EMU - ECONOMIC & MONETARY UNION
We are constantly threatened with being "left behind" if we do not join the euro. But Britain is hardly being "left behind" outside the euro, it is the euro that has trailed behind a strong pound. Since the launch of the euro Britain has overtaken France to become the world's fourth largest economy. It has the largest share of inward investment in the EU, unemployment roughly half the rate of Euroland, long term interest rates lower than Germany for the first time in a generation and the lowest inflation in the EU. We are the EU's most important export market. 60% of our total world trade is denominated in US dollars; of our manufactured goods, which account for less than 50% of total trade, only 12% of exports are denominated in euros, including legacy currencies, and only 14% of imports are denominated in euros. (Global Britain briefing note 14, 2/3/01)
When launched, 1 euro - 1.17 $US in Jan 1999; it dropped to its lowest point in autum 2000 - 0.826 $US.
Latest Currency Rates from OANDA or Universal Currency ConverterBet on the date when the euro will collapse: eurobet.asp
The
latest figures from Eurostat show that prices
differences between Eurozone countries have stayed the same in 2003 and actually
increased since the introduction of the euro in 1999.
The possibility of price convergence has been used by the British euro
lobby to suggest that joining the euro would 'hold prices down' of everyday
goods like jeans and CDs. But
Francisco Caballero-Sanz, head of economic analysis at the internal market
directorate, said "Cross-border shopping has been overestimated.
The people of
The
European Commission last week announced it would press ahead with a legal
challenge to defend the Stability and Growth Pact. The
Commission, which was divided over whether to pursue legal action, said it was
asking the European Court of Justice to rule that EU finance ministers should
not have suspended disciplinary procedures against
Jacques
Delors,
the former President of the European Union, this week admitted that
Six
of the European Union’s largest countries, all net financial contributors to
the EU, called for a freeze on the EU’s
budget until 2013, it was reported on Dec. 16. The leaders of
With
the eurozone’s two leading economies out of control, the European Commission
is now predicting that the budget deficit of the eurozone as a whole will be 3% or over this
year, at which news the value of the euro fell sharply on foreign exchanges.
This figure contrasts with the 2.5% which the Commission predicted for
the eurozone last spring. [Le
Figaro, Agence
With
the big countries
More
than 700,000 European citizens living in the
Cash-strapped councils are being provided with a dodge to finance future spending plans and further penalise drivers - the euro! Covert Government guidance, issued to local authorities nationwide - to prepare for the euro - advises councils that they may wish to increase car-parking charges, fines and charges for other council-run services, using a euro-changeover to mask price 'revisions'. "Local Authorities: Euro Preparations Guidance - Part 1", issued in June 2003 - to all local authorities in the UK states that "when" the euro is introduced - "even after rounding according to EC rules - amounts might seem 'odd' or 'rough', and councils might decide to apply certain further adjustments to produce more convenient euro amounts, by 'smoothing'. car parking charges, fines and other council-charges (p.17) to an operationally practical level" (p.32)" The document continues, "Operators may wish to combine the conversion with a suitable, general price-revision (p.37)" (A S Reed UKIP posting 3 Aug 2003)
The
Dutch finance minister talked about fining
"The important point about the Maastricht treaty is that it retained the veto over the currency. That was the guts of the treaty, and I have always been at the forefront of the argument that Conservative and Labour Governments should use that veto. We are conducting a debate today and have the opportunity to keep the British people out of the euro only because we negotiated that important opt-out. Incidentally, we have learned from the Chancellor today that he has not managed to transfer that opt-out to the constitution, which could then fall because it is part of a treaty that is replaced." (Hansard – John Redwood MP 5/07/2003)
In
an interview with the Austrian daily Der Standard this week,
INCOME
tax could
have to
rise by
5p in
the pound
- equivalent
to a
£16 billion
tax hike
- to smooth
the path
into the
euro, according
to the
Treasury. The
alarming finding,
buried in technical
studies published
as part
of Gordon
Brown's 'not
yet' verdict
on euro
entry last
week, emerges
in the
Treasury's work
on modelling
Britain's transition
to euro
membership. The
tax hike
would be
needed to
prevent an
unsustainable economic
boom and
a sharp
rise in
inflation, as
a result
of moving
towards a
lower exchange
rate for
the pound
and lower
interest rates.
The Treasury's
work on
the painful
adjustments that
would be
needed matches
recent work
by Goldman
Sachs, the
investment bank.
It said
taxes
would need
to rise
by 1.5%
of gross
domestic product
-£15 billion
- to
achieve entry.
'There's still
a gap
between Britain
and the
euroland economies'
said Ben
Broadbent, an
economist with
Goldman Sachs.
"we don't
think entry
will happen
in this
parliament.' (The Sunday
Times
The Government this week decided not to recommend British entry to the euro,
announcing that four of its five tests were not met. The detailed studies by the
Treasury concluded that the UK economy was more closely correlated with the US,
that there were important differences between the UK and Eurozone housing
markets and that the higher level of variable rate borrowing in Britain made our
economy more sensitive to interest rate changes, which would lead to divergence
if we joined the euro. The Treasury studies said: On business cycles: "the
EXPORTS
from UK
manufacturers to
the eurozone
dived by
13 per
cent in
April and
slumped 5
per cent
during the
latest quarter -
crushing the
industry’s hopes
of a
jump in
sales amid
the recent
slide of
sterling against
the euro.
Official trade
data published
yesterday by
National Statistics
revealed the
depth of
the decay
in economies
across the
Channel. Britain
sold just
£8.05bn of
its wares
to the
Continent in
April, compared
to £9.25bn
in the
same month
a year
ago. Clydesdale
Bank’s Tom
Vosa said:
"What is
clear is
that the
fall in
exports has
little to
do with
movements in
the exchange
rate. It
instead reflects
the worsening
domestic demand
environment in
the single
currency area."
He added:
"The April
slide in
exports led
to a
£500m widening
of the
trade deficit
to £1.5bn.
That’s a
useful reminder
that a
weaker exchange
rate will
not necessarily
lift the
manufacturing sector,
as there
is still
a crucial
lack of
demand in
the eurozone
market." Analysts
said the
grim figures
underlined the
extent to
which the
UK and
continental economies
are not
converging -
a key
reason for
Chancellor Gordon
Brown’s rejection
on Monday
of UK
adoption of
the euro.
As sales
to the
eurozone have
faltered, exports
to countries
outside the
European Union
have surged.
Non-EU countries
purchased £6.94bn
of UK
goods in
April, a
rise of
5 per
cent on
the year
and up
11 per
cent from
March. The
three-month total
rose to
£20.1bn, from
£18.87bn in
2002. (The
Scotsman
FORGET about
TONY Blair's only major pro-euro union
ally last night turned against the single currency. The GMB public sector
union cited soaring unemployment in
During the early days of the euro adventure,
Germany,
once the powerhouse of Europe, has more than four million unemployed.
With an independent monetary policy it would have had lower interest rates much
sooner. But its political leaders are
willing to accept a eurozone-wide interest rate - and the consequent
unemployment - as a price worth paying for the objective of political union.
They are perfectly entitled to hold these views. The creation of political union
is an entirely legitimate ambition. And, to their credit, it is not an ambition
which they have sought to hide. The problem for the British Government, however,
is that it is not an ambition shared by the people of
The claim that
joint membership of the euro means that two EU countries have
eliminated exchange rate risk in trade between them is simply not true.
Virtually
all commodities - steel, oil, wool, aero engines etc., are sold
worldwide in US Dollars. (I Francis posting
The National Institute
of Economic and Social Research this week claimed again that the five tests are
met and that the exchange rate is right to join. NIESR
have taken a highly political line. Ray Barrell said there were "many
political reasons for joining". Previously Martin Weale claimed that not
joining the euro would mean that
The Treasury has announced the contents of the extra four studies that will accompany the assessment of the five tests. The four extra papers will cover: a) the exchange rate and macro-economic adjustments, b) the transition to the euro, c) an analysis of the "framework" in which the five test analysis is being conducted and d) a report bringing together "specially commissioned" papers by international academics on Britain and the euro. ("No" bulletin 13/2/03)
European Commission says Britain would have to rejoin the ERM. Britain would have to rejoin the ERM before joining the euro, according to Klaus Regling, the European Commission's Director General for economic and financial affairs. This contradicts claims made by the Government earlier this week that the Commission had agreed to waive the need for Britain to rejoin. Mr Regling also confirmed that we would not know the exchange rate we would be joining at in a referendum. This would be negotiated after the referendum result. The Government needs to clarify now whether the Commission is right to say that we need to rejoin the ERM. Britain's last period of membership was a disaster - we lost 100,000 businesses and unemployment doubled. ("No" bulletin 6 February 2003)
The European Commission this week called on Gordon Brown to reduce his projected budget deficit for 2003-2004, saying that the Government current investment and spending plans risk breaching the 3 percent limit of the Stability Pact. In a separate speech, Pedro Solbes, Commissioner for Economic and Monetary Affairs, described the 3 percent limit as "untouchable". This provoked an angry reaction from the Treasury who said that the Government had no intention of cutting public spending to comply with the "doctrinaire" interpretation of the Stability Pact. ("No" bulletin 12/2/03)
It has been stated (by the Prime Minister) that there is no ‘constitutional bar’ to the adoption of the Euro. Given that entry into the Euro is irrevocable, a fact confirmed in a Parliamentary reply given by Government spokesman Lord McIntosh of Haringey on 2nd August 2002, stating that the "EC Treaty contains no provisions for a member state to withdraw from Economic and Monetary Union", adoption of the Euro would clearly be a breach of two fundamentally important constitutional conventions: firstly, that no one Parliament may bind its successor and secondly, the judgement established in the case of Blackburn versus the Attorney General that "as a matter of law the Courts of England recognise Parliament as omnipotent in all save the power to destroy its own omnipotence". However one looks at it these are not insignificant constitutional barriers to abolition of the national currency. (Letter to Treasury Select Committee by Freedom Association 17th January 2003 )
Economies need to be in a state of total collapse before the rules contained within the Stability Pact can be lifted. The threat of fines for a fiscally recalcitrant country, for example, is taken away only if GDP contracts by 2 per cent or more in any one calendar year. Germany may be in a bad way but it's certainly not facing difficulties on this kind of terminal scale as yet. If GDP falls by between 0.75 per cent and 2 per cent, the country is allowed to ask its peers for respite and, to be realistic, there's a good chance of a sympathetic hearing. If, however, the economy shrinks by less than 0.75 per cent or grows at a snail's pace, punishment will be required. A severe telling off comes first but, if this is ignored, there is a transparent path towards monetary fines. ( Independent 13/1/03)
Swedish politicians opposed to the European Union's single currency have criticised Goran Persson, the Prime Minister, for saying that Sweden could be forced to vote again if it says "no" to joining the euro in next September's referendum. Mr Persson, who wants Sweden to adopt the euro, told Swedish public service SR radio that a rejection of the euro by a majority of Swedes on 14 September would probably lead to a new referendum at a later stage. (The Independent - 24 December 2002)
It was Speaker Lenthall who, in an historic statement, refused to let King Charles I, accompanied by a party of soldiers, arrest five MPs. Now one of Lenthall s successors has made another defining statement, this time in the House of Lords. Bernard Weatherill, now a lord, has broken with tradition and condemned the drive to monetary union as the biggest threat to the freedom of Parliament since Lenthall. In a little-noticed speech, Weatherill, who was Speaker in the Thatcher era, declared: I am increasingly alarmed by the way in which our constitution today is overriden with a flood of EU directives and regulations which are seldom, if ever, debated in Parliament and yet are binding on us. Referring to monetary union, he added: This would constitute the greatest handover of national sovereignty in our history. Speakers of the House of Commons are traditionally guardians of the rights and privileges of Parliament achieved for us through the centuries by our forebears. Weatherill, who has faithfully abided by the convention that Speakers never stray into party political controversy, added: No Speaker should envisage his or her successor becoming in a EU about as important, say, as the chairman of the Greater London Council, whose former building across the river is now an upmarket hotel. Afterwards Weatherill said: I know it is a breach with convention, but sometimes you have to dig in your swords. I shall return to this theme. (Times Newspapers 20/12/02)
The price for an average basket of goods in Spain has risen 18 percent, according to new research released this week. The study, by the El Pais newspaper, compared prices for a basket of 60 goods from December 2001 and December 2002. In December 2001, the basket cost 170.44 euros but in December 2002, the same basket bought at the same supermarket cost 201.12 euros, a rise of over 18 percent. Fish and meat rose on average by over 30 percent and vegetables by nearly 25 percent. This survey follows a report by the trade and tourism ministry which showed that one third of foodstuffs examined had risen in price by between 8 and 30 percent since the introduction of the euro. ("No" Bulletin 19/12/02)
At the beginning of the year when euro notes and coins were launched, politicians from both Britain and the Eurozone predicted that it would lead to lower prices, more jobs and higher growth. In fact, there have been significant price rises, constant tensions over the Stability Pact, and the single interest rate has led to lower growth and rising unemployment. ("No" Campaign bulletin 12/12/02)
Has there been convergence between the countries already in the euro? The divergence in gross domestic product growth rates since 1998, the year before the formation of the euro, has eased somewhat, but it has been a convergence downwards. Countries that were growing fast have fallen sharply while the formerly slow growing countries, principally Germany and Italy, have fallen back still further. Interestingly, there has been little convergence on unemployment. This year the average divergence in unemployment rates between the 12 members and the euro zone average is about 3 per cent. When it comes to inflation, there has been considerable convergence. In 1992 the average difference between individual countries' rates and the euro zone average was 2.5 per cent but this year it is down to 1 per cent. Mind you, there are still some substantial differences between countries, with Germany and Belgium having inflation rates not much above 1 per cent while, at the other end of the spectrum, Ireland, Greece, Spain, Portugal and the Netherlands have rates just above or below 4 per cent. Do these continued divergences matter? You could say that they are supportive of UK entry into the euro. After all, those euro-sceptics who argue that if we were to join the euro we would immediately have to import German and French levels of unemployment have to ask why this has not happened to the Netherlands, Ireland and Portugal. Unemployment in France and Germany is at 9 per cent and 10 per cent but in those countries it is between 2 per cent and 5 per cent. Whether the structural differences in labour markets are allowed to remain is another matter. As the drive towards harmonisation proceeds, they are likely to be reduced. Accordingly, you would expect unemployment rates to tend to converge. As UK unemployment is a good deal lower than the euro zone average, this is hardly an appealing prospect. The continued divergence in inflation rates is probably more surprising. First, relatively poor countries such as Portugal and Greece, which are growing relatively fast, tend to have high inflation rates, as their lower prices rise to the level of the central European countries. Second, the countries of the union may not have joined at the "right" exchange rate. With the nominal exchange rate fixed irrevocably through membership of the euro, the only way for competitiveness (what economists call the real exchange rate) to adjust is for countries to experience different inflation rates. This is the nub of the German predicament. If the other euro members are themselves inflating only at very low rates this means that Germany can only regain competitiveness by deflating. In this respect the problem of German competitiveness and the threat of deflation should be regarded not as an unhappy accident but rather as a direct consequence of abandoning the mark for the euro. But membership of a currency union does not immunise you from changes in the real exchange rate. Perhaps the most striking thing about the operation of the single currency is the way that it has not led to a convergence of real interest rates, that is to say, money interest rates minus the inflation rate. This follows inevitably from the fact that inflation rates are so different. Given that all countries face the same nominal interest rate, set by the ECB, the real rate must differ along the same pattern as inflation rates. The differences are quite marked. In 1998 Greece and Ireland had high real interest rates, but apart from these countries all the others had virtually the same real interest rates. Now, however, real interest rates differ considerably across the euro zone. Rates are highest in Germany and Belgium, which have the lowest inflation rates, and lowest in the countries which have the highest inflation rates. Indeed, Greece, Ireland, Spain, Portugal and the Netherlands have negative real interest rates. In other words, the countries which have the highest inflation rates are forced to operate a policy that encourages higher inflation, while those countries with the lowest inflation are forced to operate a policy which encourages still lower inflation. When you think about it, it is a wonder that the divergences are not greater. It is more likely to be a case of making do with the one size which fits no one. Moreover, even though the workings of the policy mechanism appear to be perverse, they will drive the system towards equilibrium in the end. Mind you, if you had the choice, is this how you would choose to run a railroad? (The Telegraph - Economic Agenda 08/12/2002)
Last year Portugal overshot the eurozone public sector deficit limit of 3 per cent of GDP by a full percentage point and narrowly escaped a fine by agreeing to cut back state spending and to privatise some state-owned assets. The right-of-centre Government is also trying to introduce a huge Bill to free a labour market that is one of the most rigid in the EU. Lisbon says that the reforms are essential to restore economic competitiveness in the face of a growing challenge from Eastern Europe. But trade union leaders say that the legislation aims to take away workers' rights at the behest of employers' organisations. Today's protest by the CGTP trade union federation, and supported by the rival UGT federation, will be widely felt in education and transport, closing most schools and bringing the state-owned rail network to a halt. TAP, the state-owned airline, will be hard hit, with many flights cancelled. Dustmen will also be on strike. Budget cuts have been felt keenly in sectors such as health and education. Many nurses are not paid for overtime and universities have suffered a reduction in funding. Some university rectors have said that their institutions will be unable to function normally from next term. (10/12/2002 Times)
Revolt is in the air. The most, perhaps the only, popular people in Germany are its satirists; and German satire, when it gets going, is robust verging on nasty. The "shirt game" is gentler, but its message is unmistakable. In response to the 48 different tax increases, on everything from flowers to fuel oil, announced since September by a Chancellor who only last July declared that "tax rises make no economic sense" in a slump, the web designer Christian Stein suggested that people should solve Herr Schröder's financial worries by sending him the "shirts off their backs". The response has been such that he predicts that the Chancellor, compared in one of the less vitriolic epithets around to a bad case of athlete's foot, will have 50,000 of them in his wardrobe come Christmas. The Germans also want their deutschmark back. It turns out - as became known when C&A, in an inspired bit of marketing, invited Germans to spend their "useless" marks in all its branches this week - that they hated surrendering the currency so much that they still have E8.8 billion stashed under their mattresses. The euro - and, by extension, "Europe" - is becoming equated with national disaster. (Times 4/12/02)
Portugal's hospitals, courts, fire service, public transport and ports were severely affected in the one-day strike on Thursday, which took place as MPs voted on an austerity budget in Lisbon. The budget calls for wage cuts, when adjusted for inflation. Manuela Ferreira Leite, the Right-wing finance minister, said the country had to make "sacrifices" to repair national finances left in tatters by the last coalition. "Our economy is like a drowning man. It's not a question of deliberating over what medicine to administer. We have to act now to save it," he said earlier. More than 70 state bodies have already been closed or merged. Civil service recruitment has been frozen. Lisbon's new airport has been put on hold. VAT has been raised from 15 to 17 per cent. The defence budget has been slashed, prompting the Portuguese to recall ships to port. Soldiers have been instructed to bring their own lavatory paper to work and the army is taking out loans to pay servicemen. The cuts are required to stop Portugal's budget deficit from mushrooming out of control. The country ran a deficit of 4.1 per cent of GDP in 2001, far above the EU's Stability and Growth Pact ceiling of three per cent. (Daily Telegraph 16/11/2002)
Britain's European policies rest on two misapprehensions. Perhaps the parlous state of Europe may open even our apologetic eyes and change the way we handle European affairs. The first misapprehension is the idea that other countries, particularly France and Germany, are our "partners" - a weasel word used in business by people who want to take advantage of you. In fact, in the inter-governmental model, they are our allies and rivals. The second is that Britain must placate them. The inconsistency is clear: were they partners, we should not need to placate them; since they are rivals, we should rarely try. The reality is that the European Union has shown itself not so much resistant to economic reform as utterly unreformable, even as evidence of peril mounts. The malign grip of French state employees continues to keep what should be the richest country in Europe operating well below its potential. The Commission is weak and blunder-prone. The bear market in equities threatens to defer by a generation a market solution to the pensions time-bomb. And the German economic crisis deepens by the day. I made a speech five years ago, saying that I thought it would be tough to make the euro work because of the rigidity of continental economies. I also said that Britain should not join, partly because its economy differed substantially from other EU members, and partly because the early years of the euro would be tough until the eurozone economies reformed or the system blew up. The problems remain where they always were, at the institutional level. I pointed out in 1998 that the downward wage adjustments commonly seen in the US were not symptoms of transatlantic brutality, as many Europeans seemed to think, but the necessary consequence of a monetary union. Europe had no adjustment mechanisms then and has none now, except for ruinous unemployment. Fiscal room for manoeuvre is stymied by national debts and the stability and growth pact, which must urgently be reformed or replaced. Euro-trainspotters will talk to you about the European parliament and three commissioners with unlikely titles. Forget it. This is about brute power, exercised by men with failing economies. Is the Franco-German engine bad for Britain? No, it is bad for Europe because these countries are backward in the economic respects that now matter. Under these circumstances, scepticism is not enough. For Britain to join the euro at this juncture - even to think about it - would not merely be risky but stark staring mad. Not even friends of the euro should seek British entry now, since it would make an unstable position worse. The euro is in in too much of a mess to make entry feasible at any time in the foreseeable future. (Martin Taylor chairman of W.H. Smith - Financial Times November 12 2002).
The finance ministers of the EU have formally opened against Portugal the procedure that was set up to control national budget deficits. They do this just as the president of the European Commission, Romano Prodi, has declared these rules to be stupid and as France and Germany have announced their intention to ignore them. Portugal now faces millions of euros in fines, because its budget deficit is 4.1% of GDP. Germany is also threatened with a similar procedure, but it avoided it by garnering enough allies in a Council vote last February. [Handelsblatt, 5th November 2002]
Countries now know they need not follow stability pact's rules. So it is dead. And in acknowledging this fact, Mr Prodi deserves praise for his honesty, if not for his delivery. Most of the smaller European countries are understandably furious at the recent fudging of the stability pact. They would be wrong to cling to its flawed strictures but they have had their fears confirmed that in the euro there is one rule for the big countries and another for the small. This sore will not heal quickly. (Financial Times 23/10/02)
The malign effect of the Growth & Stability Pact on small countries is exemplified by the experience of Portugal. By allowing current account debt to exceed 4% Portugal is under immense pressure by the European Commission to cut government spending wholesale. Another effect on the economy was described in a letter to the Financial Times: "Many European banks are seeking to boost their deflated capital reserve ratios. In Portugal most of the commercial banks are unable to lend at all on any new commercial deal or residential property, even if they are conservative, asset backed transactions. The effect in Portugal, already the poorest country in the EU, is becoming marked. Half-completed building projects are becoming noticeable. With small businesses going to the wall in this unfortunate way, the downturn effect on employment levels and consumption expenditure is inevitable. (Financial Times 23/10/02)
About 100 protest marches were launched around France. Similar protests two years ago led to the ouster of Socialist Claude Allegre as education minister. The 2003 budget proposed by the center-right government of Prime Minister Jean-Pierre Raffarin would do away with 5,600 school aides and would not renew some 20,000 special contracts for youths who help in schools. The government argues that the cuts are needed because of the budget deficit, and urged understanding from the unions. (Associated Press Paris, Oct. 17, 2002)
Romano Prodi, president of the European Commission, thinks the EU's stability and growth pact is "stupid" Germany and Portugal have broken the pact, and France is ignoring it Shouldn't they just abandon it? The stability pact was devised in the 1990s to give the new single currency a firm launch pad, by placing tough curbs on irresponsible government borrowing Now it is starting to look its age He thinks it is too rigid The pact insists that each EU member state runs a balanced budget in the medium term and that no country's deficit should exceed 3 per cent of GDP The problem is that, in the current downturn, the pact's rigid rules look "medieval", in the words of the EU trade commissioner Pascal Lamy The four countries that failed to tackle structural deficits before the downturn started - France, Germany, Italy and Portugal - have borne the brunt They say the pact is pro-cyclical, forcing them to cut spending just when their economies need a boost Mr Prodi's doom-laden comments may hasten the stability pact's demise But most still believe that Europe will have to soldier on with the weakened pact for a few more years to come Smaller countries in particular, which went through great pain to control their deficits, are fiercely opposing any reform of the pact simply to make life easier for Germany, France and Italy Romano Prodi is pushing hard for the Commission to have more power in policing and enforcing whatever economic rules the EU agrees He is fed up with the Commission's attempts to uphold the stability pact being overturned by EU finance ministers, behind closed doors, in their monthly Ecofin council Britain, France and some other countries would prefer to keep power in the hands of the council. (Financial Times October 18 2002)
Sweden and Finland offer a near-perfect laboratory study of why it matters whether a country retains control of its own monetary policy in difficult times. Their sibling economies both rely on a mix of forestry and hi-tech industry such as Ericsson and Nokia, the two biggest mobile phone producers. When the technology crash hit in 2000, Sweden absorbed the shock letting the currency fall by 16 per cent over a period of several months against the euro - though it has since edged back up. This did not stop a sharp fall in the sale of Ericsson's mobile phones; but it gave a shot to the rest of the economy. "Old" companies, such as Volvo, increased exports and profits and even hired extra workers. Unemployment has fallen slightly to 3.9 per cent, a point that is not lost on Sweden's Eurosceptic trade unionists. Nils Lundgren, the former chief economist of Nordia bank and a leading Social Democrat said the outcome of the past two years was a clear vindication for the krona. "This has been a classic test of what we call a 'country-specific shock'," he said. "The system has worked exactly as it should do, Finland is not so lucky. The Finnish economy is in trouble. Excessively low interest rates in the euro-zone led to overheating in 2000, when growth was 6.1 per cent. This fell to 0.7 per cent in 2001 and to -2 per cent annual rate in 2002. Unemployment has jumped to 9.5 per cent, but there is almost nothing the Finnish government can do to counteract the slump. As the European Commission admits in its annual report, the Euro destabilised countries because interest rates were set too low for domestic needs, in Portugal's case, a wild credit boom was followed by bust. The government was forced to rein in spending to meet European Union deficit rules. By the time of the March elections, the Portuguese government's reputation for economic management was in ruins. The political damage to the Portuguese Left mirrors the effect of the ERM crisis on the Tories and may last as long. Holland is more of a surprise. It has one of the most dynamic economies in Europe; too dynamic for the euro-zone, as it turned out. Interest rates set for the "sick men", Germany and Italy, led to a property boom. Inflation rose to 5-5 per cent. The Dutch "mini-bubble" burst this year cutting growth to 0.5 per cent or worse. (Daily Telegraph September 21, 2002)
The deflationary policies enshrined within the European Union's mis- named Stability and Growth Pact, which governs economic policy within the eurozone, has led to ballooning unemployment and negligible growth levels in employment; in Germany alone unemployment has hit over four million. Portugal, one of the EU's poorest countries, also faces the possibility of fines from the European Commission of over £5 billion next month for failing to make severe spending cuts demanded by the draconian pact. Euro membership also demands handing over most of this country's gold reserves to the European Central Bank, and there is no mechanism for any country to leave once it is locked into the single currency. Millions of ordinary people share such concerns and oppose this country being reduced to a rate-capped county council ruled from Brussels. The RMT union intends to raise these issues at the TUC conference next month. (Letter in the Times 24/8/02 from Bob Crow, General Secretary, National Union of Rail, Maritime and Transport Workers)
In the FT this week, David Clark claimed that Eurozone countries' trade with each other is growing faster than ours. Actually Eurostat figures show that since the launch of the euro, Britain's exports to the Eurozone have grown faster than the euro members' exports to each other. Over the three years since the launch of the euro, Britain's exports to the Eurozone grew 23.5 percent. On average euro members' exports to the rest of the Eurozone grew only 19 percent over the same period. He also repeats Britain in Europe's claim that trade with the Eurozone has fallen as a share of GDP since the launch of the euro. This is not true. National Statistics figures show Eurozone trade increasing as a share of GDP from 23.5 percent in 1998 to 25.3 percent in 2001. BiE have not explained where their figures are from. Clark also claimed that euro members' inward investment has increased 384 percent - a number seemingly plucked randomly from the air. When challenged to provide a source for this figure, the office of Chris Huhne MEP, from whom it originates, claims it is from "an unpublished European Parliament report". In fact, UN figures for 2001 show Britain receives more inward investment than France and Germany combined and our share of investment into the EU has been stable since 1998. Despite BiE's figures, the real evidence so far suggests that Britain is not "missing out". What we are missing out on is higher unemployment, higher inflation, lower growth and the future costs of the Eurozone's bankrupt state pensions. ("No" Campaign Bulletin 23/8/02)
The Government's network of 12 regional euro forums is being wound down after enquiries from businesses about the euro dried up (FT, 20 August). Some of the forums have already closed and passed their responsibilities - their euro "hotlines" etc - on to Business Link organisations. Many others are planning to do the same over the next few months. The closures will be a blow to the euro lobby. Although the forums were officially supposed to help prepare British businesses for the euro as a foreign currency, many went beyond this to actually promote the euro. According to the FT, "The Prime Minister is still keen to call a referendum next year, and the 12 units could have been a useful resource for a pro-euro campaign." Some of the forums were effectively becoming campaigning organisations - the South West and South East forums both sent out euro "information" to tens of thousands of businesses last year. ("No" Campaign Bulletin 23/8/02)
"What has the European Union ever done for us?" This question was never expected to be heard in Portugal, where joining the Community and the euro were enthusiastically welcomed as historic national achievements. The Portuguese can draw up a long list of what the EU has done for their country, from huge of inflows of aid to increased living standards and a stable currency. However, as the country faces harsh austerity measures to avoid EU sanctions over its excessive budget deficit, many Portuguese are beginning to ask why they are being made to pay such an unexpectedly high price for their place in the single currency. After disclosing that the previous Socialist government ran up a 2001 budget deficit of 4.1 per cent of GDP - breaching the 3 per cent limit set under the EU's stability pact - the new centre-right government has pledged to cut the deficit to 2.8 per cent of GDP this year and to maintain a downward trend in 2003 and 2004. Economists see this as a Herculean task. Government cuts have damaged consumer confidence and slow economic growth is hitting tax revenue. Further cuts in public spending are the only effective means for reducing the deficit. There is little doubt that the "deep, violent" cuts that Manuela Ferreira Leite, finance minister, has warned the country to expect will take their heaviest toll on the poorest. Public sector wages, which set the national trend, will be held down. Increases in pensions will be minimal. Public transport fares and other administered prices will go up more than usual. Education, health and other social services will suffer cuts. Local governments will see their budgets pared back. Infrastructure projects will be postponed. Value-added tax has already been increased. (Peter Wise in Lisbon July 28 2002)
The Commission has opened the procedure that is supposed to deal with excess deficits, although the Council of Ministers will take no decision until the autumn. The fines on Portugal could be as high as 270 million euros, while cohesion fund payments could also be suspended. Portugal would expect to receive 3 billion euros from the cohesion funds between 2000 and 2006. (Le Monde, 30th July 2002) (EFD 148)
The European Commission informed, late Thursday night, that it is preparing its sanctions procedure against Portugal, whose budget deficit last year reached 4.1 per cent of its gross domestic product, in breach of the Eurozone limit of 3 per cent, reports the Danish newspaper Berlignske Tidende. According to the procedure, the Commission will now prepare a report on Portugal’s economy, which is handed to the European Union’s economic and financial committee. The Committee will then, in no uncertain terms, ask Portugal to take action. If the Portuguese government does not heed the advice of the committee to a satisfactory degree then sanctions will become active. (EUobserver.com 26.07.2002)
We are vulnerable to the risk of being blackmailed into the euro, regardless of any referendum or the result. There are two routes. One in the future, one long-standing. First, the so-called 'constitutional' treaty planned for 2004 is expected to make exemptions and opt-outs untenable in practise. In or out - no half-ways. Join the euro or leave the EU! Second, Article 73f of the Maastricht Treaty. That says the EU can impose capital controls on money movements anywhere within the EU to and from the rest of the world. These draconian controls are permitted if "capital movements to or from third countries cause, or threaten to cause, serious difficulties for the operation of economic and monetary union." No definitions are provided for the phrases 'threaten to cause' and 'serious difficulties'. In other words, the ECB or the EU Commission, or whoever, can invent whatever criteria they think they need to justify such a decision, and they can then claim to be acting within the terms of the Treaty. Worse, the terms of this article can be invoked under QMV. There is no veto. Of course, there are two ways of interpreting this scenario. Before British entry into the euro, and after entry. Before entry: London goes ape, and pressure suddenly grows for Britain to leave immediately. But, if a monetary crisis had been engineered beforehand - collapse of the euro, for example - the EU could then demand de facto instant entry so that sterling could be used to prop up the ailing euro. And once they had their hands on the Bank of England, all the rest is mere practicalities. After entry: Exchange controls re-introduced. In the early 1990s EU committees discussed the introduction of capital controls. They were talked of again in the late 1990s as part of the management scenario once all members were in the euro. There has also been serious discussion within the EU of the introduction of exit taxes on individuals wishing to leave the EU This suggests that any likelihood of British entry will be preceeded by a significant flight of cash and people. Sterling would come under colossal and sustained downward pressure. Those who talk of the entry rate being too high have forgotten the realities of the international money markets. In fact, the continentals saw exactly that before and after the euro was introduced in 1999. The flight of capital from Germany, France and the other continental members drove the euro's value down inexorably. Capital controls would be a disaster for London: "That would not be a deterrent to Britain's partner governments, for whom the destruction of London as a financial centre would be a cause for great rejoicing." (AIG International 4/4/02)
The pound will have to devalue by at least 20 percent if the UK is to join the euro according to the Chairman of the European Banking Federation, Martin Huefner. He said, "at the current rate, entry is not possible or advisable". The Federation represents 3,000 banks across Europe. A 20 percent devaluation would give a rate of about 77p, compared with an all-time low of 57p. ("No" bulletin 6/6/02)
"I am, however, more worried about the impact of the euro on micro policies. There has been much talk of asymmetric shocks as a threat to a wider euro area. The most likely shocks are from divergent policies of member governments. Or, to be more precise, fears of such divergence will prevent members from engaging in worthwhile policy experiments. There are all sorts of reasons why a government may want to pursue policies leading to a once-for-all increase in money costs. Examples are energy or environmental policies that raise the cost of fossil fuels and a payroll tax to finance the National Health Service. Again, I would not lose any sleep if such policies were determined at a European level. But they will not be in the foreseeable future. We shall just see national governments needlessly put into a straitjacket, deprived of both the safety valve of the exchange rate and the knowledge that common forces are affecting costs throughout the area. Thus my scepticism is based not on dislike of the euro but on a positive preference for a floating exchange rate. Encouraging the euro to compete with the pound sterling is not just a form of words. It means that, far from being hostile to the euro, the government should do what it can to promote currency competition inside the UK. But there cannot be currency competition between sterling and the euro, or anything else, if the pound disappears." (Samuel Brittan Financial Times 22/5/02)
Ireland's Minister for Finance, Mr Charles McCreevy, has criticised the EU Commission's proposal to strengthen their supervision of national Budgets and suggested that over-ambitious calls for European political integration could be driving voters into the arms of the political far-right. The Irish Times of today, Wednesday 8 May, reports Mr McCreevy as saying in Brussels after yesterday's meeting of EU Finance Ministers that recent election results in various EU countries showed that voters were uncomfortable with the pace of EU integration. "It is no accident that in all European countries, there is growing support for people who want to step back," he said. Mr McCreevy was responding to a proposal by the Economic and Monetary Affairs Commissioner, Pedro Solbes, that finance ministers in the eurozone discuss in advance Budget proposals that could affect their countries' compliance with the EU Commission's Broad Economic Policy Guidelines. Commissioner Solbes wants unanimity if politicians wish to amend the EU Commission's recommendations on broad economic policy guidelines without its acquiescence. The Irish Finance Minister said he felt the implications of the proposals would see the EU running the rule over budget proposals before they were even put to national Governments and Cabinets. (The Irish Times 8 May 2002)
The UN's annual economic survey, published this week, accused the EU and the ECB of "policy paralysis" and concluded that Europe had done too little to boost growth and had also added to trade frictions. The ECB and the Stability and Growth Pact are especially attacked. The report says, "the Stability and Growth Pact has forced governments to pursue deficit targets with insufficient regard to their cyclical positions." The report cites Germany as an example of the problem, saying, "Discretionary fiscal actions to stabilise the economy, such as advancing the introduction of tax cuts, was ruled out by the European Commission with respect to Germany". With regard to the ECB, the report suggests it is too slow to react to economic events - "the ECB responded late and in a way not clearly linked to conditions in the real economy . the ECB was reluctant to cut rates as aggressively as the US Federal Reserve". (Telegraph, 2 May 2002).
Oxford Economic Forecasters highlight the problem of choosing the right rate to lock sterling against the euro. Entering the single currency at the wrong exchange rate could potentially push up unemployment by nearly a third, forecasters from Oxford Economic Forecasters warn in a report prepared for the British anti-euro campaign. The Forecasters highlight the problem of choosing the right rate to lock sterling against the euro, should the government win a referendum on the single currency. "For a 10 per cent overvaluation of sterling at entry, UK prices would ultimately have to fall by 10 per cent relative to prices in the rest of the euro zone. That order of magnitude of price adjustment is costly in terms of output and employment," Adrian Cooper, the managing director of Oxford Economic Forecasting told the Guardian. Erring on the low side would be equally disastrous - triggering an inflationary boom, which would eventually lead to a painful recession, he said. It is widely thought among economists that Germany entered the euro zone at too high a rate and that this is a key reason for Germany's current high unemployment. (Guardian 01.05.2002)
The gloomy French budget deficit announcement coincided with a newspaper report signaling trouble with France's pledge to the European Union to balance public finances by 2004. The finance ministry's budget office, in an internal document, predicted the multi-year timetable of deficit reductions France had given to the European Union in 2001 would be impossible to meet, the French business newspaper Les Echos reported Friday, citing sources close to the situation. The only way to maintain the timetable would be to increase personal and business taxes, the document reportedly said. The budget office forecast the public deficit would climb to 2.1 percent of gross domestic product in 2003 because of declining social accounts, Les Echos said. The 2002 government budget includes a public deficit between 1.7 and 1.8 percent of GDP. The deficit stood at 1.4 percent of GDP last year. The Stability and Growth Pact, adopted at a European Union summit in 1997, calls on the 12-state euro-zone -- the EU minus Britain, Denmark and Sweden -- to restore balance to their public finances or to come close to doing so in the medium term. The euro-zone finance ministers agreed in March to bring their public finances close to balance or to a surplus by 2004. (5 Apr 2002 PARIS, AFP)
Eurostat, the EU's statistical office, warned that there was a strong risk of Portugal breaching the stability and growth pact's condition that a country's budget deficit must not exceed 3 per cent of GDP, writes the Financial Times. Portugal, along with Germany, narrowly escaped a warning last month over its budget deficit, after European finance ministers decided to reject a Commission proposal to issue such a warning. Eurostat said that, according to Portugal's own estimates, the discrepancy between taxes that had been levied and taxes that were actually paid could increase the deficit to 2.6 per cent of GDP. The Commission body added that the deficit was likely to increase still further because of suspicions that operations the government depicted as share purchases were really capital transfers to companies. (EUobserver.com 22/3/02)
PORTUGAL'S navy was ordered back to port last month after the Defence Ministry said there was no money left in its coffers. In a further blow to national morale, Uefa, the governing body of European football, threatened two weeks ago to take away the 2004 European championships after local authorities cast into doubt earlier pledges of £3 billion funding for the competition. "The state of public finance could bring on a long period of economic stagnation," he said. "We are looking at a situation where we could be overtaken by Greece and lose out to the east European countries preparing to join the European Union." The European Commission is nervously watching as Portugal is seen as a test case of a peripheral euro economy that has fallen out of alignment with the core of EU states. In its annual economics report in December, the commission described Portugal's economy as "alarming" and the country narrowly escaped a formal warning over its growing budget deficit, which was 2.2 per cent of GDP in 2001 - twice the government's target. It has one of the EU's highest rates of inflation and debt and lowest rates of productivity. After early warnings from the commission last year over Portugal's debt, the government cut the defence budget by half. The army has taken out bank loans to pay its soldiers, who have been advised to take their own lavatory paper to work due to cutbacks. The air force has cancelled training flights and asked personnel to procure their own food. (Daily Telegraph16/03/2002)
The Economist publishes an annual forecast of GDP per head (not adjusted for purchasing power) and the world in 2002 shows GDP per head: Germany $25,900, UK $25,500, France $24,600, Italy $21,300. It's striking that the highest GDP per head in Europe are countries outside the EU: Switzerland $36,500 and Norway $$38,700 then countries outside the Euro Denmark $34,600, Sweden $28,700. New figures from Oxford Economic Forecasting show that the UK is now better off than France or Germany. In dollar terms GDP per head in Britain is now $23,712. This is 5 percent higher than Germany $22,590, 7 percent higher than France, $22,156 and 16 percent above the 12 eurozone countries overall, $20,440. Adrian Cooper, head of Oxford Economic Forecasting said that the turnaround in relative living standards between Britain and Europe was mainly due to stronger real growth and not just the weakness of the euro. He said "The UK economy has grown more quickly than the Eurozone over the past five years - at an average rate of 2.7 percent. Over the same period Germany has grown by only 1.8 percent a year." He predicted that the gap would increase in 2002 with Britain continuing to grow more quickly than the Eurozone (Sunday Times, 23 December). Figures from the European Commission which exclude the effects of the weak Euro also confirm that Britain has overtaken the Eurozone in terms of living standards. The Commission's "Purchasing Power Parity" measure also shows that UK living standards have overtaken Germany in the last year (Eurostat 2001). (Summary 12/3/02)
Sterling is almost certainly unsustainably overvalued. But can we decide by how much? The real effective exchange rate is almost as high as it was in the early 1980s and more than 30 per cent above its trough in the mid-1990s. The latest economic survey from the Organisation for Economic Co-operation and Development gives estimates ranging from Euros 1.04 to Euros 1.54, though with most falling between Euros 1.20 and Euros 1.50. Suppose sterling enters at Euros 1.55 but the rate should have been set at Euros 1.20. To achieve this reduction through a fall in the relative price level would demand 1 per cent a year lower inflation for 25 years. Since the eurozone is expected to be a low-inflation zone, this implies extremely low inflation for a long time. Yet deciding what the entry rate should be is just the beginning. The government may indicate such a rate in a referendum but will presumably not have agreed it with its partners, since the application to join logically follows the referendum. So the electorate will not know the most important piece of information about entry. The UK could then need to persuade its partners that the right rate is not the real one. Such a suggestion could create serious problems for the UK's partners. If the entry is some years hence, the Bank of England could raise interest rates to offset the inflationary impact of the depreciation. Provided there was an agreed entry rate and a date of entry, short-term interest rates differentials vis-a`-vis those in the euro would set sterling's exchange rate path. If entry were quite quick, however, the UK would need some other means of offsetting the inflationary consequences of depreciation and perhaps of a reduction in short-term interest rates after entry. It would presumably have to use a tighter fiscal policy. But it would be hard to sell a significant (and unpopular) fiscal tightening to offset the inflationary impact of entry. To enter the euro at a real exchange rate close to a historic high seems wildly imprudent. But the alternative of forcing a depreciation seems almost equally risky, not to mention hard to do. The conclusion is simple: this option is not in the money. The chancellor prides himself on his prudence - and a prudent government would not exercise it. (Martin.Wolf, The Financial Times Mar 6, 2002) Tony Blair told journalists this week "there is an issue about the exchange rate when you come to the decision, but that is for the future." (Lobby briefing, 5 March 2002).
For any government, a credit rating downgrade is unwelcome. For Germany it would be close to a national humiliation. The prospect that the federal German government could lose its top-notch triple-A rating in world markets is now no longer unthinkable. The issue has come into focus since the European Union governments let Germany off the hook last month by refusing to endorse a warning from the European Commission wanted to give for Germany for running too high a budget deficit. (Financial Times 6/3/02)
Consider Tony Blair’s statement that taxes are going up to pay for the NHS in the light of: 1. The European Commission's criticism of Brown's original spending plans that would lead to a deficit which the E Commission says would break the Euro rules. 2. Blair's timetable to abolish Sterling. If taxes do go up, it is to pay for Sterling's abolition, and the adoption of acceptable spending regimes under the aegis of the ECB. (E-mail CJKA 24/2/02)
The Treasury this week flatly rejected demands by the European Commission to cut spending, and warned that the Commission's hardline approach would make it more difficult for Britain to join the euro. A Treasury spokesman said, "the UK has no intention of reducing public spending by 10 billion pounds as the Commission seems to imply." The Prime Minister's spokesman said, "as we are outside the single currency we are not subject to its sanctions." ("No" Bulletin 31/1/02)
Finance ministers of the EU countries on Tuesday accepted commitments by the German and Portuguese governments to watch their budget deficits to avoid that they reach 3 per cent of the countries’ GDP and turned down a Commission proposal to reprimand the two countries over their sizeable budget deficit. The decision was reached after long negotiations and two weeks of political pressure from Berlin, which fought to avoid an embarrassing warning according to the terms of the Stability and Growth Pactbefore elections. (Euobserver.com<