Ed Balls: Tony Blair never really wanted to join the euro

Gordon Brown’s former chief adviser said the disagreement over the single currency between the Labour Prime Minister and his Chancellor was less deep and more complicated than commonly thought

Ed Balls at King's College, London, on Monday, with John Rentoul and Jon Davis

Ed Balls, star of Strictly, former shadow chancellor and visiting professor, came to the “Blair Years” class at King’s College, London, on Monday to talk about New Labour and Europe. As ever, it was an education.

He started with Labour’s policy in 1983 of withdrawing from the European Community – without a referendum. “Tony Blair and Gordon Brown came into Parliament in 1983. We had a widely-judged-to-be-unelectable leader of the Labour Party in Michael Foot. Although let’s not forget that Michael Foot was desperately fighting to stop Trots like Jeremy Corbyn taking over the Labour Party. So he was actually on the other side of the argument from Tony Benn, John McDonnell and Jeremy Corbyn.

“One of the reasons the manifesto was described the longest suicide note in history by Gerald Kaufman, who died today, was because it advocated leaving the European Community, this capitalist club. Eight years earlier Harold Wilson had held a referendum on staying in, which worked out well for the country and badly for his political party. It will be interesting to see whether we are going to see the opposite this time.

“In 1983, though, anti-Europeanism was a symbol of Labour losing touch with reality. The argument about Europe was totally tied up with the argument about the Labour Party’s political direction. Support for the EC was a big symbol of modernisation.” Later, after Britain joined the European exchange rate mechanism in 1990, the ERM became the symbol of modernisation. Balls, as a leader-writer at the Financial Times, was opposed to ERM membership, but the FT’s editorial policy was in favour. “All the economists were against it, so we had to write leaders saying, ‘It’s a disaster; we must stick with it.’”

It was after the collapse of the ERM policy in 1992 that the Labour opposition started to engage with the next phase of the European project: the single currency. Balls was opposed, and wrote a Fabian pamphlet called Euro-monetarism saying so, but went to work for Brown, who had supported the ERM and who maintained a pro-European view. “He and Tony were broadly pro-European. They assumed our plan would at one point be to join the single currency. But they had never made a government decision, and they were very risk-averse.”

In the run-up to the 1997 election, neither Blair nor Brown was clear on the subject. “Who knows” what their true views were, Balls said. But Brown appeared to be more in favour than Blair – the opposite of their later positions. Blair was “very fearful that the Tories could make patriotism and opposition to the single currency an election issue” and wanted to shut it down, but Brown resisted. Blair wanted Brown to say there were “formidable obstacles” to Britain joining a single currency. Brown didn’t want to go that far, so he and Balls invented the “five tests” – they were originally an attempt to keep open the option of Britain joining the single currency rather than to obstruct it.

When Blair and Brown came into government, that uncertainty continued. Balls said: “In government you have to deal with four kinds of things: crises; big timetabled events; things politicians really care about; and the things the machine thinks you should care about. The single currency was a ‘category four’ subject. That meant we had the kind of meetings about it which are incredibly dangerous, because nobody had thought about it and prepared and people might say what they think.

“There was one meeting where Tony Blair just said, ‘I think this is a bad idea; I think I should speak to [Helmut] Kohl [chancellor of Germany] and say let’s just put it on hold.’ And Nigel Wicks [number two Treasury official] said, ‘Yes, Prime Minister,’ because that’s what you say. We spoke afterwards and I said, ‘What shall we do?’ Nigel said, ‘We could do nothing and hope he forgets.’”

Balls said: “Nigel and I didn’t know where Gordon would come out”, so the Treasury drew up a paper, which was “done deliberately so that no one could understand it”, with seven options, of which the middle one was his favourite, which was to favour joining in principle, but “not in this parliament”.

When that position appeared in the headline of an interview with Brown in October 1997, it caused an early TB-GB kerfuffle, as Brown was forced in a Commons statement to clarify that joining in this parliament was – “barring some fundamental or unforeseen change” – “not realistic”.

In that statement, said Balls, it was Blair who insisted that the passing of the five tests had to be “clear and unambiguous”, a phrase that was to cause trouble later because, Balls added, it was impossible to meet.

From then on, though, Blair seemed to be pushing to join the euro, with Brown opposed. But Balls said: “In retrospect I’m not convinced Tony wanted to join. At the time we didn’t know. If you’re a finance minister in the rough and tumble it hardens your view, but if you’re a leader it’s all more consensual. And it undoubtedly helped Tony for Gordon to be the bugbear with other European leaders.”

In April 2003, Blair and Brown met to discuss the Treasury assessment of the five tests. “Tony went bonkers because the assessment was too negative. At that point Tony could have sacked Gordon. Gordon didn’t know if he had been sacked. But what Tony did do was to send [Jeremy] Heywood [his Principal Private Secretary, now Cabinet Secretary] to decide the language – he could have sent Stephen Wall [pro-euro Europe Private Secretary] or Jonathan Powell [pro-euro Chief of Staff], or he could have played the Cabinet card and got his Cabinet to overrule his Chancellor.

“There is a phrase in economics, ‘revealed preference’: what people do is more important than what they say.”

I asked if the meetings with Cabinet ministers over the next two months, before the decision not to join the euro was announced in June 2003, were a charade, and Balls said: “Charade is too strong a word. Maybe Tony was thinking there may be a cabinet uprising.” But essentially the decision had been taken, as was usual in the New Labour government, by the Blair-Brown duopoly, with the rest of the Cabinet secondary.

In answers to questions from students, Balls expanded his view, expressed when he ran for the Labour leadership in 2010, that free movement of EU workers was “very hard to sustain if you don’t have a common tax and benefit system – I’ve thought this for a very long time but underestimated how quickly these forces were going to rise up.

“We did see how technological change would drive wage inequality, but our answers, minimum wage and tax credits, are really hard to sustain across an economy where you have freedom of movement but different wage levels and tax and benefits systems.”

This became a problem after new countries joined the EU in 2004 and the Labour government decided, unlike the French and the Germans, not to delay free movement from the new member states for seven years. “You always think about the mistakes that you make. The unforgivable mistakes are the ones that you sort of know you’re making at the time – or should have known. In the case of the 2004 accession [of new member states] I think the judgement in terms of scale was just completely wrong. The Home Office numbers expected were tiny. There was never any discussion about it.

“For us, globalisation was all about companies moving to China. It wasn’t about people coming to Britain. The Treasury and Gordon Brown wanted to be an open economy. Gordon would announce work permits and Tony would like that too. The Treasury on the European issue was on the defensive because we’d won this battle on the euro. Tony was keen to have a signal that we were pro-European.”

Balls, a visiting professor at King’s, has talked about this before. As well as the Blair Years class, which I teach with Jon Davis, to which he came last year, he spoke to the “History of the Treasury Since 1945” class, which Davis teaches with Lord Macpherson, former permanent secretary to the Treasury. In one of those sessions, he said: “When it came to the expansion of the European Union in 2004, we didn’t see the extent to which low-wage people would move. Fundamentally, we didn’t think they would.”

In another session, Balls also talked about his view that Blair didn’t really want to join the euro. In this week’s class, he filled out the reasons for that belief, pointing above all to the research done by Alastair Campbell, Philip Gould and Peter Hyman for a possible referendum campaign. “Their work suggested it would be incredibly difficult to win a referendum to join the euro,” said Balls. Last year’s referendum on EU membership surely confirms that view.