The euro is coming and there's no place to hide

Anyone who has recently visited the Continent can only despair at the poverty of leadership in Britain
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The Independent Culture
IN LESS than three months, the earthquake of a currency union among our main trading partners will hit the British economy. It will have a bigger long-term impact on our jobs and prosperity, one way or another, than the current global economic crisis. Meanwhile, one of our two main political parties is obsessed about exactly how not to join it. And the other keeps hoping the subject will go away, to save it the embarrassment of having to make a decision that might anger one or two of its powerful backers.

Whether pro or anti, any Briton who has recently visited the Continent, where shops already display prices in euros and where the politicians have mentally consigned Britain to the sidelines of the EU, can only despair about the poverty of leadership on this side of the Channel. The difficulty is, of course, that both joining the single currency and staying out of it will impose some economic costs. This is precisely why its creation has been driven by political vision, and why it is such a divisive issue in a country lacking in the Euro-vision thing.

The cost of plunging into the single currency would be the loss of our ability to have a different level of interest rates from other EU countries. With our business cycle out of sync with theirs, there may be times when the euro cost of borrowing is inappropriate for British businesses and consumers.

When Gordon Brown set out the Government's approach last autumn, it seemed sensible to make the convergence of our business cycle and theirs one of five economic tests for British membership. Our economy was belting away, with the cost of borrowing needing to climb, while Germany and France languished with low growth, high unemployment and much lower interest rates.

The Chancellor is now forecasting a sharp slow-down next year, when the UK is likely to be one of the weakest economies in Europe. Converging on German interest rates, currently about 4 percentage points lower than ours, is starting to look attractive. Even so, thoughtful sceptics worry that any convergence will be only temporary, and that at some stage the rest of Europe will need a tougher monetary policy than we will.

But the mistake in this "ships in the night" objection is its assumption that the current pattern of boom and bust is a fact of nature, like the progression of the seasons. If our economic high summer always coincided with the winter of recession on the Continent, any attempt to take Britain into the single currency would indeed be doomed. In reality, joining the euro would bring the British economy into line with the rest of Europe within a surprisingly short time.

British businesses and home-buyers would soon start to behave more like Europeans, with our interest rates moving up and down with theirs, and no exchange rate fluctuations to drive a wedge between the member economies. For example, borrowers might switch to fixed-interest-rate loans, a trend that is already making the UK mortgage market a lot more like its German counterpart. Becoming a part of the single European economy would be a sure-fire way of getting into sync with the other members.

This is not to underplay the fact that a one-size-fits-all interest rate is a blunt instrument of economic management. But this problem already afflicts us, as Britain's northern manufacturing regions can testify. They would certainly be a lot better off if Britain moved to Continental levels of interest rates under the euro. And it is hard to believe that the strength of the pound in the last two years has left anybody still desirous of retaining an exchange rate that can vary so erratically.

Whereas the costs of joining the euro would quickly shrink as the UK moved into line with the other member economies, the economic costs of staying out could mushroom. Recent announcements have demonstrated that the volatility of the pound makes overseas corporations fickle investors and employers on these shores. The combination of exchange rate uncertainty and the proximity of a huge market just across the Channel makes the threat to investment very real. Even British companies that sell into Europe would do well to move some of their operations out of the UK.

Ultimately, however, the scale of the fall-out from non-membership depends on how quickly the creation of the first genuine single market with a single currency shakes up European industry.

There is no question that there will be a big shake-up. Compared with the US, Europe has too many companies in a wide range of industries, from financial services to heavy engineering. A good part of America's productivity advantage in manufacturing stems from the fact that its businesses can exploit economies of scale in serving a bigger market. Dismantling the currency barriers between Europe's economies will create huge potential savings and wholesale industrial restructuring.

This will certainly be disruptive, but it will also generate greater prosperity. Although there will be corporate losers as well as winners inside Emu, those who stay out of the race altogether are certainly going to find themselves in the ranks of the losers. UK companies will be forced on to the sidelines until we do join, watching their successful European competitors making great strides in productivity and market share thanks to the removal of exchange-rate barriers.

This lesson is percolating through the business community. For all the stridency of the handful of top businessmen who oppose British membership, the less vocal majority recognise that their export markets are vulnerable to the economic restructuring that is under way.

Of course, it is always possible that the current world financial turmoil will get the single currency off to a terrible start. So far the European Central Bank, under its golf-playing, country-and-western-loving president Wim Duisenberg, has sounded alarmingly complacent about the likely impact on Europe. If he steers the wrong course, Britain may just do better out than in to start with, even with a separate currency vulnerable to the panic-stricken state of the financial markets.

But when the financial hurricane passes over, as it eventually will, one of the features of the economic landscape left in its wake will be the single currency. It is happening now. Within a few weeks British businesses will be operating in an entirely new world, and nothing will change that, no matter how hard we try to ignore the euro.

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