Podium: We're not anti-euro, just patriotic

From the Shadow Chancellor's first major speech, to the Political Committee of the Carlton Club, London

FIRST, LET me dispel the three most common myths about our policy, which is, for the avoidance of doubt, that Britain should not join the euro during the remainder of this parliament, nor, subject only to a vote by all our members, during the next.

The first myth is that our policy is anti-European. To refute this, I pray in aid no less a man than Gordon Brown himself. He told the House of Commons last week: "Conservative members should have some pride in the fact that the new spokesman on financial matters was the minister who, in 1991, signed the Maastricht Treaty."

Second, it is said that the Conservatives have a dogmatic, arbitrary approach. Well, we are patriotic. That is why we have said we want time to see whether the euro would be appropriate for Britain. The pragmatic course is to see whether it works.

The third myth is that the Conservatives believe that the euro is bound to fail. The truth is that we do not know whether it will fail. That is why we propose to keep Britain's options open. We do not want to see mass unemployment in key export markets. Even if the euro seems to have worked for continental Europe, that does not mean it would be right for us.

Let's start by looking at the arguments commonly deployed in favour of the euro.

First, there will be greater exchange rate stability; second, business transaction costs will be lower; lastly, interest rates would be lower. This prospectus is allied to the threatening suggestion that investment to the UK, a rich source of jobs and prosperity, would dry up if we were outside. However, it is not like that.

For a start, none of these suggested advantages is quite what it seems. Even if you take these gains at face value, they would only be part of the story. EMU is not some bolt-on accessory. Joining the single currency would mean irreversible changes to the way our economy is run. British interest rates would have to be set to suit the economic needs of Europe as a whole, rather than of Britain. That would mean interest rates that were likely to be wrong for Britain nine times out of 10. And EMU would also be likely to mean a degree of harmonised taxation. For Britain, harmonisation can mean only one thing - tax rises.

Obviously, Britain would have absolute exchange rate stability with the rest of the euro area. But this greater stability would be bought at the expense of greater instability with the rest of the world.

Transaction costs will be lower if we join the euro. But they will also be lower if we don't. For those who trade with several countries in the euro area, costs will be less, whether we are in or not.

What about interest rates? As even Mr Brown has to admit, the single currency will not work for Britain unless our economic cycle and structure converge with the Continental economies. That is the pre-condition for us to live with a single European interest rate. If we were to join today, we would have to cut interest rates by four points, provoking an unsustainable inflationary boom. The incontestable fact is that our economy is cyclically and structurally different. This effectively rules out membership of the euro for the remainder of this parliament and the next.

For some reason, Gordon Brown always leaves tax out of his analysis of EMU. But almost everyone involved with EMU expects it to be accompanied by at least some measure of fiscal integration. After all, the E of EMU stands for economic union.

In a monetary union, countries that fall behind will not be able to use their exchange rates to price themselves back into the market. Nor does the EU have anything like the labour mobility that other monetary unions need to make them work. Indeed, many Continental politicians support EMU precisely because they see it as the route to fiscal union, and thus political union.

What would this mean for Britain? Quite simply, it would mean that the competitive advantage of our low-tax economy, painfully built up over the last 18 years, would be thrown away. Let me finally deal with the threat that we would lose inward investment if we remained outside.

This is not legally possible. The Treaty of Rome, the Single European Act, and Maastricht guarantee our access to the single market.

Labour is attracted to EMU for political reasons: it believes it would make it look modern, to show it has shaken off its socialist past. It is happy to display sophisticated contempt for any expression of nationhood. If Britain shoe-horns itself into EMU, it is our businessmen who stand to pay the price.