The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state.

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The Business Implications of the Single Currency

Ignore the pro-euro propaganda - businesses will be hurt if Britain joins the euro

Sir Michael Edwardes

The Distortion of Business Opinion
EMU and Inflation
EMU and Transaction Costs
EMU and Interest Rates
Gordon Brown's Five Criteria


I have no problem about the euro across the 11 countries. As a businessman I welcome their having a single currency. It will make life simpler for us. The fact that some of our EEC friends will be out of 'synch' from time to time or even all the time, is essentially their problem. In Britain it will impinge more directly on politics than on business. The tensions which will be caused by resulting unemployment in parts of the euro area may well be resolved by the '11' by cohesion payments and other artificial adjustments. As a businessman, no problem. We will deal with a single euro from outside just as we do with the dollar and the yen now.

On the other hand, if I were a British politician, I would be very concerned indeed, for two serious issues arise. First, if the tensions between policy for a hard euro and a soft euro spill over into the sort of stresses that caused two world wars, I would be apprehensive about being dragged in as their close neighbour. And second, if they subsidise the unemployment hotspots by cohesion payments, our politicians will need to assure us that British taxpayers will not be called upon to fund the cop-out directly or indirectly.

Being financially and economically independent of the Euro eleven gives me great comfort. I will demonstrate that there is no business downside from being outside of the single currency whilst being part of the single market. If this is right, why should I as a citizen want sovereignty to be handed over to an unelected Central Bank whose agenda may coincide with our economic needs for only 20 per cent of the time, if we are very lucky. Why should we join in the fun at such enormous risk to our economy and our security. It would make no sense.

The Distortion of Business Opinion

Perhaps I should begin by looking at the main claims put forward by businessmen who favour EMU. I say put forward by businessmen, but in fact, if you look at the names of the people doing it, you will rarely find entrepreneurs. The people who spend their time writing pro-Euro letters to newspapers tend rather to be corporatists. That is, they are not the sort of people who have built up successful enterprises. That breed of businessman - Stanley Kalms at Dixons, for example, or Anthony Bamford of JCB or Emmanuel Kaye - tend to be anti-EMU.

The people who are most often trotted out as pro-Euro spokesmen for British business are seldom British industrialists, but are presented on the Today programme, on Newsnight and on countless other BBC broadcasts as though they represented the entire British business community.

As for the CBI, its members employ around 8% of the workforce. The Sun newspaper has greater influence. So, bearing this in mind, let us look at some of the claims made in favour of EMU by these businessmen. They claim that the single currency would be counter-inflationary; that it would reduce transaction costs; and that it could bring down interest rates. More recently they have taken to claiming that it would boost exports, which of course contradicts their counter-inflationary argument, since it relies on the assumption that the euro will not be as strong as sterling. Let me briefly consider these claims in turn.

EMU and Inflation

First, the claim that the single currency will bear down on inflation. Supporters of the euro like to tell us that it will have all the anti-inflationary properties of the Deutschmark. This, of course, is not a view widely shared in Germany. After all, the proposed European Central Bank will contain representatives of countries with relatively inflationary traditions, whose natural inclination will be to try to loosen Germany's monetary policy - something that they would perceive as being in their own national interest.

But I don't actually need to argue in the abstract about why monetary union would be inflationary. I can demonstrate it by pointing to recent history. Perhaps you will bear with me if, in order to prove this point, I recall briefly the story of the Exchange Rate Mechanism.

The ERM was set up on the continent in 1979. Britain, however, pursued its own monetary policy for eight years until 1987, when it began to shadow the Deutschmark as a prelude to full ERM membership in 1990. So, by comparing Britain's record during this eight year period to that of the ERM countries, we ought to be able to test the question of whether an independent British monetary policy is more or less inflationary than that on the continent. In fact, during this period, UK inflation fell faster and remained consistently lower than the ERM average. And the ERM, let us remember, did not even include states like Portugal, Spain and Greece in those days.

After 1987, however, inflation rose from 4 per cent to 11 per cent, and remained high until we left the ERM on White Wednesday in September 1992, when it immediately fell to its lowest level in 30 years. The lesson from this is about as clear as anything can be in economics; it is that modern Britain can run a better anti-inflationary policy on its own than by contracting out its monetary targets to Europe.

EMU and Transaction Costs

Then there is the claim that EMU will reduce transaction costs. I have to say that this is not the kind of argument you hear among real businessmen. I have yet to find a company board that agonises more over transaction costs than over, say, keeping key personnel. The truth is that we have evolved sophisticated financial mechanisms for getting around the cost of fluctuations in the exchange rate by hedging the futures market; mechanisms cheaply and readily available even to fairly small companies. In any case, the total amount of transaction costs within the EU is only around 0.4 per cent of GDP - or 0.1 per cent for a country like Britain, with its advanced banking sector.

Yet this relatively trivial issue is blown up out of all proportion; presumably because it is the only unequivocal advantage that EMU supporters have been able to latch onto.

EMU and Interest Rates

The most ridiculous claim made for the euro is that it will mean lower interest rates. Now I could talk to you at length about why Britain's monetary needs to diverge from those on the continent. But it is much easier simply to say - "Remember ERM."

To join the euro today, we would need to cut interest rates by three or four points at the beginning of what could easily turn into an inflationary boom. During ERM, at the other end of the cycle, we had to keep interest rates at 10 and even 15 per cent during a deep recession. Those two statistics prove that there can never be a right rate for sterling to join the euro. They speak more eloquently of why the project is cockeyed than anything I can say tonight. What price convergence?

There is never a right rate for all time between the pound and the other currencies. If convergence ever happens it will be momentary.

Gordon Brown's Five Criteria

But that is not just my conclusion. It is also the implicit conclusion of the Chancellor of the Exchequer. Now, I realise that this may sound strange. Gordon Brown, after all, is probably the greatest euro-enthusiast in the Cabinet. But the European Research Group recently tried a little experiment: they tested the five criteria that he himself has laid down for Britain to join the euro, against economic reality. And they concluded that, according to Mr Brown's own definition, we shall not be in a position to join for at least thirty years, if ever. Let me run through those five criteria very briefly. I shall quote them in his own words.

"Are business cycles and economic structures compatible so that we, and others, could live comfortably with euro interest rates on a permanent basis?"

The Treasury acknowledges that our cycle is likely to remain decoupled from the rest of Europe "for some time." But, as the Chancellor must be aware, this lack of synchronisation is not a recent phenomenon. It can be identified at least as far back as the first oil shock in 1974 and arguably much earlier than that. It is based on several permanent, structural differences between the British and European economies. Just three examples:

1. Britain is uniquely dependent on non-EU trade. Around 44per cent of our exports go to other EU members as compared with, say, Belgium which sells 81 per cent of its products to other members. 79 per cent of our overseas investment is in non-EU markets. Britain, consequently, moves in what economists call the 'AngloSaxon' (as opposed to the 'European' or 'German') cycle.

2. The United Kingdom has much more flexible labour laws than the other members; we shed workers more quickly in recession and hire them more easily at other times.

3. We are the EU's only net oil exporter: a change in the world oil price would have precisely the opposite effect on us from that which it would have on every other member.

These differences will not go away in five or ten years. If anything, the British and European cycles are diverging even further.

And the Government will not be able to bring about an artificial convergence, since it has given responsibility for monetary policy to the Bank of England with instructions to meet domestic monetary targets. Any undue reduction in interest rates, and inflation looms.

"If problems emerge is there sufficient flexibility to deal with them?"

Gordon Brown rightly acknowledges that, if external shocks cannot be absorbed by a flexible exchange rate, they will be felt in output and jobs. Employment and wage flexibility would obviously be crucial in these circumstances.

So why is the Government determined to reduce our labour flexibility by implementing the EU Social and Employment Chapters, and our wage flexibility by introducing a minimum wage?

Meanwhile, the continental countries show no sign of deregulating their own sclerotic employment regimes.

"Would joining EMU create better conditions for firms making longterm decisions to invest in Britain?"

The fact that the United Kingdom has attracted nearly 40 per cent of all foreign investment into the EU despite our scepticism does not suggest that investors are put off by our attitude.

Foreign businessmen cite four main reasons for preferring the United Kingdom to other European economies.

* The lowest rate of corporation tax in Europe
* The most flexible labour market in Europe
* Relatively incorruptible public servants
* The English language

Haruko Fukuda of Nikko Europe, one of Japan's largest investment banks, said recently "Japanese investors would actually prefer Britain to stay outside the single currency so that their production bases here continue to enjoy the benefits of a flexible exchange rate."

"What impact would entry into EMU have on the competitive position of the UK's financial services industry, particularly the City's wholesale markets?"

The Treasury believes that remaining outside EMU would not jeopardise London's pre-eminence as a financial centre. (International banks are not troubled by what currency their employees use to buy their tube tickets.)

London is the world's largest centre for currency, insurance and bond trading and for international bank lending and international equity trading. The bulk of its trading is carried out in US dollars. Although Britain is the world's second largest exporter of financial services, the Single Market has had almost no effect on our invisibles sector. Europe accounts for just four per cent of Britain's turnover in banking and two per cent in life assurance and eight per cent of its foreign exchange dealing.

The City can only lose if we join the euro.

"In summary, will joining EMU promote higher growth, stability and a lasting increase in jobs?"

Is the Government seriously suggesting that we should converge with European employment levels? Unemployment in the United Kingdom is 6.9 per cent and falling. In the rest of the EU it is 11.1 per cent and static.

My last comment on the Chancellor's logic is as follows:

Last Thursday on the Today programme he spoke for 10 minutes about Britain's low productivity, that 16 countries do better than we do, including Germany. He said that Government will initiate reforms to solve the problem. Not once did he mention the possibility of our joining the single currency and the certain employment disaster that would befall us if we cannot control our own interest rates, growth rates, exchange rates and therefore levels of unemployment. Not once did he say that our inability to achieve productivity levels within the straightjacket of single currency would mean British people being forced to look for work in Europe and elsewhere. He made the case for staying out of the single currency without once mentioning the dreaded words.


It is impossible to believe that Mr Brown is genuinely persuaded by the economics of EMU, since his case fails even in the terms which he himself has set: an opponent of the single currency might have chosen very different criteria, such as the cost in higher taxation, which the Treasury estimates at £20 billion per year. The only explanation for the Chancellor's statement is that he is drawn to EMU for political reasons but has decided, for the sake of public opinion, to argue for membership in terms of spurious economic advantages. These advantages do not exist.

Twenty-one years ago I became chairman of a British company that had just lost 32 million man hours in one year due to strike action. That was a national crisis. Now we have another potential crisis; the possibility that Britain might enter the EMU. Let us keep the pound so that Britain may be both free and rich.