I no longer believe that Britain will join the European monetary union.
I no longer believe that Britain will join the European monetary union. I don't put this forward because I have suddenly lost my enthusiasm for Europe. My loyalties remain, as ever, first to my country, then to Europe and also to London, where I have lived and worked for 40 years. I remain strongly in favour of closer integration with our neighbours. Nor have I reached my negative view about British entry as a result of studying fresh soundings of public opinion. Although the proportion of people stating that they would vote against merging the pound with the euro remains well in excess of 50 per cent, that is not the reason. For I agree with those who assume that were the Government strongly to recommend the answer "yes", then people would be won over.
I don't even see the famous five economic tests set by the Chancellor of the Exchequer, Gordon Brown, as the obstacle as such. In the spirit in which they were originally framed, they are not a formidable barrier. They accept Economic and Monetary Union as a given and then ask whether Britain could comfortably fit in.
Rather, my doubts focus on something more profound: whether the whole idea is not beginning to have perverse results. Indeed, whether the economic difficulties of Germany, to take the central example, are actually being made worse rather than easier by its membership of the European currency union. Hence the exceptional importance of the recent general election. For just when Germany needs a strong government, the result is a narrow majority.
Remember, too, that in a column just before the election, my esteemed colleague, Hamish McRae, asked us to consider the hitherto unthinkable: so great might prove the disadvantages for Germany of remaining in the European monetary union that the country one day might wish to leave it. I go one step further and say that if the biggest member of the club could want out, why would Britain, which would be the second largest member, ever wish to join?
What is going wrong is precisely what was forecast by the least vociferous group of doubters when our neighbours first began to plan merging their national currencies into the euro: one size doesn't fit all. Those of us who took this line were making almost a technical point – yes, we would like to see closer integration; yes, a common currency would be a good idea, but this particular scheme won't work.
In this light consider Germany's predicament. Like Japan it is suffering from a deficiency of demand. Domestic sales are falling at about 2 per cent per annum; Japan is about 1 per cent down. By contrast, the US, Britain and France are still showing growth.
Moreover, it is obvious what Germany should do to halt the decline. The advice could have been found in any economics textbook published on the Continent before the euro came into existence. It should reduce interest rates; it should let its currency depreciate somewhat against the dollar, so as to find a new level which encourages exports; and it should stimulate its economy by increasing state spending even if the result would be higher government borrowing.
Unfortunately Germany cannot do any of these things. It cannot cut interest rates, for those are set for all euro members by the European Central Bank. Consequently it is obliged to endure rates which in real terms, that is after subtracting its very low rate of inflation, are punishingly high. Nor can Germany allow its currency to depreciate because it doesn't any longer have one. It trades in euros over which it has little influence. It is obvious now that Germany entered the euro at an exchange rate in terms of the old Deutschmark which was too high.
As for letting government spending rise, again it is balked. It has committed itself to obeying the rules of the Stability and Growth Pact, which it itself designed in order to instil budgetary discipline on all members. Deficits must be strictly limited and last only for short periods. But in practice what the rules are coming to mean is that countries already in recession must make matters worse by cutting public spending.
What might happen to Germany as a result of having cheerfully signed up a couple of years ago to a system which, as it turns out, is completely unsuitable to its present circumstances? I believe that it will start to go the way of Japan and sink into deflation. Like Japan, prices for its goods and services will begin to decline; companies and consumers with heavy debts will find them harder and harder to repay; the banks will gradually be rendered immobile by bad debts; stock market prices will continue to test new lows and property values will fall back.
If I am right in this, I cannot imagine that Mr Blair would want to recommend entry to the British people. Germany would be a dreadful warning. So we would be told that Mr Brown's five tests had, after all, given a negative result. The referendum would not be held. The pound would continue to exist as a separate, albeit minor currency. The euro would be discredited. The Conservative Party, or at least most of it, would feel triumphantly vindicated. Politicians and others who had backed entry would feel a trifle embarrassed. End of story. Life would go on.Reuse content