Britain and the euro ten years after the ERM – is history repeating itself?

The Rt Hon. Lord Lamont of Lerwick 

Norman Lamont said the Prime Minister seemed determined to ignore the lessons of the past:-

“The Prime Minister has said it would be folly to refuse to join the euro for political reasons. It would be a much greater folly to do the reverse and for political reasons join the euro regardless of the risks. Many of the political arguments now advanced in favour of British membership of the euro were wheeled out at the time of the ERM, and the economic reasons were seen as less important than the political price to be paid if Britain stayed out. That is where history may be repeating itself. Mr. Blair seems determined to ignore both his own five tests and the lessons of the past…”

Norman Lamont praised the Chancellor of the Exchequer for devising the five economic tests that have to be satisfied before the Government would recommend the Euro:-

“I have to say the document published by The Treasury in October 1997 is formidable and impressive in dealing with the issue of convergence. So much so I would defy anyone to read it and still be in favour of Britain joining the euro. The Chancellor and his officials are to be congratulated. The case against in the Government’s document, even if the Prime Minister doesn’t realise it, is huge. The Chancellor is clearly mindful of the difficulties Britain had in the past in the ERM and the risks for the future………”

“The document describes in considerable detail the cyclical differences in the past between the UK, the US, France and Germany, and it does not understate the difficulty. As it says “a view of the future must depend on an analysis of the past”. The past may be inadequate but it is best guide we have………”

“The document details the structural differences between the UK and other European economies and makes the point that these differences are important not simply because they make the UK more likely to suffer from different types of “shocks” but also because they affect how the UK responds to “shocks”. Even if the UK is affected by the same shocks, but then responds differently the UK economy could diverge from other countries……”

Norman Lamont highlighted the housing market as a major obstacle to Britain joining the Euro:-

“If all this were not enough the marked differences between the UK housing market and the housing market in Europe ought to be sufficient to stop all talk of Britain joining the single currency. This is not necessarily so for all time but it certainly is now……”

“The important consequence of Britain’s reliance on variable rate mortgages is that the UK economy is far more sensitive to changes in interest rates than other European countries. Simply put interest rate movements in the UK feed directly into take home pay………”

“In l997 a committee under the chairmanship of Rupert Pennant-Rae, the former Deputy Governor of the Bank of England, concluded that the UK economy was consequently four times as sensitive to changes in interest rates as the average for European countries. Professor Walter Eltis of Oxford University calculated that two fifths of the entire responses to changes in interest rates by the ECB would be borne by the UK. This is similar to my earlier point about the dangers of joining a labour market with less flexibility than your own. If you are the only flexible economy you are the one who makes the harmful adjustments…”

Norman Lamont denied that the UK and the Euro zone were converging:-

“If the UK has come to look more like European economies, that surface convergence has been achieved by strikingly divergent means, particularly by consistently higher interest rates. Britain has often required higher short-term interest rates because of the way in which the UK economy responds to changes in circumstances is different…”

“Who can know on the basis of past experience whether recent developments are permanent or temporary? Will they continue or will they reverse? Is the UK leading or lagging? What we do know is that the structure of the housing market and short-term borrowing has not changed and therefore the much higher sensitivity of the UK to interest rate changes whether from Threadneedle Street or Frankfurt remains as it always has been…”

Norman Lamont said the convergence test could never be satisfied:-

“It is impossible to see how the Government’s own test of cyclical convergence could ever be “unambiguously” satisfied. I do not myself go as far as Mervyn King, the Deputy Governor of the Bank of England who said that it would take two or three hundred years to offer “any certainty”.

Two or three hundred years would be a tall order. But you surely cannot judge convergence over just one cycle let alone part of a cycle.”

“Certainty” may also appear an unreal standard for an issue of this kind. Sometimes one has to take risks on imperfect information. But it is the Government, which, by its words, has committed itself to certainty. The Prime Minister himself and the Chancellor again and again have said they will only recommend entry if the economic evidence is “clear and unambiguous”……”

Norman Lamont said the Prime Minister could not possibly mean what he has said about the five tests:-

“One is driven to the conclusion that the PM cannot possibly mean what he has said. Jack Straw gave a very different version of the five test on Newsnight on the 21st February when he said “If the choice is a very tricky one and there is ambiguity in it, then you will spend time, and of course there is a point where there has to be a political decision. But it is a decision informed by an economic assessment.” That is very different – that is not “clear and unambiguous”. This time it is not the voice of some Treasury civil servant who can be disowned. This is the Foreign Secretary who has blurted out the truth.”

“Clearly there are huge risks for Britain in joining the euro, and there is no way the evidence in the near future can be “clear and unambiguous”.

Norman Lamont said Germany was the first victim of the Euro:-

“Germany has become the stalling locomotive. German growth has trailed behind the rest of Euroland for some time but since the euro came into being the underperformance of Europe’s largest economy has worsened. At least part of this lack lustre showing must lie with the inappropriate interest rates that the ECB has set for Germany……”

Norman Lamont said mistakes were made at the time of entry to the ERM:-

“Firstly Britain chose to ignore its own Madrid condition for joining the ERM…”

“Second, Britain and other countries too gave insufficient attention to the effect of the abolition of exchange controls.”

- ENDS -

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