallible humanity has found to improve the lot of
the people and ensure that the processes of improvement are accountable. Britain
has not managed these processes as successfully as competitors. It has lost an
empire and not gained a role either in a Europe which doesn’t suit it or as an
independent player. It has missed out on the rapid economic growth which has
made other countries richer, better, more contented and more powerful. Its
Euro versus the people 185
political elite has shown neither the same economic competence nor the same
dedication to the national interest. It has neither grasped, nor really wanted, the
opportunities open to an independent player, putting national interest first. It has
always shown too great a willingness to live beyond its means and shoulders
excessive burdens, whether in Defence or in the disproportionate costs of EU
membership.
Such mistakes are ours, not imposed from outside by another system dedicated
to other interests and making different mistakes. Democracies do make mistakes
but making our own is of the essence because those who make them are
accountable, and open to influence, protest and ultimately change. People are loyal
to, and identify with, the nation state because it belongs to them. All else is
plutocracy. Like the euro. Thus the questions facing the people in the referendum
are simple: What kind of Britain do you want? A power or a province? Who should
run it? Us or them? Exactly the questions the British don’t like to face up to.
20 The establishment of a
Commonwealth of Europe
The Rt Hon Tony Benn
Introduction1
Tony Benn, who was elected to Parliament in 1950 and served as a minister in
several Labour governments, is one of those rarities in politics and life generally.
Benn’s experience of holding government office, and the process of ageing,
resulted in him becoming more rather than less radical over time. Likewise, on the
issue of European integration, he broke the mould. While many on the left shifted
from an anti-European Union (EU) position towards a more favourable stance,
particularly during the 1970s and 1980s, Benn moved the other way, becoming
one of the most vociferous critics of the European Union on the left. I will briefly
trace this journey, highlighting Benn’s economic and political arguments against
the European Union, thus setting the scene for his contribution to this book.
In the early 1960s Benn was favourable to the concept of European integration:
The idea of Britain joining the Common Market is emotionally very
attractive. To throw open our windows to new influences, to help shape the
destiny of a new community, even to merge our sovereignty in a wider unit –
these offer an exciting prospect.
However, he recognised that the reality of the European Union was rather
different.
The Treaty of Rome which entrenches laissez-faire as its philosophy and
chooses bureaucracy as its administrative method will stultify effective
national economic planning without creating the necessary supranational
planning mechanisms for growth and social justice under democratic control.’
(Benn 1963: 64)
In the mid-1960s Benn began to question his stance, becoming more disposed to
entry, viewing it as a means of arresting Britain’s decline and containing the
growing power of multinational companies. One example at a practical level was
his support for a European Technology Community as part of the solution to
Britain’s failed economic policy.
A Commonwealth of Europe
187
Defence, colour television, Concorde, rocket development – these are all the
issues raising economic considerations that reveal this country’s inability to
stay in the big league. We just can’t afford it. The real choice is, do we go in
with Europe or do we become an American satellite?
In reality, he lamented:
The choice lies between Britain as an island and a US protectorate, or Britain
as a full member of the Six, followed by a wider European federation. I was
always against the Common Market, but the reality of our isolation is being
borne in on me all the time.
(Benn 1988: 204)
Britain joined the European Union in January 1973, following a parliamentary
vote in October 1972. Benn, however, supported the principle that the people
should decide, arguing that the Conservatives possessed no democratic mandate to
take Britain in. He first suggested the idea of referendum on entry at a meeting of
the Labour Party National Executive Committee in October 1969. In March
1972, following a determined campaign, the Shadow Cabinet accepted Benn’s
referendum proposal; the Parliamentary Labour Party accepted it in April of the
same year. At a Cabinet meeting in July 1974 Benn announced his intention to
campaign against British membership of the European Union.
During the Cabinet debate on Labour’s renegotiation of the terms of EU membership in March 1975, Benn highlighted what he saw as the critical issue, that of
‘whether the Community was to be a supranational structure or a community of
sovereign states’. For Benn ‘sovereignty means democracy, in the sense of power to
make your own laws’. Commenting on the report containing the results of the
renegotiation, Benn stated:
This is the most important constitution document ever put before a Labour
Cabinet. Our whole political history is contained in this paper. It recommends
a reversal of hundreds of years of history, which have progressively widened
the power of the people over their governors. Now great chunks are to be
handed to the European Commission. I can think of no body of men outside
the Kremlin who have so much power without a shred of accountability for
what they do.
(Benn 1990: 342–3)
Benn duly played a leading role in the No campaign during the 1975 Referendum.
Benn’s experience as a minister reinforced his opposition to the European
Union. He increasingly saw the European Union as a capitalist bureaucracy with a
growing democratic deficit that aspired to superpower status. As Secretary of State
for Industry, Benn later learnt that the Foreign Office had cleared his Industry Bill
with the European Commission before it was even published. As Secretary of State
for Energy, which involved attending meetings of the Council of Ministers, Benn
noted that the latter:
188 Tony Benn
is really a parliament because it is a legislative body, but it poses as a cabinet. I
felt, as a Minister and an elected representative, that I was among a tiny group
of fellow Ministers, all burdened down with briefs prepared by officials to
submit to the European Commission, also made up of officials. The political
impulse has been completely overcome and the system is so cumbersome and so
secret that there is no real feeling of being engaged in a democratic process at all.
(Benn 1990: 408)
He complained that ‘not a single working person or the needs of working people
are brought near this centre of power’.
Despite the Yes vote in the 1975 Referendum, Benn continued to campaign
against the European Union, persuading the 1980 Labour Party Conference to
adopt a manifesto commitment to withdraw from the European Union, a pledge
which was included in Labour’s 1983 General Election Manifesto. However, the
process of European integration accelerated with the adoption of the Single
European Act (1986), and the treaties of Maastricht (1992), Amsterdam (1997) and
Nice (2001), prompting Benn (1996) to devise a practical alternative to the
European Union:
We should be seeking a better framework within which European cooperation can be made both effective and durable, recognising that the treaties
of Rome and Maastricht, far from ending nationalism, have actually
encouraged it by their centralised and undemocratic structures. The
alternative is not for any country to withdraw into isolation, but to begin to
construct a Commonwealth of Europe that would allow all the forty seven
countries on our continent to harmonise their policies by consent, expressed
through their own parliaments. …Unless we move towards a looser, wider
Europe, the present Union could disintegrate under the control of unelected
Commissioners and bankers.
(Benn 1996)
The Commonwealth of Europe Bill, reproduced below, was submitted to the
House of Commons in June 1992.
Commonwealth of Europe Bill
Whereas it would be in the interests of the people of the United Kingdom to
co-operate closely with the people in all the other countries in the continent
of Europe for the welfare of all, and
Whereas the European Community set up under the Treaty of Rome has
conferred too much political power on the Commission, which is not elected,
nor can it be removed by democratic means, and
A Commonwealth of Europe 189
Whereas the Community laws, which take precedence over the domestic
laws of member states, are made by the Council of Ministers, in secret, without
requiring the prior consent of the elected parliaments of member states, and
Whereas the proposals for an economic, monetary and political union contained in the Treaty of Maastricht would necessarily undermine still further
the democratic accountability of those with power to those over whom that
power would be exercised, and
Whereas the effect of this would be to weaken the rights of the peoples of
Europe to determine the policies of those in power, and
Whereas the long-term effect of these changes could be to lead to apathy, or
the recrudescence of the worst form of nationalism, and
Whereas great new opportunities now exist for the creation of a wider
European system, based upon the progressive harmonization of interests
between the fully self-governing states in the continent;
Now therefore be it enacted, and it is hereby enacted by the Queen’s Most
Excellent Majesty, by and with the advice and consent of the Lords Spiritual
and Temporal, and Commons, in this present Parliament assembled, and by
the authority of the same, as follows:
1 Within six months of the passing of this Act, Her Majesty’s Government
shall summon a Conference in London of the governments of all the
European States listed in the Schedule to this Act, to be held not less
than six months thereafter, to discuss the establishment of a Commonwealth of Europe, to which all nations in Europe should invited to adhere.
2 At the Conference referred to in section 1 above, the draft of a Treaty of
London, in the form set out in the Schedule to this Act, shall be presented
to the Conference for discussion, amendments and subsequent ratification by the processes that apply for that purpose in each of the nations
wring to participate.
3 Notwithstanding section 2 of the European Communities Act 1972, all
legislation that has been enacted, or may be enacted by the United
Kingdom Parliament shall, from the passing of this Act, have precedence
over any laws, directives or regulations of the European Community.
4 There shall be paid out of money provided by Parliament any expenses
of any Minister under this Act.
5 This Act may be cited as the Commonwealth of Europe Act 1992
Schedule
The Treaty of London for the establishment of a Commonwealth of Europe
(Preamble)
The duly elected representatives of the following nations peoples of Europe:
190 Tony Benn
Albania
Andorra
Armenia
Austria
Azerbaijan
Belgium
Belorussia
BosniaHerzegovina
Bulgaria
Croatia
Cyprus
Czechoslovakia
Denmark
Eire
Estonia
Finland
France
Georgia
Germany
Greece
Hungary
Iceland
Italy
Kazakhstan
Kyrgyzstan
Latvia
Liechtenstein
Lithuania
Luxembourg
Malta
Moldavia
Monaco
The Netherlands
Norway
Poland
Portugal
Romania
Russia
San Marino
Slovenia
Spain
Sweden
The Swiss
Confederation
Tajikistan
Turkey
Turkmenistan
Ukraine
United Kingdom
Uzbekistan
Vatican City State
Determined to lay the foundation of an ever-closer association of the peoples
of Europe for the common welfare of them all;
Accepting that this association must be based upon the maintenance of
mutual respect for the fully self-governing status of all the signatories of this
Treaty;
Resolved to work for the fullest degree of co-operation between the
governments here represented in all matters that concern the continent as a
whole, and its relations with the rest of the world community;
Committed to uphold the Charter of the United Nations and its decisions,
and to the promotion of peace, democracy, disarmament and development
and the maintenance and extension of Human Rights as specified in the
United Nations Declaration of Human Rights;
Believing that the rich and diverse cultural, political, economic, religious and
institutional identity of Member States must be preserved inviolate if peace
and progress are to be achieved;
Resolved to work for these ends with good-will and in a spirit of tolerance
and understanding
Have decided, at our meeting London, to create a Commonwealth of Europe,
to which all entitled Nations may adhere, and which shall be in accordance
with the following provisions:
Article 1 By this Treaty, the High Contracting Parties establish amongst
themselves a Commonwealth of European Nations.
Article 2 The Commonwealth of Europe shall assume the task of working,
by common consent, for the harmonious and peaceful development of all
Member States, and the welfare of all the people living in them, and of the
continent as a whole.
A Commonwealth of Europe 191
Article 3 The tasks entrusted to the Commonwealth shall be carried out by
the following institutions: The Assembly, The Council of Ministers, The Court
of Justice, The Human Rights Commission, The Secretariat. Each institution
shall act strictly within the limits of the powers conferred upon it by this Treaty.
Article 4 Member States shall undertake to promote appropriate measures,
whether general or particular, to win support from their own parliaments to
secure fulfilment of the obligations arising out of this Treaty, or resulting
from recommendations made by the institutions of the Commonwealth.
Article 5 Member States shall in cooperation with the institutions of the
Commonwealth, seek to use their best efforts to harmonise their policies.
Article 6 The institutions of the Commonwealth shall take no action that
would prejudice the interests of any Member State, or its fully self-governing
status.
Article 7 Any independent Nation whose frontiers lie partly, or wholly within
the Continent of Europe shall be eligible to join the Commonwealth, the
subject only to the consent of a majority of the Members of the Assembly.
Article 8 Any Member State shall be free to leave, after giving twelve
months’ notice to the Secretariat.
Article 9 The Assembly may suspend the membership of any Member State
by a simple majority vote, and may extend, or lift, that suspension at any time.
Article 10 This Treaty shall remain in force for an indefinite period, unless
a majority of the Assembly, and of the Council of Ministers, recommend that
it be terminated.
Article 11 This Treaty shall come into force when it has been ratified by the
National Parliaments of a majority of the Nations whose representatives
have signed it, and when a majority of the peoples of those Nations have
approved it by a simple majority in referenda in their respective countries.
The institutions
Article 12 The Assembly
The Assembly shall be composed of a maximum of five hundred Members,
and of men and women in equal numbers; and the representation of each
Member State shall reflect the proportion which its population represents of
the total population of Member States; save that in calculating such representation fractions shall be disregarded, provided always that a Member
State shall have at least two representatives.
It shall be elected for a four year term, on the basis of an electoral system
to be chosen by each Member State, provided that there shall be a single
polling day within three months of the coming into force of this Treaty.
192 Tony Benn
It shall meet in public and have the responsibility for determining the policy
of the Commonwealth as a whole, subject to the limitations set down the
Preamble to this Treaty.
It shall elect its own presiding officer each year, may determine its own
procedure and shall have power to establish its own Committees.
Its Members shall be paid out of the national budgets of the Member States,
as determined by each of them severally.
Its functions shall include the drafting of Conventions on any matter the
Assembly deems to be necessary, which shall then be transmitted to the
Council of Ministers and all Member States for ratification.
Article 13 The Council of Ministers
The Council of Ministers shall be composed of one representative from the
government of each Member State.
It shall meet in public, unless, by a majority, it decides that it is in the interest
of the Commonwealth, as a whole, that certain matters should be discussed
privately, and it shall publish all the decisions which it has en, as soon as
practicable.
Thereafter, it shall consider recommendations of the Assembly, and shall
make recommendations to the governments of Member States.
The Council shall be charged with the task of actively seeking to harmonize
the policies of all the nations of the Commonwealth on any issue, which
concerns the continent as a whole, including the following matters:
Economic and
industrial
Food and Agriculture
Energy
Trade
Political
Social
Environmental
International policy
Defence and
disarmament
Development
Article 14 The Court of Justice
A Court of Justice shall be established, composed of judges nominated by
each Member State, and confirmed by the Assembly, who shall serve unless
they are removed by a two-thirds majority of the Assembly.
The Court shall be responsible for the interpretation of the constitution of the
Commonwealth, and for adjudicating on matters referred to it by the Council
or the Assembly.
Article 15 The Human Rights Commission
The Assembly shall elect, at the beginning of each term, from amongst its
own Members, a Human Rights Commission, composed of persons from
each Member State who shall serve for the duration of that term.
A Commonwealth of Europe 193
That Commission, guided by the Charter of Right set out below, shall have
the authority to examine and report on any matter which it deems to involve
human rights throughout the Commonwealth, or any matter referred to it by
the Assembly, the Council or the Secretariat, and all its reports shall be
published.
The Council, the Assembly and any Member State whose practices have
been examined by the Commission shall consider and publish their response
to such recommendations as may be made by the Commission.
Article 16 The Secretariat
There shall be a Secretary-General of the Commonwealth, elected by the
Assembly at the beginning of its term, who shall serve for four years, and
who shall have responsibility for the administration of the Commonwealth,
reporting jointly to the Council and the Assembly.
The Secretariat shall consist of a number of deputy Secretaries-General
who shall be nominated by the Secretary-General and confirmed by the
Assembly and by a full-time staff for whom the Secretary-General shall be
responsible.
The Secretary-General, or his deputies, shall attend all meetings of the
Council of Ministers and the Assembly, may make recommendations to
those bodies, and shall implement decisions taken by the institutions of the
Commonwealth.
The costs of administration of the Commonwealth shall be met by moneys
provided by the Member States through an equitable tax system levied
within each state for that purpose.
Article 17 The Rights of Member States
Nothing in this Treaty shall infringe the absolute legal rights of Member
States to take such action, within their own jurisdiction, which they believe to
be necessary, using such powers as they possess.
The government of each Member State shall, subject to the consent of its
parliament, implement any Convention or Treaty to which it has roe a
signatory on its own initiative or on the initiative of the Commonwealth.
Article 18 Rights of the Peoples of the Commonwealth
The rights of the peoples of the Commonwealth to elect or remove their own
governments, and as a result, to repeal or amend their own domestic legislation or to follow such policies as may have been determined by their own
parliaments and governments, shall be entrenched in this Treaty.
Article 19 Domestic jurisdiction of Courts of Member States
Nothing in this Treaty shall in any wry limit the powers of the Courts of
194 Tony Benn
Member States to apply the domestic laws of their own states in accordance
with their own constitutional arrangements.
Article 20 Ratification and amendment of the Treaty
This Treaty be ratified by a referendum to be held in each Member State,
and may be amended, on the recommendation of a majority of Council of
Ministers and the Assembly, subject to the approval of all the Member
States by a popular vote in a referendum in each Member State.
Annexe – The Charter of Rights
1 All citizens shall be entitled to enjoy, and to campaign for, universal
democratic and enforceable rights, both individual and collective,
enshrined in law, adhered to in practice and respected by society, as a
precondition of self-government and the achievement of full political,
social and economic emancipation within a civilized society.
2 Every citizen shall have the following political rights:
• to freedom of speech;
• to freedom of assembly and of association for the purpose of expressing an opinion, without interference from the State;
• to organize for common political, social or economic ends;
• to practise, or not to practise, any or all religions;
• to vote in all elections, participate in all electoral processes and
institutions, and to contest ail elections;
• to privacy and the protection of personal information and correspondence from surveillance or interference;
• to information about public, political, social or economic affairs;
• to freedom of movement, unhindered by arbitrary interference, and to
be given asylum from political, social or economic oppression; and
• to conscientious objection to service in the armed forces.
3 Every citizen shall have the following legal rights:
• to personal freedom from arbitrary arrest, detention or harassment;
• to a fair and impartial hearing by a jury of the citizen’s peers if accused
of any unlawful activity, and to equal treatment before the law and
equal access to legal representation;
• to be presumed innocent until proved guilty, to be informed of all
charges laid and the evidence in support of them, and the right to
silence in court;
• to freedom from torture or cruel and degrading treatment, and from
capital punishment;
• to legal advice and services, free at the point of use; and
• to equal treatment before the law, and in the community, without
discrimination, and regardless of race, sex or sexual preference,
colour, religious or political conviction or disability.
A Commonwealth of Europe 195
4 Every citizen shall have the following social rights:
• to adequate and warm housing and comfortable living conditions;
• to rest, recreation and leisure, to a limitation of working hours and to
holidays;
• to enjoy access to literature, music, the arts and cultural activities;
• to good health care and preventive medicine, free at the moment of
need;
• to lifelong and free educational provision;
• to dignity and care in retirement;
• in the case of women, to control of their own fertility and reproduction;
• to free and equal access to child care;
• to cheap, effective and equitable means of transportation;
• to a healthy, sustainable, accessible and attractive environment and
to clean water and air;
• to media free from government or commercial domination; and
• to full access to personal information held by any public authority,
subject only to a restriction order signed by a Minister and reported to
Parliament.
5 Every citizen shall have the following economic rights:
• to useful work at a fair wage that provides an income sufficient to
maintain a decent standard of living.
Conclusion
In an attempt to grant the British people the right to accept or reject the Maastricht
Treaty, and to open up the debate about the European Union, Benn submitted his
Treaty of Maastricht (Referendum) Bill to the House of Commons in September
1992. At the Labour Party Conference later that month, he submitted a resolution
in favour of a referendum, which was defeated. Nevertheless, Benn continued his
campaign for a Commonwealth of Europe throughout the 1990s.
Although Benn left Parliament in 2001 to devote more time to politics, his case
against the European Union has never been more important. The proposed
European Constitution, agreed in 2004, will further centralise power at the
European level. However, the promised referendum on whether Britain should
accept or reject the Constitutional Treaty, expected in 2006, presents the left with
an ideal opportunity to rediscover Benn’s proposed Commonwealth of Europe
and to campaign for such an alternative before it is too late.
Note
1 The introduction and conclusion for this chapter were contributed by Andy Mullen.
21 Fighting against federalism
Rt Hon the Lord Shore of Stepney PC
Introduction
The problem that Europe in general and the euro in particular poses for Prime
Minister Tony Blair and his Chancellor Gordon Brown can be simply stated: both
men are genuine europhiles, eager to carry forward the whole process of European
integration in foreign and defence as well as in domestic policies, keen to bury the
pound sterling in the single currency as they see Britain’s future as above all centred
in the European Union (EU) and quite undeterred by the accelerating progress
being made towards transforming the European Union into a fledged United
States of Europe.
Both men want, if not a Federal Europe, then something very close to it indeed.
Their problem is that they dare not admit it. Their deep commitment to all things
European and their longing to be ‘at the heart’ of Europe, is the ‘love that dare not
speak its name’. They dare not admit it because, while they rightly assume that the
majority of their fellow countrymen are well disposed towards their continental
neighbours, they do not and will not accept that Britain, with its separate history, its
separate institutions, its parliamentary democracy and its worldwide interest and
connection, should be stripped of the powers of self-government and transformed
from an independent state into a province of the United States of Europe.
British political leaders are not dishonourable men. Moreover, obvious falsehoods are, in a democracy, sooner or late exposed, with serious loss of public trust
in public men. So, the Prime Minister and the Chancellor in their public statements, along with virtually all closet Federalists in UK public life, do their best to
dodge the central question: isn’t the creation of a United States of Europe now the
main objective of the European Union? And isn’t the euro simply one of the main
means of achieving it?
Deception and self-deception
Were dodging not impossible, like so many of their predecessors they engage not in
direct deceit but in self-deception. People around them, overwhelmingly europhiles themselves, whether they are drawn from the FCO or from the appointed
advisers in the Number 10 Policy Unit, understand the government’s problem very
Fighting against federalism 197
well and use all their sophisticated skills and word play to give them credence and
support. In what is now almost a separate branch and art of politics, they have
created their own euro-speak vocabulary: ‘pooling’ sovereignty, subsidiarity, tax
‘coordination’ etc.
The Labour Party’s approach was worked out years ago in Opposition and
thrived during the period of latter-day Neil Kinnock and John Smith just as much
as in the period of our present Prime Minister. Just how far self-deception can go
was revealed in the Labour Party’s 1997 General Election manifesto in this
statement ‘our vision of Europe is of an alliance of independent nations choosing to
co-operate to achieve goals they cannot achieve alone. We oppose a European
Federal Superstate.’ And for those who don’t read manifestos, Tony Blair
broadcast the same message through the columns of the Sun in these words: ‘New
Labour will have no truck with the European Superstate’ and ‘if there are those in
Europe who want a Federal Superstate, we would refuse to go along’.
Little was said than about the single currency, except for the low keyed ‘we are
not opposed, provided it is in the United Kingdom’s interest’ and the same basic
approach was fully deployed by Chancellor Gordon Brown in his definitive
statement in November 1997 of Britain’s policy. The essence of what he had to say
was that the issue was essentially one of economic judgment and that Britain would
join provided that five tests of national economic self-interest were met. Yes, there
were some constitutional and political considerations but these were in no way of a
character that should be allowed to influence the decision to join.
This pragmatic and low keyed approach seemed at first to be working well. The
Amsterdam Treaty of June 1997 posed no major problems for the new government
and the British Presidency in the first half of 1998, while embarrassingly short of
any serious achievements, avoided the great row. Indeed the single currency, the
euro, was formally adopted by 11 states of what we now call Euroland on 2 May
1998 at the meeting of ECOFIN with a benign UK Chancellor in the Chair.
Chancellor Kohl of Germany, in particular, well understood the political problem
of the British government and along with his close colleague, President Chirac of
France, understated rather than overstated the immense political significance
of the single currency, leaving the triumphalist noises to be made by the
Commission’s Yves de Silguy and Jacques Santer.
Moreover, the whole strategy of downplaying the significance of the single
currency, denying its real meaning and political significance, and asserting that we
would join, but only if it didn’t threaten Britain’s economic interests, had this
added attraction: it played very well in the party political battle, both before and
after the 1997 General Election. Labour’s apparently no-nonsense, straightforward and friendly approach to our European neighbours contrasted vividly
with the increasingly hostile, muddled and obviously divided approach of the
Major government and of William Hague’s post-election Opposition Conservative
Party. Labour’s spin doctors were convinced, not without some reason, that the
deep divisions within the conservative Party on the issue was politically and
electorally damaging to the Major government and was perhaps the crucial factor
in Labour’s electoral success. The spin doctors took the same view about the
198 Peter Shore
damage caused by division and open dissent within the Labour Party. Much effort,
art and skilled media manipulation was deployed to stifle and conceal the
continuing Labour debate about Europe and the single currency.
The strategy and approach seemed to be working. But the trouble remained as
virtually all the opinion polls showed that the British public remained stubbornly
hostile to the single currency. Furthermore, that stubbornness was undoubtedly
strengthen as the grass roots level by the vigorous campaigning of the Sun and Daily
Mail newspapers and by the clear editorial eurosceptic tilt of The Times and the
Telegraph, very influential broadsheets read by virtually the whole British political
class.
The truth will out
But the crucial input that now threatens to wreck the whole New Labour approach
to the euro has come, not surprisingly, from Euroland itself. Chancellor Kohl lost
the German General Election in the autumn of 1998 and the successor government under Chancellor Schroeder, with former Finance Minister Lafontaine and
his Foreign Minister Fischer, have felt free to openly state both the real significance
of the single currency, emphasising its political importance for European integration and stating, in unambiguous terms, the over-riding purpose of accelerating the
process of creating a European State. There were audible sighs of relief in Downing
Street when Lafontaine unexpectedly resigned. But his successor, Hans Eichel, a
far less flamboyant personality, is if anything an even more committed federalist
than his predecessor. In an article in January 2000, Eichel wrote ‘we will now strive
towards political unification . . . EMU will not be enough . . . why do we still need
national armies? One European army is enough.’
Equally and embarrassingly clear was Foreign Minister Fischer’s statement to
the Strasbourg Parliament on 12 January 2000: ‘For the first time in the history of
the European integration process . . . an important part of national sovereignty,
to wit monetary sovereignty, has passed over to a European institution . . . the
introduction of a common currency is not primarily an economic, but rather a
sovereign and thus eminently political act.’
And, if that was not enough, in his 26 November 1998 speech he said,
‘transforming a European Union into a single state with one army, one constitution
and one foreign policy is the critical challenge of the age’. The former Finance
Minister, Lafontaine, had made his views crystal clear and indeed reminded his
fellow countrymen and his European colleagues that ‘the United States of Europe
has been the aim of the Social Democratic Party all along’.
Not only have none of the 12 states in Euroland dissociated themselves from
these remarks, they have added greatly to their strength. Thus former Prime
Minister Gonzalez, speaking shortly after the decision of the 12 to join the euro
asserted that ‘the single currency is the greatest abandonment of sovereignty since
the foundation of the European Community . . . we need this United Europe . . . we
must never forget the euro is an instrument for this project’. The voice of Belgium,
in the person of its then Prime Minister Jean Luc Dehaene claimed that ‘monetary
Fighting against federalism 199
union is the motor of European integration’. The Italian Finance Minister Carlo
Ciampi is scarcely less forthcoming when he says, ‘I don’t think we will have a
Federal Government, but something between a Federal State and a Federation of
States’.
And it isn’t just the European politicians who have loosened their tongues and
spoken the truth. Hans Tietmeyer, President of the Bundesbank, strongly believes
that the ‘European currency will lead to member nations transferring their
sovereignty over financial and wage policies as well as in monetary affairs. It is an
illusion to think that states can hold on to their autonomy over taxation policies.’
And no less a person than the (then) President of the European Central Bank, Wim
Duisenberg, publicly asserted, ‘the process of monetary union goes hand-in-hand,
with political integration and ultimately political union’.
Our European partners have indeed blown the gaff! If that wasn’t enough, at the
centre of the agenda of the German Presidency, which began on 1 January 1999,
were placed the two dreaded items of tax harmonisation and the financing of the
European Union, including the large and much resented British rebate. They
remain on the agenda.
Getting desperate
So what is the British government now to do? Labour is criticised by their natural
allies, Lord Jenkins, Paddy Ashdown, Michael Heseltine, Ken Clarke et al. for not
being courageous enough, for not openly declaring their commitment to join the
single currency. They are faced with a still hostile British public and a Europe now
dominated by social democrat governments openly proclaiming not only their
hostility to alleged ‘unfair’ British tax and other advantages but also their profound
disagreement with the deflationary provisions written in to the Maastricht Treaty,
the very provisions which Mr Gordon Brown, in particular, has totally embraced
and accepted. The government’s increasingly desperate response has come in
three instalments. First, a massive attack on the media, endangering the support
that the Murdoch press has in the past given to New Labour, accusing them of
hysteria on the subject of tax harmonisation and a new public relations strategy of
by-passing the national press and other media channels.
The second and more important reaction was of course the Prime Minister’s
statement in the House of Commons on 23 February 2000 when, in Paddy
Ashdown’s words, he ‘crossed the Rubicon’ and publicly committed himself and
the government to joining the euro, just as soon as the economic tests which
nobody takes seriously have been met. The launch of a National Changeover Plan
backed with millions of pounds of new expenditure, is allegedly to prepare British
firms and financial institutions, government departments and consumers for the
adoption of the euro. In reality it is aimed at something much more, to convince the
British people that the euro is coming, whatever they might wish, and to
demonstrate to our European partners that we really do intend to ditch the pound,
that we really are, unreservedly ‘good Europeans’ and that we do genuinely wish to
be at ‘the heart of Europe’.
200 Peter Shore
The third and most recent government initiative was its attempt to bury the
unpopular euro issue in the larger issue of membership of the European Union
itself. Both at the Labour Party Conference in Bournemouth and again at the
launch of the ‘Britain in Europe’ campaign, with the Prime Minister openly in
alliance with Heseltine, Clark and Kennedy, the claim was made that to oppose the
adoption of the euro was to join a ‘conveyor belt to withdrawal’. Some of those who
do oppose the single currency also wish to leave the European Union. But the great
majority of those determined to keep the pound are also in favour of staying in.
The crucial issue is not the alleged ‘conveyor belt to withdrawal’ but the far more
dangerous ‘conveyor belt, via the euro, to total immersion’ in Europe, to the
creation of the European State. To this, the Prime Minister has virtually nothing to
say except: ‘I do not dismiss the constitutional or political issues. They are real.’
But what those constitutional and political issues were was not stated. Instead the
Prime Minister went on, ‘monetary union is a big step of integration, but so were
the Single European Act and the European Union itself ’.
The goal is political union
Yes, Prime Minister, these were important treaties. But there is a big difference
between them and the single currency proposals, and the Prime Minister not only
knows it but has articulated it with precision on many occasions. The single
currency and Economic and Monetary Union are not just another incremental
step but a massive leap forward for political union. As its proponents and
opponents alike agree, the single currency decision is the most important that
Britain and its people will have taken in the whole period since the Second
World War.
Why? Because at one and the same time, it destroys the capacity of any future
UK government to use the power of the state to guide, influence and control the
economy and, at the same time, gives precisely these powers to unelected
European institutions in Frankfurt and Brussels. Moreover as the advocates and
architects of EMU and the single currency well know, it cannot work without the
further fiscal, economic and political integration of the member states. There is not
a responsible governmental voice anywhere in the European Union that would
deny it. If British ministers are deaf to the voices of their European political
colleagues, they can scarcely fail to hear these words from Wim Duisenberg, the
President of the newly created European Central Bank: ‘EMU is and always was
meant to be a stepping stone on the way to a United Europe.’
The genie is out of the bottle. The appalling ‘F’ word, Federalism, is in the public
domain and the United States of Europe, with Britain in it has become indissolubly
linked to the issue of the euro itself. The argument cannot be avoided; the issues can
no longer be hidden or concealed.
The referendum of course will take place. The government is too strongly
committed to that to now renounce it. But, when the British people are asked
whether they agree to give up the pound sterling and joint the euro currency, as
Prime Minister Blair and the europhiles in all parties will recommend, they will
Fighting against federalism 201
know they are also being asked to give up their independence as a sovereign state
and to abandon parliamentary government and rule by men and women whom
they elect as MPs. Henceforth they will merge themselves, along with their
currency, into a vast new European State whose institutions – the Commission in
Brussels, the European Central Bank in Frankfurt, the Judges of the European
Court of Justice in Luxembourg and the European Parliament in Strasbourg – they
may occasionally influence but can never control and, except for 87 MEPs out of a
total of 626, have no power to elect.
22 Rediscovering progressive
economic policy outside EMU
Philip Whyman, Brian Burkitt and Mark Baimbridge
Introduction
As the previous chapters within this edited collection demonstrate, participation in
the European Union (EU) single currency will place a straitjacket upon UK macroeconomic policy and sovereignty, thereby increasing the difficulty of pursuing its
national interest. The model for Economic and Monetary Union (EMU) designed
by representatives from Europe’s central banks, and ratified by all member states in
the form of the Treaty on European Union (TEU) in 1993, seeks to impose a
particular institutional framework which restricts the flexibility of action of
individual countries in order to enable economic policy to be determined, or at
least coordinated, from the centre. Many economists (see, for instance, Jamieson
1998; Michie 1999; Minford 1999; Ormerod 1999b) argue that greater autonomy
for individual nation states, under the principle of subsidiarity, might provide a
more stable economic environment in which to pursue further cooperation
between countries. However, largely due to the political desire to tie members
more closely together, EMU seeks to progressively replace economic autonomy for
a nation state by the requirement to coordinate its economic strategy with the EU
norm, or else be subject to sanctions levied by the EU Commission (Pennant-Rea
et al. 1997).
Hence, EMU is an essentially political strategy based upon false economic
assumptions of cyclical and structural convergence. The national interest of the
United Kingdom requires the implementation of a long-run opt-out from EMU,
given that its participation is neither inevitable nor desirable. The central issue
therefore becomes, what framework is needed for the formation of macroeconomic
policy in a Britain outside the single currency on a permanent basis? An initial stage
is a national information campaign to acquaint the public and industry with the
factual consequences, the opportunities created and the dangers averted by opting
out. It should be supported by a detailed strategy for each British government
department, to enable them to identify the trade, financial and investment
opportunities arising from the creation of a euro-bloc. For instance, the City of
London will gain opportunities to trade in eurobonds, whilst British manufacturing
and service companies will enjoy competitive advantages from being free of the
costs of converting to, and implementing, the euro. However, this should only be
Rediscovering progressive economic policy 203
seen as merely an initial phase. It is vital for those advancing a progressive left
critique of Britain’s role within European integration to develop positive alternatives. It is this ‘vision’ of the future policy implications and general economic
strategies that would be ultimately instrumental in persuading people to reject the
straitjacket of EMU. Hence, this final chapter seeks to move the debate forward to
discuss two broad potential policy strategies for the United Kingdom outside EMU
and also re-emphasise the importance of retaining control over the exchange rate.
Positive alternatives to EMU participation
A decision to reject participation in the single currency would restore to national
government those economic instruments essential to the management of its
economy. Governments will be able to devise different economic programmes
and, once endorsed by the electorate, will possess the means by which to pursue
their chosen objectives. Democracy will, therefore, be restored, so that citizens can
once again enjoy the opportunity to choose the economic strategy pursued by the
government of the day, rather than it being dictated by unelected, unaccountable
central bankers based in Frankfurt. Moreover, governments will be able to pursue
a more balanced economic programme, pursuing the multiple objectives of full
employment, high economic growth and a sustainable balance of payments as well
as low inflation. The opportunities are substantial. To illustrate the broad range of
different policies that could be enacted, this chapter will outline two alternative
economic strategies that could be pursued, once a nation is freed from the
restrictive grip of the ECB and the requirements of the TEU. Additionally, we
discuss the development of an exchange rate policy that is critical to the successful
implementation of the outlined options for macroeconomic policy. The intention
is to demonstrate, not only that national economic management is still feasible
despite the arguments of supporters of the single currency, but also that it is
preferable to transferring the main levers of macroeconomic policy into the hands
of the ECB, which is incapable of using them consistently in the best interests of all
member states simultaneously.
Tight monetary policy – low interest rate strategy
The first potential economic strategy seeks to follow the framework established by
Alan Greenspan and the US Federal Reserve Bank, whereby national monetary
authorities (whether in the hands of an independent or democratically controlled
central bank) seek a higher long-term growth rate by providing a favourable
climate for industrial expansion through low inflation and hence reduced longterm interest rates. Fiscal policy is used to support the more dominant monetary
policy by restraining inflationary pressures, thereby reinforcing the low interest
rate objective. The globalisation of financial markets prevents governments from
‘persuading’ financial institutions to finance public sector borrowing at less than
the market rate. Consequently, the higher the level of public sector borrowing on
the international money markets, the higher the price for that borrowing in terms
204 Philip Whyman, Brian Burkitt and Mark Baimbridge
of long-term interest rates. This approach assumes crowding-out in the financial
markets due to limited resources for lending to prospective borrowers, because,
were banks to create money simply to meet the additional demand for funds so that
the supply of loanable funds was relatively elastic, interest rates would be
unaffected. However, the strategy seeks to reduce government expenditure in
order to reduce borrowing and hence interest rates.
In ‘hard’ versions of this strategy, the government endeavours to maintain a high
value for the currency in order to squeeze inflation further. The objective is
comparatively easy to accomplish if the country enjoys a trade surplus, because the
pressure on its exchange rate is upwards due to the country’s competitive position,
assuming the absence of speculative motives to counter this fundamental
relationship. However, since the United Kingdom typically suffers from a current
account trade deficit, a rise in short-term interest rates is needed to attract sufficient
short-term capital investment into UK securities to counterbalance trade-related
downward pressures on the currency, thus maintaining a high value for sterling.
However, these developments will impact upon long-term interest rates and thus
conflict with the fundamental goal of the strategy. Nevertheless, there is no reason
why sterling should not prove to be a stronger currency than the euro, particularly
due to the participation of high-inflation southern European member states and an
ECB forced to balance economic policy between conflicting needs (Baimbridge et
al. 1999a; Weber 1991b). The ECB will require time to establish its anti-inflation
credibility and to demonstrate that it can ensure the long-term stability of EMU.1
Moreover, unemployment remains the greatest economic problem for Europe to
solve; 13 of the 15 governments currently in power were elected on a left-of-centre
pledge to create jobs, so that it is only a matter of time before the ECB comes under
renewed pressure to loosen monetary policy. The departure of German Finance
Minister Lafontaine may have indicated an early victory for supporters of the independent ECB and the restrictive Maastricht rules, but it does not indicate which
viewpoint will ultimately prove the stronger.
‘Keynesian’ strategy
A second distinctive economic strategy involves the more active use of fiscal as well
as monetary policy in order to pursue both internal and external balance for the
economy. Internal balance refers to more than just low inflation, but also to low
unemployment and to high rates of economic growth. Accordingly, a mixture of
demand-side reflation and supply-side labour market policies, particularly measures
encouraging retraining and labour mobility, could reduce unemployment. Thus,
the net stimulative effect is targeted upon specific sectors of the economy which
most require assistance, rather than raising aggregate demand per se and creating
inflationary bottlenecks. Economic growth could be facilitated by the maintenance
of a competitive exchange rate through managed floating, perhaps based upon a
trade-weighted basket of currencies, together with tax incentives for firms which
increase productive investment. A mixture of fiscal and monetary policy could
restrain inflation; if this proved difficult to achieve, rather than abandon the other
Rediscovering progressive economic policy 205
internal objectives, governments could enact additional measures to restrain
inflationary pressures. These might include the temporary reintroduction of credit
controls, an incomes policy (tax-based or otherwise) or coordinated national
bargaining. Although currently unpopular amongst economists who prefer the
allocative efficiency of free markets, the reality of sticky wages and prices, due to
oligopolistic markets as much as the existence of trade unions, gives rise to the
possibility of market failure resulting in persistently high unemployment and
slower-than-trend output growth. In this case, government intervention is justified
to achieve a superior outcome. It is a fact that the majority of the world’s nations
still retain exchange controls to assist them to manage their economies, whilst
Ireland’s remarkable recent growth rates have been facilitated by ‘social contracts’
with trade unions to prevent wage pressures undermining its competitive position.
Finally, external balance can be achieved through the provision of a competitive
exchange rate, although structural problems in export sectors may require
supplementary supply-side measures to improve product quality and reliability
and to encourage a shift of resources to provide goods and services in growing
rather than stagnant markets.
The ‘Keynesian’ strategy is notably different from the first approach due to its
positive role for government action in wider areas of economic activity. Accordingly, an approach of this nature would probably be accompanied by an industrial
policy designed to enhance the long-run competitiveness of UK industry. An
analysis of trade flows indicates that Britain enjoys a comparative advantage in
financial and media services, and in those areas of manufacturing which rely upon
a high degree of scientific innovation, such as telecommunications, pharmaceuticals, aerospace, energy exploration and generation, biochemicals and
computer-related activity.2 In contrast, Britain is less competitive in lower valueadded manufactures, most notably in engineering and metalworking sectors.
Outside EMU, the UK government could strive to strengthen its competitive
position by enhancing the productive potential of already strong sectors through
targeted reductions in corporation tax, research and development, tax credits, and
greater spending upon education. Innovative research undertaken by universities
and publicly funded research centres requires prioritisation in terms of the
allocation of government resources if higher growth is to be forthcoming. Labour
market programmes designed to re-equip workers for the requirements of
industries with a competitive advantage ensure that their maximum growth
potential is not undermined by the lack of a skilled workforce, whilst facilitating the
shift of resources to more productive uses. The promotion of firms based in the
United Kingdom has the further advantage that it will substantially improve the
balance of payments position in the long run, whilst ensuring that the majority of
the improvements in living standards and profitability remain in the UK economy
and are not repatriated abroad by transnational corporations. Moreover, the trend
towards foreign-owned plants demanding ever-increasing ‘sweeteners’ to retain
production in existing plants raises the possibility that providing inexpensive
finance or development grants to UK-based firms might prove a cheaper
alternative that generates an improved long-term growth reward.
206 Philip Whyman, Brian Burkitt and Mark Baimbridge
Exchange rate policy
Over a period the desired objectives of exchange rate policy are short-term stability
and long-term flexibility. The dangers to avoid are long-term fixity and short-term
volatility. The only way of achieving these goals is a system that permits long-run
change whilst avoiding violent short-run fluctuations. Various policies are
available to secure this end, but membership of the euro prevents them being
implemented by establishing a permanent fixity which imposes deflation upon less
competitive national economies. Deflation does not reduce relative prices automatically; it does so by creating unemployment and stifling the future prospects for
economic growth.
The exchange rate between two currencies is a price like any other. Its movement enables the two economies to achieve trade and payments balance. If one
country’s exchange rate is overvalued (i.e. if a unit of its currency is worth too many
units of the other currency), its exports become more expensive in the foreign
currency, while imports become cheaper in its own currency. Therefore export
volumes tend to decline and import volumes to increase, so that eventually the
trade balance moves into deficit and unemployment rises. Conversely, when a
country lowers its exchange rate, exports became cheaper and expand, while
imports are constricted. The trade balance usually improves3 but at some
contemporary sacrifice of real income due to higher internal prices.
The correct level for the exchange rate at any one time is that which enables an
economy to combine full employment of productive resources simultaneously with
approximate balance of payments equilibrium. A higher exchange rate generates
overseas deficits and unemployment; a lower one leads to the build up of excessive
foreign currency reserves and domestic inflation. However, it has been emphasised
that this ‘correct’ exchange rate varies in value over time ( Jay 1990). The variety of
influences affecting economic performance (trade balances, productivity, price
movements, discoveries of natural resources etc.) combines to ensure that the
‘correct’ value of the exchange rate alters with the years. Therefore a country needs
to retain its ability to adjust the external value of its currency. To fix it irrevocably
forever, as compelled by EMU membership, is no less foolish than attempting to
maintain in perpetuity the rate of income tax or the price of oil. The endeavour to
do so generates economic inefficiency, usually in the form of accelerating inflation
or a rise in unemployment.
Consequently, Britain’s optimal strategy is to retain the national policy instruments required to increase its competitiveness in a socially acceptable manner. It is
essential that the United Kingdom retains control over its interest rate, uses Bank
of England intervention to smooth speculative fluctuations, encourages worldwide
cooperation (through the G8) between central banks and aims for the maximum
long-term exchange rate flexibility combined with the maximum practical shortterm stability. Under such a regime, the exchange rate fulfils its role as facilitator of
greater growth, higher living standards and full employment, without becoming an
end in itself.
There is always a rate of exchange that enables each country to employ its
Rediscovering progressive economic policy 207
productive resources fully. In an ever-changing environment, the rate frequently
alters to secure simultaneous full employment and trade balance. Therefore, when
formulating British economic policy outside EMU, any suggestion that the pound
should ‘shadow’ the euro must be rebutted. Such targeting makes domestic
objectives harder to achieve; in any case the pound moves more closely with the US
dollar than with any European currency. Over the past two decades the pound’s
fluctuations left it almost unchanged against the dollar. Today sterling is just 4.5
per cent below its average value in 1977, whilst lying very close to its average value
for the last 20 years as a whole. More recently, the pound has been relatively stable
against the dollar even in terms of short- run fluctuations; since leaving the ERM in
September 1992, the pound never moved outside a 13 per cent band between
$1.50 and $1.70. By contrast, its value against the Deutschmark oscillated
considerably, over a range of 35 per cent during the same period.
Misplaced criticism
Supporters of EMU argue that the degree of economic autonomy for the nation
state outlined here is illusory, because globalisation and the integration of financial
markets will not allow differences in economic policy to persist. Therefore the
United Kingdom might as well join the single currency. Indeed, many left-ofcentre supporters of economic and monetary integration profess the belief that
only as part of a new ‘Euroland’ can governments become sufficiently powerful to
operate a form of euro-Keynesianism without financial markets causing terminal
destabilisation via a currency crisis. However, both viewpoints are overstated. For
example, the experience of the UK economy between 1990 and 1992 demonstrated that being tied into a fixed exchange rate system at an uncompetitively high
rate leads to a fall in output and a rise in unemployment.4 However, departure from
the ERM and the subsequent 20 per cent depreciation in sterling resulted in the
resumption of economic growth, which facilitated a fall in unemployment to levels
last experienced two-and-a-half decades earlier. Thus arguments that economic
policy autonomy is impossible because of financial market integration are wrong,
because the United Kingdom’s strategy and performance were significantly
different from all other EU member states during this period; that is why it was so
comparatively successful. Devaluation gave UK firms a much needed increase in
competitiveness, which was not instantly lost due to inflation, as new classical
theorists claim, but instead provided government with a freedom of manoeuvre
that could have resulted in the adoption of either strategy outlined in this chapter or
a multiplicity of alternatives.
A second argument for EMU membership is the suggestion that the United
Kingdom’s European partners would engage in some form of trade protection,
which would deny British firms access to the single internal market and therefore
cause considerable damage to its economy, should the United Kingdom remain
outside the euro on a long-term basis. The argument is implausible. First, the
United Kingdom has suffered a substantial trade deficit with the rest of the
European Union since accession in 1973. Therefore, in the event of a trade war,
208 Philip Whyman, Brian Burkitt and Mark Baimbridge
our EU ‘partners’ would lose the most. Second, any such protectionist measures
would fall foul of the Treaty of Rome, the Single European Act, the TEU and the
World Trade Organization’s regulations. All are international treaties, binding
their signatories to respect reciprocity of trade.
Another argument favouring membership of the single currency is that frequently
associated with Tony Blair, namely that it will provide the United Kingdom with
additional political influence over the future development of the European Union.
Independence, according to the argument, equals powerlessness.5 However, the
claim is spurious. Whilst the participants in the single currency may opt to discuss
their common economic policy apart from other EU member states, there is no
legal mechanism for any other decisions to be taken in this way. Thus the United
Kingdom cannot be marginalised simply due to its non-participation in the single
currency. Moreover, its position would be strengthened further by consultation
and cooperation with other EU member states who have exercised their opt-out
(Denmark and Sweden) or been deemed too divergent for immediate membership
(Greece). Further enlargement of the European Union will increase the number of
member countries incapable or unwilling to sacrifice other policy objectives for
conformity to EMU’s ‘one size fits all’ policies. When such uniform monetary
measures create areas of high structural unemployment, as they inevitably will, it is
essential for opt-out nations to possess a collectively pre-agreed strategy of vetoing
any plan to provide EU-wide aid to those areas. Problems created by the euro’s
operations should not be the responsibility of non-participants, but should be
wholly financed by those embracing the single currency. Additionally, because all
historical monetary unions not based upon political union have collapsed amidst
substantial economic difficulties, these non-members would be wise to encourage
the European Union to formulate a contingency plan for the re-establishment of
individual currencies if (or when) the demise of the euro occurs.
In reality, Britain enjoys an effective long-run choice concerning its future
strategy; it can embrace an essentially European identity or, if it decides to opt out
of the euro, it can pursue a global strategy. By remaining outside EMU, the United
Kingdom would avoid its damaging consequences. Moreover, the advantages of
free trade within the European Union and the imposition of a common external
tariff on outside imports have become progressively smaller since 1973, as
restrictions on trade have been steadily diminished worldwide. Under the auspices
of the General Agreement on Tariffs and Trade (GATT) and its successor, the
World Trade Organization (WTO), the average tariff on industrial goods between
developed countries has been reduced to just 3.8 per cent. As the millennium
approaches, the industrialised nations are closer to the free trade ideal than they
have ever been. In this gradually emerging new world economy, access to the EU
single internal market for UK business is assured.
Britain need not fear that a long-term disengagement with movements towards
further EU integration will lead to a powerless isolation. Britain is a member of the
G8 industrial nations; its economy ranks as the fifth largest in the world and the
third largest in the European Union. It is a member of the World Bank and the
International Monetary Fund. It possesses a seat on the United Nations Security
Rediscovering progressive economic policy 209
Council and remains the head of the Commonwealth, whose potential for
expanded trade has recently been grossly neglected (West 1995; Burkitt et al. 1996).
Moreover, Britain enjoys a substantial portfolio of overseas assets and investments,
and attracts the highest level of inward investment in the European Union. It is the
world’s second largest financial centre and global investor. It has more companies
in the world’s top 500 than any other EU country. The United Kingdom is well
placed to be one of the most dynamic and innovative global economies (Taylor
1995).
Among Britain’s greatest assets, underpinning its global economic effectiveness,
is the English language. More than 1,400 million people live in officially Englishspeaking countries. One in five of the world’s population speaks English. By next
year, more than a billion will be learning it. It is the main language of books,
newspapers, international business, academic conferences, science, technology,
diplomacy and the Internet. Of all electronically stored information, 80 per cent is
in English.
The widely held view that Britain has ‘no alternative’ but to participate in European integration is at odds with the facts. Instead a range of possible alternatives
exists. Britain could remain an EU member and secure, under WTO rules, free
trading arrangements with the EMU-zone through a series of mutually beneficial,
bilateral agreements. It could explore the possibility of a closer relationship with
the North American Free Trade Association, as recently suggested by Canadian
opposition leaders. Now that formal negotiations have been launched to establish a
free trade pact between Canada and the European Free Trade Association
(Norway, Switzerland, Iceland and Liechtenstein), the United Kingdom could
follow the same procedure. Above all, it should intensify its trading and investment
links with the Commonwealth and the nations of the Pacific Rim. In these ways
Britain would be able to pursue its true contemporary role of global trader and
investor, while at the same time retaining its scope for a largely autonomous
economic and social policy, such as the two possible strategies detailed above.
Furthermore, outside the single currency, the choice between and among such
strategies would be taken through the democratic process.
Conclusion
The design of a macroeconomic framework for a complex advanced economy
depends upon a multiplicity of diverse factors, including recognition of its unique
industrial structure, monetary and fiscal policy transmission mechanisms, the
practice of wage formation, propensity for owner-occupation, national savings
rates and technological progress. A combination of differences in consumer tastes,
political choices, natural resources and centres of competitive excellence, together
with the actions of institutions established to implement economic and social
policy, necessitates differences in economic policy between nations. For example,
the labour market operates very differently in the USA, where non-collective
bargaining is the rule, than in Sweden, where trade union representation is close to
saturation at 90 per cent density, irrespective of whether their fiscal or monetary
210 Philip Whyman, Brian Burkitt and Mark Baimbridge
authorities followed a similar strategy. Moreover, exchange rate regimes tend to
have a greater impact upon smaller, export-orientated nations than upon their
larger neighbours, where only a relatively small proportion of GDP is traded.
Consequently, it is extremely difficult for one international economic authority to
replace national macroeconomic management by one common interest or
exchange rate. This is not a particular design fault of the Maastricht version of
EMU, although its preoccupation with stable prices will likely result in a larger
dose of deflation across the Continent than would be the case if the ECB was
charged with a more balanced agenda. It is simply that many economies of EU
member states are too divergent cyclically and structurally from their neighbours
for any claim of prior convergence to be convincing and, without such evidence, a
common economic strategy is unlikely to be simultaneously in their individual
interests.
In view of such fundamental weakness at the heart of the EMU project, the
decision to reject participation retains for national government the economic
instruments vital to successful macroeconomic management. Exchange rates can
fulfil their function of equalising the demand and supply for a currency by the
variation of its price, thereby preventing a basic uncompetitive imbalance from
causing mass unemployment and falling standards of living. Fiscal policy, freed
from the twin restrictions of the MCC and the Stability and Growth Pact, can
smooth cyclical fluctuations, avoiding periodic unemployment that wastes productive resources and generates associated human misery. The purpose of monetary
policy is, then, to prevent unstable boom and slump conditions in housing and
financial markets, whilst seeking to ensure a low interest rate for investors in
productive capital. Supply-side policies, including selective labour market
programmes and investment in the economy’s physical and IT superstructure, do
not require a rejection of the single currency to be applied, although the benefit of a
macroeconomic structure tailored to the needs of the economy would provide a
more fertile environment for their implementation. Thus, rather than being
weakened by the refusal to be dominated by an EMU agenda, which will often
conflict with the interests of its economy, the United Kingdom would both be
stronger and possess a superior ability to adapt to changing international market
conditions. In the process democratic choice would be enhanced, rather than
withdrawing the ability of citizens to influence the policies pursued by the ECB
nominally on their behalf. Furthermore, it might encourage the United Kingdom
to end its undue preoccupation with events in a small corner of the European
continent at the expense of a vigorous attempt to meet the growing demands of
emergent markets across the globe.
In view of the overwhelming evidence supporting the maintenance of national
self-determination of economic policy, two factors remain to provide the momentum towards EMU participation. The first relates to the determination of a small
political elite, together with the representatives of multinational corporations, to
complete the European integration project; the former perhaps seek the increased
influence a ‘United States of Europe’ would play in world events, whereas the latter
desire to evade national regulatory regimes and thereby enhance profits. However,
Rediscovering progressive economic policy 211
these small elites are neither representative of the wider British electorate, nor even
of the majority of business. Indeed, two of the three main UK business organisations, the Institute of Directors and Small Business Federation oppose EMU entry,
whilst only the Confederation of British Industry, the group which tends to reflect
the interests of large corporations, supports UK membership of single currency
despite its membership being deeply split on the issue. In a democracy, governments should act in the interests of all the people, which requires the rejection of
abandoning national economic policy.
The second factor undermining the vigorous assertion of national independence
is the fear of failure. The notion of the United Kingdom as a declining nation has
long sapped its resolve to follow its own interests and has caused many to prefer
safety in ‘Fortress Europe’, with economic policy dictated by outside ‘experts’. Yet,
as illustrated in this chapter, this is a dangerous illusion which will further weaken
the UK economy, which remains the fifth largest in the world and possesses the
significant potential for accelerated growth if freed from the restrictions imposed
by the EMU integrationist process. Fear is the enemy of innovation and change,
yet great is the prize in terms of enhanced economic prosperity and restoring
democratic choice to the British electorate.
Notes
1 Kydland and Prescott (1977) argue that rules or pre-commitment are more relevant
when the monetary and fiscal authorities enjoy a reputation for discipline and consistency over time, whereas discretionary policy is more appropriate when such credibility is
lacking.
2 It is worth noting that the international price structures of many of these key products
are denominated in US dollars. Moreover, the euro is likely to have a more volatile
medium-term relationship with the US dollar than sterling has experienced since the
UK’s withdrawal from the ERM in September 1992.
3 The converse occasionally occurs, if import and export volumes do not change
sufficiently to offset the price movements; the Marshall–Lerner condition states that the
trade balance will improve when the sum of the elasticities of demand for exports and
imports exceeds unity.
4 One estimate, made by Burkitt et al. (1996), concluded that the UK’s two-year
membership of the ERM cost an estimated £68.2 billion in 1992 prices (equivalent to
11.5 per cent of UK GDP), in terms of lost output, and one-and-a-quarter million more
unemployed.
5 A related, but separate, argument that the United Kingdom will lose its world influence
if it remains outside EMU is the direct opposite of the truth. If subsumed into EMU, the
United Kingdom will be seen as a duplicate mouthpiece for EU interests and there will
be pressure for the European Union to replace British, German and French individual
participation on international bodies including the UN, IMF and G8. A distinct British
influence over world events will, under such circumstances, be far smaller.
Glossary
Amsterdam Treaty The Amsterdam Treaty of 1997 introduced a number of
institutional reforms, incorporated the CFSP and Social Chapter into the European
Union, and introduced the concept of variable geometry.
Asymmetric and symmetric external shocks External shocks refer to the impact
upon the domestic economy generated by activities beyond the control of the UK
authorities, for example a sudden rise in oil prices or change in global demand for raw
materials. If an external shock has a similar effect upon a given group of countries, it is
said to be a symmetric shock, since the policy response will be largely the same for all
countries. Asymmetric shocks, alternatively, refer to those changes in the external
environment which have significantly different effects upon different countries,
requiring very different policy responses by each country in order to respond effectively.
Bundesbank German central bank – equivalent to the Bank of England, although
operating with greater independence from government.
Common Agricultural Policy (CAP) EU agricultural support scheme which accounted
for a majority of the EU budget until 1997. The protection of EU food producers has
led to food prices in EU countries rising significantly higher than world prices.
Common Fisheries Policy (CFP) Under the Treaty of Rome, fish and fish products
are considered as agricultural products. Consequently, the CFP is based on the same
principles as the CAP.
Common Foreign and Security Policy (CPSP) The CFSP was one of the intergovernmental pillars of the Maastricht Treaty, subsequently incorporated into the
European Union by the Amsterdam Treaty. The CFSP (which incorporates the
Common European Security and Defence Policy) has resulted in a new EU security
doctrine, EU police missions in Bosnia, EU-led military operations in the Congo and
Macedonia, a European Defence Force, a European Armaments Agency, and an
independent EU military planning unit.
Cyclical and structural convergence Economic convergence refers to potential
EMU participants becoming economically similar prior to membership. Cyclical convergence occurs when the business cycles of boom and recession become increasingly
similar amongst participating economies, so that a recession in the UK would occur
approximately at the same time as a comparable slowdown in Germany, rather than
one or two years in advance as at present. Similarly, structural convergence refers to
changes in the industrial and financial structure of the participating economies which
have the effect of ensuring similar reactions to external forces over the long term.
Deflation/Reflation Deflation may be defined as a reduction in economic activity in the
Glossary
213
economy which is associated with a sustained fall in inflation, output and employment.
Reflation refers to an increase in economic activity which stimulates output, employment and inflation in varying degrees.
Devaluation/revaluation/overvaluation Devaluation refers to a reduction in the
value of a given currency relative to others, whilst revaluation concerns an increase in
the exchange rate. For example, when the exchange rate on a given day was £1 equals
$1.67, if the value of sterling increased so that £1 could now buy $2 worth of goods, the
value of the pound would be said to have appreciated, whereas if the value fell to $1.5,
sterling would be said to have fallen in value or devalued. Overvaluation refers to the
circumstance where the value of sterling is so high that British exporters find it difficult
to compete and could lead to a trade deficit where more is imported than exported. An
overvaluation could lead to recession as export companies reduce output and lay off
workers. This then may spread to the remainder of the economy.
Direct elections The European Assembly, composed of nominated national parliamentarians, was transformed into the European Parliament in 1979 as a result of elections
by direct universal suffrage across the European Union.
Economic and Monetary Union (EMU) The European Council accepted Delors’
EMU plan in June 1989. Following an intergovernmental council on economic union
and another on political union, the Maastricht Treaty was agreed in December 1991.
The treaty set out the three stages of EMU, detailed the convergence criteria for EMU,
granted the ECJ the power to fine member states, expanded the European Parliament’s
powers, provided for EU citizenship, established the statute of the European Central
Bank and extended EU competence into new policy areas. As a matter of definition,
monetary union occurs when exchange rates are permanently and irrevocably fixed and may
therefore precede the introduction of a single currency. However, the two terms are
generally used interchangeably. Economic union involves a further transfer of macroeconomic policy to the federal level – particularly monetary policy but typically also
coordination of fiscal policy within prescribed limits.
European Central Bank (ECB) Superseded national central banks in those EU nations
participating in EMU. Based in Frankfurt, the ECB is in sole charge of exchange rate
and monetary policy for all EMU countries, setting one common interest rate which
will apply irrespective of the particular needs of individual countries at any period of
time. Its sole policy goal is to achieve price stability and there is no similar responsibility
to assist employment creation or economic growth. Policy conflict between the ECB
and the wider economic responsibilities of individual governments is difficult to resolve
since the ECB is beyond the control of both member states and the EU Commission.
European Company Statute (ECS) Still under discussion, this would enable
companies to register at EU, rather than national, level.
European Constitution The Convention on the Future of Europe was established in
2002 and produced a draft EU constitution in 2003. However, disagreement over the
European Council voting system, the mutual defence clause, economic, defence and
foreign policies, the size of the European Commission, Britain’s budget rebate and the
status of God in the constitution proved insurmountable. For the first time, the intergovernmental council held in 2003 was a failure. However, following further negotiations, a European Constitution was agreed in 2004. It grants the European Union a
legal identity, reforms EU decision making, creates the posts of EU Foreign Minister and
President and extends majority voting to 30 new policy areas.
European Council This is the executive of the European Union, composed of heads of
state or government of member states.
214 Glossary
European Monetary Institute (EMI) The forerunner of the European Central Bank
(ECB).
European System of Central Banks (ESCB) The central banks of all member states
participating in EMU act as subsidiaries of the ECB, implementing its policies.
European Union (EU) Formally the European Community (EC) and Common Market.
The change of name occurred after ratification of the Maastricht Treaty and signified a
changed relationship between the 12 (now 25) participating nation states (called
member states in EU terminology), from a loose trading community to a federal state
with one currency and one central bank, with discussion of parallel moves towards
political union.
European Works Councils (EWCs) Originating from an EU Directive, EWCs are to
be established in large multinational European companies based in one or more
member states, in order to encourage consultation with, and between, workers from all
productive units.
Euro-X Committee A committee of those member states participating in EMU whose
discussions may include market-sensitive preferences for interest and exchange rates.
Excessive Deficit Procedure (EDP) The EDP is a feature of the Maastricht Treaty,
whereby a budget deficit is deemed excessive if it exceeds 3 per cent of GDP, and if
government debt exceeds 60 per cent of GDP.
Exchange Rate Mechanism (ERM) Introduced as part of the European Monetary
System in 1979 as a means of minimising currency fluctuations. Each currency is
allowed to fluctuate against the others by an agreed margin around a set of bilateral
central rates. If the currency approached its top or bottom limit, then national central
banks intervened to bring the currencies back into line.
Fiscal federalism Involves a redistribution of resources from more successful to weaker
regions of a federal state or, in the case of the single currency, between regions or
member states participating in EMU. In practice, fiscal federalism acts in a similar
manner to regional transfers in a nation state, whereby it seeks to stabilise the entire
EMU by reducing inflationary pressure in booming areas and kick-starting recoveries
in depressed areas through a transfer of tax revenue from the former into public
expenditure (or a tax cut) in the latter. Fiscal federalism may, therefore, assist
macroeconomic management, particularly due to the existence of regional spill-overs
or externalities, thereby preventing individual regions from going it alone. It may also
aid social cohesion by acting as an inter-regional public insurance scheme, preventing
unlucky areas from bearing a disproportionate financial burden.
Fiscal policy Refers to the interaction between government expenditure and taxation.
Under EMU, fiscal policy will remain under the control of national economic
authorities, although constrained by the Maastricht Convergence Criteria (MCC) and
the Stability and Growth Pact (SGP) rules.
G7 An informal grouping of seven of the largest industrialised economies (USA, Canada,
Germany, France, UK, Australia and Japan). Russia has occasionally been invited to
participate in recent summits, giving rise to G8.
Gilts A gilt is a promise by the government to pay interest on a loan which it has raised
from the capital markets, with the loan becoming fully repayable at the end of an agreed
period, i.e. gilt-edged security.
Gold Standard A currency arrangement whereby the central bank is obliged to give a
fixed amount of gold in exchange for its currency. If a number of countries all fix their
currencies relative to gold, they must, by definition, fix their exchange rates amongst
themselves. The Gold Standard that existed between the majority of industrialised
Glossary 215
economies during the 30 years or so before the First World War, imposed certain rules
upon participating economies, the most important of which was a distaste for debasing
the currency by devaluing. Moreover, a participating nation that experienced a balance
of payments deficit would have to take corrective deflationary action, thus preferring
external over internal balance. The increased international volatility caused by war
conditions terminated the system, and its replication in 1925 was disastrous for the
United Kingdom as it occurred upon pre-First World War parities which no longer
represented the economic balance between nations.
Gross Domestic Product (GDP)/Gross National Product (GNP) These are two
methods of measuring the value of the total flow of goods and services produced by an
economy over a specified period of time – usually a year. The difference between the
two is that GNP equals GDP plus net income earned by domestic residents from
overseas investments.
Intergovernmentalism This refers to institutional arrangements and decision-making
procedures that allow governments to cooperate in specific areas while retaining their
sovereignty.
International Monetary Fund (IMF) Established in 1944, by 2004 it possessed 184
members. It is intended to encourage international cooperation in monetary matters
and the removal of foreign exchange restrictions. Members are required to contribute a
quota calculated upon the basis of GDP, and this fund can then be utilised to help
members over temporary balance of payments difficulties, although usually in parallel
with adopting corrective economic policies, such as domestic deflation and devaluation, which are intended to stimulate exports and reduce imports.
Lisbon Agenda The Lisbon Summit in March 2000 set a new strategic goal for the
European Union: to become the most competitive and dynamic knowledge-based
economy in the world, generating 15 million jobs by 2010. The strategy, based on
economic reform through increased competition and on social reform through the
modernisation of the European social model, identified the construction of a single
financial market, full implementation of the Single Market, and welfare state reform as
its key instruments.
Maastricht Convergence Criteria (MCC) Established by the Treaty on the European Union (Maastricht Treaty) to ensure economic convergence amongst potential
participants prior to their entry to EMU, there are five criteria which each country must
achieve before they are permitted to participate in the single currency. They are: (i)
each country’s rate of inflation must be no more than 1.5 per cent above the average of
the lowest three inflation rates in the EMS; (ii) its long-term interest rates must be within
2 per cent of the same three countries chosen for the previous condition; (iii) it must
have been a member of the narrow band of fluctuation of the ERM for at least two years
without a realignment; (iv) its budget deficit must not be regarded as excessive by the
European Council, with excessive defined to be where deficits are greater than 3 per
cent of GDP for reasons other than those of a temporary or exceptional nature; (v) its
national debt must not be excessive, defined as where it is above 60 per cent of GDP and
is not declining at a satisfactory pace.
Monetary policy Typically concerned with the level of interest rates, the availability of
credit, banking regulations and the control of the money supply by the central bank.
Under EMU, monetary policy will be transferred from national authorities to the ECB.
Nice Treaty The Nice Treaty of 2001 reformed EU decision making, extended qualified
majority voting to 27 new policy areas and provided for enhanced cooperation and thus
for the development of a two-speed Europe.
216 Glossary
Nominal and real wage rigidity Nominal wages refer to money wages, whereas real
wages refer to the purchasing power of those wages. Thus, a 3 per cent rise in nominal
wages during a period of 2 per cent inflation produces a 1 per cent rise in real wages.
Wage rigidity refers to a situation where wages are observed not to be perfectly flexible
in response to a change in economic circumstances, for example if wages should fail to
fall sufficiently to price people back into work during a recession.
Non-accelerating inflation rate of unemployment (NAIRU) NAIRU is the rate of
unemployment, whether it is 1 per cent or 8 per cent, where inflation remains stable.
The importance of this measure is that, if unemployment falls below its NAIRU rate,
inflation will accelerate, whilst if above the NAIRU, inflation will fall.
Optimum currency area (OCA) theory This theory is utilised by economists to
identify those factors which indicate the optimum size of a currency arrangement. Consequently, the theory proposes that objective tests can be employed to decide whether it is
in the common interests of, for example, Ireland and Italy, or France and Germany,
that they should join together in EMU, or whether it is to their mutual advantage to
retain separate currencies and monetary systems. Similarly, the theory could be used to
identify whether regions, rather than countries, should form a currency union. Thus, the
south-east of England may have more in common with certain wealthy regions of
Germany and France than either Wales or Northern Ireland, and in theory it may make
economic sense to form a currency arrangement accordingly. In practice, however,
whilst nation states remain the principal form of government for the majority of the
world’s population, OCA theory will be concerned in deciding where monetary
integration should and should not be formed between groups of countries.
Organisation of Economic Co-operation and Development (OECD) The rich
nations’ club, based in Paris, famous for economic research and forecasting.
Qualified acceptance This is a procedural device used by the Labour leadership to
neuter Annual Conference policy decisions.
Qualified Majority Voting (QMV) A method of voting used in the Council of
Ministers, whereby votes are allocated to member states according to the size of their
population, and a certain number of assenting votes is required for a measure to be
adopted.
Remitted Remitting is a procedural device, whereby the mover of a motion/resolution
at the Annual Conference is requested to pass it to the executive committee for
consideration. If the mover refuses, the executive committee usually asked the Annual
Conference to reject it.
Schuman Plan Proposed the integration of Europe’s coal and steel industries, which led
to the European Coal and Steel Community (ECSC).
Single European Act (SEA) The 1986 Single European Act introduced the single
internal market, but also extended qualified majority voting within the Council of
Ministers and further committed the European Union to ‘the objective of the progressive realisation of European and Monetary Union’.
Single European Market (SEM)/Single Internal Market (SIM) Resulting from
the 1986 Single European Act, the Single Market refers to the removal of trade, capital
and physical barriers across Europe, supposedly achieved by 1 January 1993, which
allows free competition across the entire EU market. Britain argued that the creation of
a European single market could be achieved through a non-legal agreement with
implementation proceeding on the basis on unanimity, thus preserving the national
veto. However, the British proposal was defeated and an intergovernmental conference
was convened to revise the founding treaties of the European Union. The price for the
Glossary 217
creation of the Single Market was the Single European Act of 1986, which extended
qualified majority voting to 12 new policy areas, whilst committing its signatories to
EMU.
The Six In 1951, the original members of the European Union – Belgium, France, Italy,
Luxembourg, the Netherlands and West Germany, known as the Six – proceeded to
establish the European Coal and Steel Community.
Social Charter/Social Chapter The Social Charter (actually the 1989 Charter on the
Fundamental Social Rights of Workers) was agreed as a separate social protocol and
was signed by 11 member states during the Maastricht Treaty negotiations. It was
subsequently incorporated into the European Union, as a Social Chapter of the
Amsterdam Treaty.
Social Dialogue A decision-making process whereby the social partners (representing
employers and labour) agree new social policy legislation.
Stability and Growth Pact (SGP) Proposed by Germany to avoid excessive fiscal
profligacy by individual member states within EMU, the SGP limits budget deficits to 3
per cent of GDP (as with the MCC prior to membership). If this limit is ignored, and the
country is not in recession (defined as GDP falling by 0.75 per cent), fines of between 0.2
and 0.5 per cent of GDP will be levied by the EU financial authorities. The Stability and
Growth Pact additionally suggests that budget deficits be limited to 1 per cent of GDP
in the long term, thus increasing fiscal tightening.
Supranationalism This is government by institutions operating over and above nation
states.
Three-year rule This is a procedural device created to avoid the reaffirmation of a policy
for three years following its adoption by Labour’s Annual Conference.
Variable geometry/Two-speed Europe This allows member states to proceed
towards integration at differential rates.
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Political Economy, 4 (1), 55–75.
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Index
Page references to tables and figures are shown in bold, e.g. barter card 162
accession countries 65–8
Accession, Treaty of (1972) 21
accountability 119–20, 121; of British
governments 170
acquisitions and mergers 150–2
advanced technology structures 100
AES (Alternative Economic Strategy) 23, 25
aggregate demand 97, 99
Alternative Economic Strategy (AES) 23, 25
Americanisation 89
Amsterdam Treaty (1997) 31, 171, 197, 212
Annual Conferences (Labour Party): debates on
EU (1947–1987) 27–8; debates on EU
(1988–2000) 29
Anzilotti, Judge D. 171
Arestis, Philip 5–6, 58
Argentina 161, 164; barter card 162
Arthur D. Little (consultancy firm) 160
Arts, W.A. and Gelissen, J. 106
Asia: living standards 72; trading block 101; US
power in 164
asymmetric shocks 212
Atkinson, D. 35
Baimbridge, M. 6, 93–4, 204
balance of payment deficits 46–7
Balanyá, B. 35
Bank of England, independence of 31, 41, 180
banks, and corporate governance 151; see also
central banks; European Central Bank
Barratt Brown, M. 35
barriers, to trade 72, 150
Barroso, José Manuel 114
barter card 162
barter clubs 161–2
BBC, Referendum Street (TV programme) 182–3
benefits see costs and benefits
Benn, Tony 11, 35, 186–8; referendum
campaign 21, 30, 31, 157, 187, 188, 195
Bevin, Ernest 16
Blair, Tony: opposes EU bonds 31; pro-EU
agenda 31, 85, 138, 143; pro-euro agenda
111, 112, 116, 199; pro-federalism of 196,
197
Bolkstein, Frits 128
borders, cross-border investment 150
Boyle, D. 161
Britain see United Kingdom
Britain in Europe campaign 112
Brown, George 18
Brown, Gordon 86–7, 88, 121, 134; EMU and
sovereignty 168, 169, 171; euro entry and
sovereignty 181, 182; pro-federalism of 196
budget, federal 67, 68–9
budget rules 120
Bundesbank 212
Burkitt, Brian 7–8, 10, 34, 35, 63
Bush, Janet 6
business organisations 211; see also firms;
international markets; multinational
corporations; trade
Callaghan, James 21, 22, 23
campaigns see Britain in Europe campaign;
referenda
CAP (Common Agricultural Policy) 89, 212
capital accumulation 134
capital spending, reduction of 87, 88
carbon dioxide emissions 163
Carey, A. 36
Cato, Scott 10
Ceccini report 69
central banks: independence of 78, 80–3;
see also Bank of England; European Central
Bank
Centre for a Social Europe 110, 133
Cerny, P.G. 143
CFP (Common Fisheries Policy) 89, 212
Charter of Rights (Commonwealth of Europe
Bill) 194–5
Churchill, Winston 40
Ciampi, Carlo 199
Index
Clarke, Kenneth 68
Common Agricultural Policy (CAP) 89, 212
common currency 160–2
Common Fisheries Policy (CFP) 89, 212
Common Foreign and Security Policy (CPSP)
212
Commonwealth of Europe Bill (1992) 11, 30,
188–95
conferences see Annual Conferences
Conservative Party: anti-European stance 178,
180, 197; Labour’s opposition to
Conservative entry terms (1971) 20–1;
opposition to single currency 60; proEuropean stance 1–2, 118–19; proposals on
FTAs 17
Constitution: and British sovereignty 176; see
also European Constitution; sovereignty
corporate governance, and EMU 149–52
corporations see multinational corporations
cost of living: effects of entry on 19, 20; see also
living standards
costs and benefits, of EU membership 34–5,
71–6, 119–20, 122, 124–31, 200
CPSP (Common Foreign and Security Policy)
212
credibility, of monetary policy 79
Crow, Bob 110
cumulative causation 96–7
currencies: common and alternative 160–2; the
dollar 163–4; euro as alternative to dollar
164; pound sterling 168, 178, 181, 183, 207;
see also euro; exchange rate
cyclical convergence 212
Davidson, Ian 115
de Gaulle, Charles 18, 19
Deakin, S. 42
debt, external 164, 165
deflation 94, 178, 212–13; and cumulative
causation 96; see also Maastricht
Convergence Criteria
degrees of independence 80
Dehaene, Jean Luc 198–9
Delors, Jacques 25, 48, 105, 138
demand, and supply 98
democracy: and the ECB 54; in a federal
Europe 36; loss of 130–1, 175, 176; and
new EU memberships 73; parliamentary
169–70
Denmark 73
devaluation 100, 173, 181–2, 213
developing countries 162; external debt of 165
differential shocks 55
differentials, in earnings 162
direct elections 213
dollar: as international currency 163–4; value
of, against the pound 207
Douthwaite, Richard 163–4
Duisenberg, Wim 166, 199, 200
Dyson, K. 147
231
earnings see wages
eastern Europe, monetarism in 65–8
Eatwell, John 25
EBRD (European Bank of Reconstruction and
Development) 66
EC (European Commission) 69–70, 134
ECB (European Central Bank) 41, 77–89, 213;
accountability of 119–20; and EMU 2, 52;
monetary policy and inflation control 54–5,
58–9, 63–4; price stability and
unemployment 94; privatisation agenda 61;
and the single currency 77–84
economic growth see growth rates
Economic and Monetary Union see EMU
economic shocks 148, 212
‘The Economist’ (journal) 64, 150, 151
economy/economic policy: alternatives to
EMU 203–7; alternatives to neo-liberal
policies 135–6; alternatives to single
currency 202–3; autonomy of, and
globalisation 100–1, 207; economic
consequences of single currency 39–51,
120–1; economic costs of EU membership
35, 119–20, 178; economic flexibility 114,
121, 160, 165; and EU Constitution 126–7;
impact of EMU 140–1; non-economic
factors and monetary policy 80; problems
associated with ESM 108–9; sovereignty as
economic issue 177–8; see also fiscal policy;
monetary policy; trade
ECS (European Company Status) 213
Edmonds, J. 105, 106, 139
EDP (Excessive Deficit Procedure) 214
EEC, British entry into 177–8
EFTA (European Free Trade Association) 17
EIB (European Investment Bank) 58
Eichel, Hans 114, 198
Eichengreen, B. 58
Elections: as democratic right 170; direct
elections 213; and representative politics
172; results of, and the economy 181
Electorate: labour no vote on euro 111–16;
rights and protection of 170; sovereignty and
the euro 175, 176–7, 178, 179, 182–3
Elliott, L. 6–7, 35, 165–6
Eltis, W.A. 99
EMI (European Monetary Institute) 214
employment: Keynesian and post-Keynesian
policies for 97, 98; security of 114; see also
labour market; unemployment; workers
EMS (European Monetary System) 23
EMU (Economic and Monetary Union) 52–9,
213; arguments for and against 2, 207–9;
and British sovereignty 168–74; and British
trade unions 137–44; establishment of 94;
macroeconomic impact of 145, 146–9;
microeconomic impact of 145–6, 149–52;
neo-liberalist policies 62–5; opt-out and
alternatives policies 11, 203–7, 209–10;
and a post-Keynesian strategy 95, 98–100,
232 Index
100–1; social and political costs of 148–9;
sustainability of 51
energy supplies 129–30
entry (to EU/euro)arguments against 196–201;
support for 17–20, 184; terms of 177–8;
terms renegotiated 21–2, 187; see also
federalism; sovereignty
environmental costs 160
environmental policies 130, 173
Erhard, Ludwig 108
ERM (Exchange Rate Mechanism) 23, 39–41,
92–3, 214; TUC support for 138
ERT (European Roundtable of Industrialists)
158
ESCB (European System of Central Banks) 214
ESM (European Social Model) 7–8, 105–10,
145–53; as alternative to US capitalism
model 35, 138; and denationalisation 126;
trade unions support 138–9, 143
Esping-Andersen, G. 106
ETUC (European Trades Union Congress)
138, 139
EU bonds 30–1
EU (European Union) 214; Britain’s future in
118–23; EU reform (1976-1979) 22–3;
failure of 85–90, 180; independent foreign
policies of 136; Labour Conference debates
on 26–9; limits parliamentary democracy
170–3; membership costs and benefits 34–5,
71–6, 119–20, 122, 124–31, 200; opposition
to entry 17, 20–1, 124–31, 186–8; policies
on unemployment 48–50; and the US 132–3
the euro: as alternative to dollar 164; benefits
of, for potential members 71–6; and British
sovereignty 176–7, 179–80, 181, 182–5; and
EU membership 123, 152; European
adoption of 197; impact of minimum wage
on 143; and international issues 157–67;
New Labour policies on 32, 111–16; and the
poor world 162–5; referenda on 115, 116,
182–3, 184, 200–1; value of 94–5; and
welfare state 165–6; see also single currency
Euro-Africa plan 16
Euro-X Committee 214
European Bank of Reconstruction and
Development (EBRD) 66
European Central Bank see ECB
European Commission (EC) 69–70, 134
European Company Status (ECS) 213
European Constitution 213; Constitutional
Treaty 65; debate on 119–20, 122, 135;
New Labour policy on 32–3; trade unions’
views on 124, 127, 129–31
European Convention on Human Rights 18
European Council 187–8, 213
European Economic Community 177–8
European Free Trade Association (EFTA) 17
European Investment Bank (EIB) 58
European Monetary Institute (EMI) 214
European Monetary System (EMS) 23
European Parliament 159; British votes in 175
European policy, of Labour Party and Foreign
Office (1945–2004) 13–16
European Roundtable of Industrialists 158
European Social Model see ESM
European System of Central Banks (ESCB) 214
European Technology Community 186–7
European Union see EU
European Works Councils (EWCs) 141–2,
214
euroscepticism, progressive 2, 3
EWCs (European Works Councils) 141–2, 214
Excessive Deficit Procedure (EDP) 214
exchange controls: abolishment of 44–5;
establishment of 92; and globalisation 100
exchange rate 40, 55, 182, 183; flexible
exchange rate regime 148–9; and UK
economic policy 206–7, 210
Exchange Rate Mechanism see ERM
external shocks 212
Far East 163–4
Fatas, A. 56
federal budget 67, 68–9
federalism 17, 169, 172, 196–201; fiscal
federalism 67–8, 68–9, 214
Figaro (newspaper) 166
final salary pension 127–8, 129
firms: ESM and corporate control 149–52; in
UK, and the euro 158, 159
fiscal federalism 67–8, 68–9, 214
fiscal policy 214; and abolishment of exchange
control 44–5; alternatives to EMU 204–5;
and failure of Europe 85–90; harmonization
with monetary policy 67–8; and inflation
control 54; lack of European 53, 68–9; noneconomic factors in 80; and redistribution
55–7; trade unionists’ anti-EU position
124–31
fiscal transfers 45–6, 56, 68–9
Fischer, Joschka 198
Fischer, Stanley 147
five economic tests 32, 182, 183, 197
flexibility, economic 114, 121, 160, 165
flexible exchange rate regime 148–9
Flynn, Padraig 48
Foot, Michael 24
Foreign Office, and European policy (1945–
2004) 13–16
foreign policy, of EU 136
France: Mitterand government 49; social
provision cuts 120; unemployment rates 63
free market economy: as aspect of integration
50; and EMU 60, 109; progressive
eurosceptic views on 3
FTA (Free Trade Area) 17
G7 172, 214
Gaitskell, Hugh 18
Gaspar, V. 82
Index 233
GATT (General Agreement on Tariffs and
Trade) 208
GDP (Gross Domestic Product) 68, 215; and
external debt 164; GDP growth and inflation
75; per capita GDP relative to EU core 71;
recessionary limits on 94, 140; spending on
EU membership 130
General Agreement on Tariffs and Trade
(GATT) 208
George, Susan 164
Germany: alternative currencies in 161; ESM
in 107–8; growth and expenditure in 64;
inflation and central bank independence 79;
reunification of 141; Social Market Model
139; spending cuts in 114, 120;
unemployment in 62, 66, 166; wage
bargaining in 141
gilts 214
global emissions 163
globalisation 72–3; and economic growth 176;
and EU policies 143; and the euro 158, 159,
167; and green economics 162–4; and
multinational capital 43, 50–1; political
consequences of 172–3; social consequences
of 147
GNP (Gross National Product) 215
Godley, Wynne 44–5
gold standard 39, 40, 83, 214–15
Gonzalez, Felipe 198
Gould, Bryan 4, 25, 30, 40–1
governance: corporate, and EMU 149–52; and
EU Constitution 126–7, 129–31
Grahl, J. and Teague, P. 146
Greece 71
green economics 157, 161, 162–4
Green Party 10, 157
Gros, Daniel and Thygesen, Niels 149
Gross Domestic Product see GDP
Gross National Product see GNP
growth rates: of British economy 85–6, 87,
130–1, 176; of EU economy 127; and euro
entry 178, 181; and increasing returns 96–7;
and inflation 73–4, 74–5, 79; national 64;
neo-liberal control of 61–5
Hardin, R. 96
Harmonised Index of Consumer Prices (HICP)
81
Hayes, Billy 9
HICP (Harmonised Index of Consumer Prices)
81
Hines, C. 35
Holland, Stuart 19, 24, 30, 35, 140
Honohan, P. 58
Hood, A. 35
hostile takeovers 150–1
Howe, Sir Geoffrey 86
Hundt, Dieter 166
Hungary 66
Hutton, Will 159
IMF (International Monetary Fund) 215; and
British economy 85–6; on EU economic
growth 65
imperial third force policy 16
increasing returns 96–7
independence (concept of)and ECB 78–81; of
UK from EU 130–1
industrial policies 205
industrial relations 141–2
industries, manufacturing 129–30, 178, 182,
205
inflation: alternative policies on 204–5; and
growth rates 73–4, 74–5, 79; and monetary
policy 53, 54–5, 57–8, 63–4, 67; and policy
credibility 79; and price stability 81–2; and
real GDP growth 75; and the single currency
39, 42; and unemployment 173
infrastructure 87, 89
Institute for Community Currencies 161
insurance, social 107–8
integration: and corporate governance 149–52;
effect of monetarist policies on 66–7; ESM
proposal for 105–6; free market aspect of
50, 146–9; Labour position on 4–5, 12, 17,
34–6, 186, 199–201; political consequences
of 172–3, 208; social consequences of 147
interest rates: control of and the euro 113, 180,
184; and exchange rate policy 206; and
inflation control 54–5, 173; low interest rate
strategy 203–4
intergovernmental European Co-operation 17
intergovernmentalism 215
international forces 130–1
international markets: and European internal
trade 57; and the poor world 162–4; and
power of multinational capital 43, 50–1
International Monetary Fund see IMF
investment, socialisation of 97–8
Iraq 133
Ireland 71, 141
Issing, Otmar 82, 114, 143
Italy, growth and expenditure 64
Jay, D. 35
jobs see labour market; unemployment
Kaldor, N. 46
Katz, P. 35
Kenner, J. 148
Keynes, J.M. 40, 91–2, 97–8
Keynesian strategy 3, 204–5; see also postKeynesian strategy
Kinnock, Neil 24–5, 118
Kleinman, M. 105
Kohl, Helmut 31, 197, 198
Labour Euro-Safeguards Campaign Bulletin
120–1
labour market: limited workforce composition
142; need for flexibility in 67; policies for UK
234 Index
205; protection of and EU membership
122–3; regulation of and ESM 107–9;
regulation of and social policy 142–3; see
also employment; unemployment
Labour Party: conditional support for entry
(1962–1970) 17–20; EU reform (1976-1979)
22–3; European integration issue 4–5, 12,
34–6, 186, 199–201; European integration
schemes (1946-60) 16–17; European policy
(1945-2004) 12–13, 13–16; opposition to
entry on Conservative terms (1971) 20–1;
opposition to entry without safeguards (1961)
17; policy changes on EU 33–4, 137–8; promembership policy (1988–) 24–33, 197–8,
199–200; terms renegotiated (1972-1974)
21–2; withdrawal policy (1980-1987) 24;
withdrawal scheme (1975) 22; see also New
Labour policies
Lafontaine, Oskar 198
Lamont, Norman 82–3
Latin America 162
Lawson, Nigel 82–3
legislation 169–70; powers of 171–2
Lisbon Agenda 215
living standards: in Asia 72; see also cost of living
Lucas, C. 35
Maastricht, Treaty of Maastricht (Referendum)
Bill 31, 195
Maastricht Convergence Criteria see MCC
Maastricht Treaty 5, 30, 31, 41–3; alternatives
to 43–7; and British sovereignty 173; on EIB
58; hostility to deflationary provisions of
199; neo-liberal agenda of 52–3
MacDougall Report 43, 56
McGregor, Matthew 8
macroeconomic impact of EMU 145, 146–9
macroeconomic policy 62, 66; outside single
currency 99, 203–10
Major, John 31
majority voting 171
Malcolm, N. 171
Mandelson, Peter 32, 33, 113–14, 125
Mannesmann 150
manufacturing industries 129–30, 178, 182,
205
Marino, Joe 8
Marjolin, Robert 18
market ideology: and EMU 146–9; see also free
market economy; labour market; single
market
MCC (Maastricht Convergence Criteria) 93,
108, 215
media: bias in 115, 183; Labour attack on 199;
opinions on euro 176, 182–3
Medium Term Economic Policy (MTEP) 18–19
mergers and acquisitions 150–2
Michie, Jonathan 5, 40
microeconomic impact of EMU 145
Middleton, Sir Peter 82–3
military power 163–4
Milne, I. 35
Minimum Funding Requirement (MFR) 129
Mitchell, Austin 11, 31
Mitterand, François 48
Monbiot, George 164
monetarism 62, 86–7; in eastern Europe 65–8;
and ESM 108; ‘new monetarism’ 53; the
TEU 92–5
monetary policy 5–6, 215; alternatives to EMU
203–7; autonomy of, and globalisation
100–1, 207; and central bank independence
82–3; credibility of 79; harmonization with
fiscal policy 67–8; non-economic factors in
80; and philosophy 81–2
monetary union 52–9; and internal market
147–53; and optimal currency theory 67–8;
and political union 47, 198–9, 200–1;
and regional policies 42, 53, 125; value of
69–70
Morris, Sir Bill 115
MTEP (Medium term Economic Policy) 18–19
Mullen, Andy 4–5, 32, 34
multinational capital 43, 50–1
multinational corporations 158, 159
Mundell, Robert 67, 68
Murdoch, Rupert 33
NAIRU (non-accelerating inflation rate of
unemployment) 53, 216
the nation state 3, 184–5; see also selfdetermination
National Changeover Plan 199
National Investment Bank (NIB) 98
national rates: of growth and expenditure 64; of
unemployment 62–3
national social models, defence of 146
neo-liberalism 52–3, 60–5, 133–4; alternatives
to 9, 135–6
Netherlands 64, 68, 141
New Economics Foundation 163
New Labour policies: and central bank
independence 82–3; on EU membership 11,
119; on the euro 33, 111–16; on
privatisation 61; see also Labour Party
‘new monetarism’ 53
NIB (National Investment Bank) 98
Nice Treaty 31, 215
Nicholls, Doug 8–9
No Campaign 157, 187
nominal wage rigidity 216
non-accelerating inflation rate of
unemployment (NAIRU) 216
OCA theory 96, 216
Occupational Pension Funds Directive 128
OECD 216
opinion polls see electorate; public opinion
optimal currency theory 67–8
Optimum Currency Area theory 93, 216
Index 235
Organisation of Economic Co-operation and
Development 216
Ormerod, Paul 6
Out of Crisis Project 25
overvaluation 181, 183–4, 213
Owen, David 4
parliamentary democracy 169–70
pensions 127–9
people see electorate; workers
philosophy, and monetary policy 81–2
Podmore, W. 35
Poland 65–6
political business cycle 79
political costs: of EU membership 35, 125,
168–72, 179–80, 183–5; outcomes of
integration 172–3, 208
political union, and monetary union 47, 198–9,
200–1
pooling 10, 147
the poor world, and euro 162–5
Portugal 71, 114
post-Keynesian strategy 7, 91–5; alternatives to
95–8; and EMU 95
pound sterling 168, 178, 181, 183, 207
poverty gap 161, 162; see also poor world
Powell, Enoch 168
power: of multinational capital 43, 50–1; and
sovereignty 171, 195, 200; of UK outside EU
membership 208–9; US military power
163–4
price stability 42, 77, 81–2; and unemployment
94, 158
price structures 100
private sector 149–52
privatisation: and the Single Market 35; of
welfare services 61
Prodi, Romano 66, 68
progressive euroscepticism 2, 3
public expenditure: cuts in 87, 88; high level of
182; increases in 114–15, 121; and tax 55–6,
64–5
public opinion 176, 178, 179, 198
public services see welfare state
qualified acceptance 216
QVM (Qualified Voting Majority) 216
Ramsay, R. 34
rate capping 42–3
Rawnsley, A. 32
real wage rigidity 216
recession: and ERM membership 39, 40; and
unemployment 56, 166
referenda: 1975 Referendum 23, 85, 188;
Benn’s campaign 21, 30, 31, 157, 187, 188,
195; on euro 115, 116, 182–3, 184, 200–1
Referendum Street (BBC programme) 182–3
reflation 212–13
regional transfers 56
regions: disparities in 57; policies and monetary
union 42, 53, 125
remitted/remitting 216
representative politics 172
resources: competition for 124–5; supply of
129–31
revaluation 213
rights: democratic 169–70; right to strike 135
Robertson, J. 161
Robinson, Geoffrey 180
Robinson, Joan 39
Rogoff, Kenneth 61
Rome, Treaty of 54
safeguards, to entry 17
Sawyer, Malcolm 5–6
scepticism 7, 88–9; progressive euroscepticism
2, 3
Schioppa, Tommaso Padoa 65
Schroeder, Gerhard 198
Schuman Plan 216
Scott, Regan 25
self-determination 3, 125–7, 169, 173–4,
184–5, 202–3, 210–11
SEM (Single European Market) 216–17
services: organisation of and ESM 107;
see also welfare state
SGP see Stability and Growth Pact
shocks, economic 148, 212
Shore, Peter 11
SIM (Single Internal Market) 2, 216–17
single currency: advantages and disadvantages
of 158–60, 207–9; arguments for 106; and a
common currency 160–2; the ECB 77–84;
economic consequences of 39–51, 120–1;
economic performance and the euro 60–70;
establishment of 92, 93; failure of European
system 85–90; features of monetary union
52–9; perspectives on the euro 71–6; and
UK economic strategy 81–102, 197, 202–3;
and unemployment 39, 41, 89, 113, 166
Single European Act (1986) 133, 171, 178, 188
Single European Market (SEM) 216–17
Single Internal Market (SIM) 2, 216–17
single market: ESM and forms of corporate
governance 150; and privatisation 35;
Thatcher’s support for 24
The Six 217
Smith, Gordon 134
Smith, John 25
Social Charter/Social Chapter 30, 31, 217
Social Dialogue 217
social insurance 107–8
social models see European social model;
national social models
social policy, and labour regulation 142–3
socialisation of investment 97–8
socialist third force policy 17
sovereignty 175–85; concept of 171–2; and the
EMU 10–11, 168–74
236 Index
Spain 71
spending see public expenditure
Stability and Growth Pact (SGP) 2, 42, 52, 68,
217; deflationary approach of 39, 94; in EU
Constitutional Treaty 65; limitations 86–7,
88, 114, 140, 166
Stiglitz, Joseph 165, 166
Strange, G. 138, 140
Strauss-Khan, D. 109
Streeck, W. 142
structural convergence 212
subsidiarity 107, 202
supply and demand 98
supranationalism 217
Sweden 60, 115
symmetric shocks 212
takeovers, hostile 150–1
taxation: EU control of 169–70; in Netherlands
64, 68; and public expenditure 55–6, 64–5;
and transfer of revenues 68–9
technology gaps 96–7; advanced technology
structures 100
TEU 77, 92–5, 202
Thatcher, Margaret 24, 129–30, 133
Third Way 131
three-year rule 217
Tietmeyer, Hans 199
Toyota 159
trade: barriers to 72; and carbon emissions
163; and the euro 158–60, 164; European
and international 57, 101, 184; in the poor
world 162; trade flows 99–100; of UK 205,
207–11; UK, with EU 126–7; US
dominance of 163–4; and war 133; see also
international markets
Trade Unionists Against the European Union
Constitution 124
trade unions: and the EMU 137–44; and the
ESM 105–6, 110, 138–9; and EU
membership 8–9, 118–19, 121, 124–31, 135
Trades Union Congress see TUC
Treaty on European Union 77, 92–5, 202
Treaty of Maastricht (Referendum) Bill 31, 195
TUC (Trades Union Congress) endorses Policy
Review 25; pro-EU position 126, 129, 138
two-speed Europe 48–9, 217
UBS Warberg 113
UK see United Kingdom
UNCTAD report 162
unemployment: causes of 61–2; in eastern
Europe 66; EU policies on 48–50; and
inflation 173; and the NAIRU 53; national
rates of 62–3, 66, 67, 126; and price
stability 94, 158; and recession 56, 166;
regional disparities in 57; and regional
transfers 56; and a single currency 39, 41, 89,
113, 166; and UK monetary policy 204; see
also employment; labour market; workers
United Kingdom: alternative currencies in 161;
anti-euro voters 112–13, 115–16; British law
170; and conditions for entry 134; economic
policy outside EMU 98–100, 130–1, 203–7,
209–10; growth rates in 64; pension funds
128–9; public spending 114–15; sovereignty
and the euro 176–7, 179–80, 181, 182–5; see
also self-determination
United States: and dollar as international
currency 163–4; and the EU 132–3; EU
comparisons with 67, 68, 172; and EU
competition 124–5; military power of 163–4;
opposition to US imperialism 135
United States of Europe: case against 169,
173–4; case for 35–6; see also federalism
variable geometry 217
vertical Phillips curve 79
Vodaphone 150
votes/voting: British, in European Parliament
175; labour no vote on euro 111–16;
majority voting 171; Qualified Voting
Majority 216; see also electorate
wages: differentials in 162; inequality and EMU
140–1, 142; nominal and real wage rigidity
216
wars, and trade 133
Watrin, Christian 60
Watson, Matthew 9–10
welfare state: costs of EMU for 149; and ESM
106, 107–9, 143; impact of single currency
on 8, 114–15, 165–6; privatisation of
services 61; social policy and labour
regulation 142–3; see also services
Die Welt (newspaper) 166
Whyman, Philip 7, 9, 11
Wilford, H. 34
Wilson, Harold 18–19, 21, 22, 85
Workers: and EMU 105–6, 109; recession and
unemployment 166; UK policies for 205;
and wage differentials 162; see also
employment; labour market; trade unions;
unemployment
world trade, and carbon emissions 163
WTO (World Trade Organisation) 208