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 13/2/02)
The European Union member states and the European Commission remain committed to maintaining the objectives of the Stability and Growth Pact, Commissioner Pedro Solbes stated yesterday. The Commissioner also insisted that Germany does not want to redefine the objectives of the Stability and Growth Pact and the Pact gives room for manoeuvre during periods of economic slowdown. (Euobserver.com 22/8/01)
German exports to the US
and other countries of the European Union fell sharply last November. With
respect to the same period in 2000, German exports to the US fell by 9.7% and by
5.6% to other countries in the EU. Exports to France fell by 8.6% and to
Britain by 3.5%. This last figure shows, despite what pro-euros claim, that
exports do not depend absolutely on exchange rates. Pro-Europeans in this
country are always claiming that the weak euro is hampering British exports to
the eur zone. But if that relationship of cause and effect really existed, then German
exports to Britain should be cheaper for British buyers and should therefore
have risen. [Handelsblatt, 6th February 2002] (European Foundation
Intelligence Digest Issue No. 135 7th February 2002) Germany had more cases of insolvency in 2001 than any
other country in Europe (Handelsblatt, 6 February)
The European Commission on Wednesday decided to deliver an early warning to Germany and Portugal, for failing to meet their budgetary targets under the Stability and Growth Pact. This is the first early warning ever given to EU countries, but "its significance should not be misinterpreted or over-dramatised," Commissioner Pedro Solbes Mira said. (Euobserver.com 31/1/02)
Because (in the the stability pact) there was a limit on deficits but none on surpluses the system meant that overheating countries like Ireland had an incentive to run up large surpluses rather than letting prices and wages rise. This means that slumping economies like Germany have to reduce relative wages ever further, and makes adjustment slower and more painful. (Speech in Kuala Lumpur on 22 January 2002, by the Director for Europe of the Bank of the Bank of England, John Townend)
The Government's own figures on manufacturing exports show that the dollar is more important than the euro. In 2001, 46 percent of manufacturing exports were invoiced in pounds, 29 percent in dollars, and 21 percent in euros and legacy currencies; the gap is more pronounced for imports - 34 percent dollars, 19 percent euros. For our service exports, the dollar is even more important. The pound has been far more stable against the dollar than the euro. If we had joined the euro from the outset, manufacturers would have suffered greater exchange rate volatility. Since 1992, Germany has lost 1 in 5 of its manufacturing jobs, and France has lost 1 in 10. Britain has lost just 1 in 15. ("NO" Campaign bulletin 25/1/02)
Peter Hain, now Minister for Europe, in his 1995 book 'Ayes to the Left' wrote, "The policy, legally enshrined in the Maastricht Treaty, of a European bank independent of democratic control and dedicated almost exclusively to price stability must be reversed. It is economically disastrous and politically dangerous." Amazing how being offered a government job with your own chauffeur can change your views...(Democracy Movement message 14/1/02)
In an interview with CNN on the first of January Romano Prodi said that the euro is "not economic at all; it is a completely political step." He said that the "significance of the euro is to construct a bipolar economy in the world" He also said, "The historical significance of the euro is to construct a bipolar economy in the world. The two poles are the dollar and the euro. This is the political meaning of the single European currency. It is a step beyond which there will be others. The euro is just an antipasto [first course]." He repeated his warning that there will be "crises that will push us towards the creation of the indispensable instruments for European economic policy" (CNN 1 January 2002)
Government euro policy holed below the waterline. Gus O'Donnell, the Treasury official in charge of the assessment of the Five Tests, has said that the Government will not be able to claim the economic case for joining the euro is "clear and unambiguous", and that the decision will therefore "be a political one". He also presented a cartoon to illustrate his point that the institutions running the euro are inferior to those running the pound - something he said the Treasury "would consider" when assessing test 2 on flexibility, and a point the no campaign has made repeatedly for three years without answer from BiE. This bombshell reopened the Cabinet split as ministers issued contradictory statements, ending with the Prime Minister admitting that the question of leadership in the EU and joining the euro are, after all, "separate questions". The Government's euro policy is fatally damaged as is their future ability to argue an economic case for joining the euro. The Treasury spin machine choked as they claimed simultaneously that "he has no recollection of the comments" and "the comments have been taken out of context". ("No" bulletin 11/1/02)
The ECB and the euro have yet to face the test of a sharp economic downturn that pits one eurozone economy against another, though that may happen if Germany doesn't begin growing soon. Whenever recession hits, the nationalists are sure to come out of the closet -- people like Italian Reforms Minister Umberto Bossi, head of the right-wing Northern League, who said, "Personally, I couldn't care less about the euro and I don't think it means anything to anybody else either,'' Reuters reported Jan. 2. At such times, the stresses on the ECB and the euro will be great, and it is impossible to know how they will respond. The euro appears destined to fall somewhere in between, benefiting from the economic size and strength of the eurozone but limited by the political instability inherent to a union of sovereign countries. As a result the euro will fail to gain significant ground against the dollar, much less challenge it as the world's preferred hard currency.(Stratfor research report 5/1/02)
Romano Prodi, president of the EU said of the EMU, on the 3 December 2001, "This is not an economic process; it is a political process." (Daily Telegraph 3/1/02)
According to Customs & Excise, for British exporters and importers, world-wide, sterling and dollar combined are used in roughly 80% of trade in goods, compared with roughly 20% for the euro and legacy currencies. Even for UK trade with the Eurozone, sterling and dollar usage combined is roughly double that of the euro. For British trade in goods, and even more so for trade in services and movements on the capital account, the euro is overwhelmingly a regional currency - and even then, for UK-EU trade and investment, not the most important one. (Letter Financial Times 17/12/01)
In Italy and France at beginning of '90s there was a significant fall in price of "non residential" real estate fixed assets and according to the IV Directive permanent loss of value of such fixed assets "must" be recorded in financial statements. Italian companies, however, hold very overvalued properties in their accounts. They have not written down the values in their accounts because Brussels conspires with the claim that the current low values are only "temporarily." The over-valuation arose because in the past they were not allowed to invest overseas and so invested locally in real estate. This inflated property values. These values were used as collateral for loans. Since the free movement of capital was allowed under Maastricht Italian (and French) property values have dropped in Italy BUT companies have been allowed to keep unrealistic values in their balance sheets. This means that loans are not covered by asset values and the government has inflated corporate tax income because companies have not taken losses on property valuation. If proper values were applied companies would report lower profits and Italian government income would fall necessitating increased borrowing. This would have breached EMU entry requirements. (9/12/01 alessandro.gattinoni@iol.it)
The President of the leading economic forecasting agency in Germany, the Ifo, has called for the use of emergency economic provisions. Ifo President Werner Sinn warned that Germany is in a worse situation than at any time since the second oil crisis in 1981, and called on the government to invoke a 1967 law enabling it to take emergency measures to boost the economy (Handelsblatt, 3 December). The call follows a warning last week from the head of the German Confederation for Insolvency that "it has never been this bad. A business is going bankrupt every 15 minutes. Every minute someone is losing their job because a firm is going under" (Die Welt, 23 November). The Wall Street Journal Europe ran a feature on rigidities in the German labour market. It pointed out that, for example, a German banker who loses his job would continue to receive two-thirds of his old salary for three years. Yet if he takes a job as a taxi driver and then loses this, he would receive only two thirds of a much lower base, giving people an incentive to remain unemployed (Wall Street Journal 5 December 2001).
Further evidence of the unorthodox means used to meet the Eurozone's debt targets emerged this week when a report from the International Securities Market Association found that an unnamed Eurozone member country used a complex swap contract to decrease temporarily its deficit in order to qualify for the euro. The Financial Times reported that an Italian government bond deal in 1995 and 1996 was the only one to match the description (FT, 3 November). * The deals involved raising money through bond issues in Japanese yen. The yen were swapped into lira for the length of the loan, but the cost of buying the swap from an international bank did not need to be disclosed. One of the authors of the report, Professor Gustavo Piga said, "It is a clever transaction that is initially difficult to comprehend and which hides a simple principle: advancing future cash flows into the present". Benn Steil, a senior fellow at the US Council of Foreign Affairs said, "This particular transaction was clearly intended to mislead. It was absolutely, positively not for hedging" (Wall Street Journal Europe, 5 and 6 November).
The Economic Case Against the Euro - The Liverpool Model. We need to change our mind-set and stop thinking 'are we good enough for EMU?', and start thinking 'is EMU good enough for us to join?'. Joining EMU would increase the variability of the economy - the boom and bust factor - by 75 per cent. * The instability of growth or output would be nearly a third higher inside the euro. * Swings in employment and unemployment would be nearly a fifth higher inside EMU. * Real interest rates would be more than four times more variable inside EMU. * Inflation would swing around 10 times more if Britain were inside the euro. * One key pro-euro argument is that joining the euro would cut out all exchange rate risk on trade with Europe and therefore make the British economy more stable. These results show that this alleged benefit is far outweighed by the cost of losing control over national interest rates which creates a far more unstable economic environment overall. The executive summary and the whole document are available at www.no-euro.com/economiccase.asp (8/11/01)
Luxembourg was prepared to break its monetary union with Belgium at the height of the crisis in the European exchange rate mechanism (ERM) in 1993. The news, coming from the countries prime minister, comes as Luxembourg reveals that in September it destroyed thousands of coins and notes it was hoarding in the event of its monetary union with Belgium collapsing. The two countries have maintained a monetary union since 1921. However, Luxembourg's prime minister Juncker was, at the height of the ERM crises in 1993, informed that Germany and the Netherlands were planning to quit the ERM at the request of France at a meeting of European Finance ministers, reports the BBC. That, he said, could have torpedoed the whole system - and with it any chance of getting back on the path towards financial orthodoxy and the euro, writes the BBC. "I threatened that very night to sever our monetary union with Belgium and to follow Germany and the Netherlands," and "We could have done it, because since 1982 we had been printing Luxembourg notes that would have appeared the day following such a decision," Mr Juncker added. (EUobserver.com 27/11/01)
EDF (the French electricity supply company) started by sending out their bills in Euros. As one Euro equals 6.55957 francs, this meant a much lower figure than normal, so the French just paid that amount in francs! An 85% drop in income for EDF! (eurofaq posting P Hampton Oct 6, 2001)
"With plans by the Chancellor to severely restrict the movement of sterling out of Britain through the bureaux de change, we now have little choice but to accept the Euro as a parallel currency, especially as these restrictions will not apply to the new European currency due in January 2002" (p145, screen 9/10 Ceefax October 02, 2001).
In an effort to cut production costs associated with its famous Monopoly board game, Parker Brothers announced today it will replace its colorful play dollars with the Euro, a form of cheap fake money widely used in Europe. According to Parker Bros. spokesperson Amanda Wright, the company was looking to make a change from the pink, blue, yellow, green, and white play dollars it has made for decades, but didn't want the switch to escalate production costs. It also had to assure that the new money not be mistaken for actual currency. The Euro met both requirements. (Satwire.com 14/6/01)
LONDON listed shares could see an exodus of up to 300 billion worth of investment funds if Britain joins the single European currency. The effect of such a large outflow of cash, according to new research published by HSBC, the banking group, could result in the FTSE 100 share index underperforming expectations by as much as 10 per cent. It could also make UK companies more vulnerable to takeover bids from foreign rivals as share prices come under pressure. Lower equity market values may also make it harder for British companies to raise capital through the stock market. Steve Russell, the head of UK equity strategy at HSBC, claims that a single currency would force UK fund managers to invest more heavily in European stocks to avoid losing vital performance to Continental rivals. A rebalancing of Britains pension fund assets, of which shares constitute about 75 per cent, threatens to do the most damage. Mr Russell forecasts that pension funds could see as much as 161 billion, or about 16 per cent of the total invested in equities, coming out of UK companies into Continental rivals. Funds chart their performance against a benchmark, and in the UK that is commonly the FTSE all-share index. If we join the euro, the benchmark will become European and in order to ensure that pension fund managers keep up with their peers they will be obliged to invest much more on the Continent. Insurance funds and unit trusts are also likely to invest heavily in Europe, the HSBC research suggests. (The Times 11/6/01)
"Bilderberg is fearful that the EU might be coming apart; it had expected Britain to be a full partner and to have embraced the euro by now," Jim Tucker, a Bilderberg expert and writer told the weekly newspaper, the European Voice, after having attended the secretive Bilderberg summit of the world's 'power elite' held last week in Sweden. "Speakers called for Europhiles in the opposition Conservative Party to bring participation in the single currency to the top of the list of priorities as soon as the expected Labour Party victory in the 7 June election is official," Mr Jim Tucker said. Two EU Commissioners and an executive board member of the European Central Bank took part in the Bilderberg summit held on the west coast Swedish town of Stenungsbaden. Spokesmen for competition chief Mario Monti and Agriculture Commissioner Franz Fischler confirmed their participation in the controversial summit. They joined around 100 business leaders and politicians at the three-day meeting, but are barred from divulging details of their discussions under 'Chatham House' rules. The summit hotel was protected by a 900-metre-long metal fence and patrolled by secret servicemen. Other leading participants included NATO Secretary-General George Robertson, Finnish premier Paavo Lipponen, US Senators Chuck Hagel and Christopher Dodd, former US Secretary of State Henry Kissinger, Palestinian leader Yasser Arafat, Swedish Trade Minister Leif Pagrotsky, ECB executive board member Tommaso Padoa-Schioppa and newspaper tycoon Conrad Black. Critics say the Bilderberg group, named after a Dutch hotel where it first met in 1954, is an unaccountable shadow government, which seeks to exert its influence over the world's leading politicians. (EUobserver.com 4/6/01)
Gordon Brown yesterday delivered a calculated rebuff to the European Central Bank when he announced in the most public way possible that Britain's inflation target would remain unchanged in order to safeguard jobs and growth. Rejecting calls that he should cut the inflation target from 2.5% and bring it into line with the 2% ceiling in the single-currency zone, the chancellor underlined his concern over the ECB's structure and conduct by continuing with a go-it-alone approach. One of Britain's leading economic think tanks, the National Institute for Economic and Social Research, will today call for Britain to adopt a 2% inflation target as the first step towards joining monetary union. It says reducing the target to 2% will help ensure lower interest rates and facilitate "the process of convergence with the European monetary union." (The Guardian Monday 30th April 2001)
Recent Customs and Excise figures show that 27 per cent of British exports are invoiced in dollars, compared to 12 per cent in euros. 52 per cent of exports are invoiced in pounds. The figures are unsurprising given that the Eurozone accounts for only 45 per cent of British trade. (Independent 20 April, 2001)
Gordon Brown, Chief Finance Minister of the UK, is said to be furious about Brussels' interference with British economic policy. In the guidelines, the Commission would like to see the Chancellor limit future expenditure to the forecasts set out in last month's budget. This is seen by Mr Brown as a deliberate attempt by the European Union to meddle in domestic affairs, even though Britain is not yet a member of the single currency. In the proposed guidelines, the Commission called for public spending (excluding investment) to be kept to 37.3 per cent of national income next year. However, the Labour government will be reluctant to scale back public spending because the planned increases on health, education and transport are central to the government's election strategy. In February, Mr Brown was criticised by the rest of the EU for breaking the terms of the stability pact, which requires all EU members (including those, like Britain, who are outside the eurozone) to balance their budgets. The new restrictions go beyond the terms of the stability pact not just on how much the Government should spend in the future, but by implication on tax policy, writes the Telegraph. "Brussels has overreached itself," warned officials in Britain. (Euobserver.com 26/4/01)
There is a less-than-50 per cent chance that the UK will replace the pound with the euro. Goldman Sachs concludes: 'Given all the hurdles along the way - ensuring economic convergence, winning a referendum, negotiating an acceptable entry rate - we judge the odds in favour of the UK joining EMU in the lifetime of the next Parliament are still less than 50 per cent.' The report draws particular attention to the disastrous experience of the Exchange Rate Mechanism, Britain's last currency experiment, during which unemployment doubled, 100,000 businesses bankrupted and 1¾ million homes were thrown into negative equity. ("No" bulletin on Goldman Sachs report 7/4/01)
The continued weakness of the euro and evidence of widespread economic slowdown led to a sharp increase in the value of funds leaving the eurozone. Net outflows from the zone totalled £12.7bn. during April, more than four and a half times that recorded in the same month last year. The ECB said it was only the second time that non-residents had divested euro area bonds and notes. The latest figures mean that £65bn. left the eurozone in the first four months of the year. More than double the amount recorded last year. (Daily Telegraph 28/6/01). This outflow is in large part explained by the failure of governments to remove structural rigidities or, worse, their willingness to add new ones. In 1999 the net outflow of portfolio investment was £98.9bn. In 2000 it was £96bn. In the first quarter of 2001 alone it was £52bn. Since the current account has been in deficit throughout (£20bn in 2000) it is no surprise that the euro has been weak. ...The core economies are elderly. Ageing societies avoid risk and resist change. What is happening this year is a harbinger of a feeble future for a senescent continent. (Martin Wolf, Financial Times4/7/01)
When the euro last fell below $0.90 in August, European policymakers could barely conceal their embarrassment and dismay. International concern over the undervalued euro culminated in intervention by the central banks of the Group of Seven industrialised nations on September 22. Now the euro is again within striking distance of the levels at which the [G7] US Federal Reserve intervened in September - on Friday the currency fell below $0.88. But this time, euro-zone policymakers appear relatively unconcerned. But in some respects the latest fall in the currency is more mysterious and more worrying than last year. Investment capital continues to flow out of the euro-zone at an alarming rate. "In January every kind of capital that could have flowed out of the euro-zone did so," said Jim O'Neill, head of currency research at Goldman Sachs. Most worrying was the trend in equities. Foreign sales of European equities provide some evidence that US investors are now unloading the shares in euro-zone companies they received during the merger and acquisition boom of last year. "If this is the case, then US investors who became involuntary holders of European shares have a lot left to sell," said Ray Attrill, director of research at economic consultancy 4Cast. European investors, on the other hand, continued to invest heavily in the US despite faltering growth. Paul Meggyesi, director of foreign exchange at Deutsche Bank, thinks there may also be a structural element to the outflow. "If this outflow continues much longer it will be tempting to think that they are due more to the deregulation of pension funds - ie, reducing restrictions on where they can invest - than on a simple preference for US shares," he said. "This would make them more inexorable." (Financial Times April 2 2001)
The euro lobby has claimed that keeping the pound has already weakened British manufacturing and will in the future deter investment, lead to higher interest rates and cost jobs. But in his Budget speech, Gordon Brown showed that the opposite is the case: 'I can also report that manufacturing - despite the euro sterling exchange rate - grew last year by 1.6 per cent; manufacturing productivity grew by 4.4 per cent and manufacturing exports by 11.8 per cent; and it is to the credit of thousands of successful British companies that overall British exports grew by 7.4 per cent.' (Hansard, 7 March 2001, col. 297.) 'I can report to the House that today because of the choices Britain made our country now has the lowest inflation for 30 years; the lowest long term interest rates for 35 years; mortgages now averaging one thousand two hundred pounds a year lower than under the last Government; more people in work than ever before; and the lowest unemployment since 1975.' (Hansard, 7 March 2001, col. 296.)
The EU's German-designed economic policy rulebook is tough, relentlessly objective and built to withstand anything thrown at it. Until anyone uses it, that is. Then the growth and stability pact agreed five years ago turns out to be negotiable - the kind of Union fudge-machine Germany feared when it signed up to economic and monetary union. The public brawl between European Commissioners and the Irish government over the latter's flouting of the EU's budgetary guidelines showed how vulnerable the pact is to intense political assault. At the same time the French, Italian and British finance ministers were also feeling the heat. Rome was told its rising tax revenue expectations relied too heavily on aster growth rates and not enough on improved collection and a stable tax base. French finance minister and his UK counterpart both told colleagues that their decision to introduce, respectively, a tax cutting and giant spending programme represented discretionary choices at a time of strong budgetary performance. (European Voice 1/3/01)
More of Britain's exports to Germany are priced in US dollars than in D-Marks or euros, according to official data released yesterday. The report cast doubt on claims that joining the euro will deliver greater exchange rate stability to British exporters. Opponents of Britain's entry into the euro have argued that if companies are already doing a large proportion of their business in dollars, adopting the euro would leave them exposed to fluctuations. The Office for National Statistics said that 37 per cent of UK exports to Germany in 1999 were billed in dollars compared with just 24 per cent in D-Marks and 8 per cent in euros. For the European Union overall, 25 per cent of the UK's exports were invoiced in dollars. Ian Campbell, director-general of the Institute of Exporters, said a large proportion of Britain's exports were in industries in which the dollar has been the dominant currency of trade. Aside from being the main invoicing currency for commodities, including oil, the dollar is overwhelmingly used in trade in aerospace, defence, chemicals and semiconductors. Ian Milne, director of Global Britain, an anti-euro campaign group, said the research undermined a central argument for British membership of European monetary union. "This blows apart the case for joining the euro in order to give greater exchange rate certainty to exporters. Many would continue to export to the Continent using dollars anyway." (Financial Times; Feb 24, 2001)
On Radio 4 Today Programme, 1/2/01, Neil Kinnock said that Britain's trade would not be affected were we to withdraw from the EU. Earlier this year, Robin Cook said that the economic effects of Britain's remaining outside the Euro were broadly neutral. (Eurofaq posting 18/2/01)
"Given that the advantages claimed for EMU are (even by its supporters) small but long term, it follows that the UK is unlikely to be seriously disadvantaged by not joining in the short term. Even in the long term it is reasonable to argue that the structural changes made to the management of the UK economy have already eroded much of the advantages offered by claimed-for dynamic effects. My guess is that in 28 years' time it will be as hard to pinpoint the net benefits of EMU membership as it is today to do the same for membership of the EU since 1973. - end of brief" (Conclusions to a research paper by the House of Commons Library on the costs/benefits of joining the EMU for J Sayeed MP 15th February 2001)
Britain and Ireland refuse to obey Brussels on spending. Gordon Brown is cross, and he wants us to know it. His fellow EU finance ministers have had the gall to tell him that, if he wants to stick to his spending plans for the next three years, he will need to put two pence on income tax. The hard truth, however, is that, if Britain were to join the euro, we should have no choice but to run our economy as part of a larger European bloc. It seems odd - to put it mildly - that Brussels should be ordering Mr Brown to raise tax in order to avoid a deficit, while simultaneously ordering Mr McCreevy to raise tax when Ireland is running a four per cent surplus. It is hard to avoid the conclusion that the other finance ministers resent the tax levels in the British Isles and that, in the case of Ireland, their resentment is seasoned by irritation at what they see as the bumptiousness of a country that has been a heavy net recipient of EU structural funds. (Daily Telegraph 13/2/01)
CAMPAIGNERS for an early referendum on the euro were dealt a blow yesterday when the International Monetary Fund suggested that the British and European economies should remain apart. In line with Gordon Brown’s cautious approach, the IMF cast doubt over the prospect of early economic convergence and said Britain’s business cycle remained more in line with America than with countries in the eurozone. The IMF also said early euro entry would have led to higher inflation in Britain. Its research challenges growing claims by pro-single currency campaigners in Britain that the UK is moving rapidly towards meeting the Chancellor’s tests of euro entry. The Times 7/2/01)
On 28 September 2000 - one year ago - the Danes voted No to the euro in a referendum. They did this despite threats that multiple disasters would come upon them. LO (Danish TUC) said that an ordinary worker would lose an amount corresponding to 400 British pounds a year because of higher Danish interest rates, and various politicians, banks and business leaders said that 20,000 would lose their jobs, because no one would invest in Denmark any longer. "It is not free of charge to say No," said Marianne Jelved, minister of economics. One year later, an assessment is made by Finn Østrup, assistant professor at the Copenhagen School of Economics and Business Administration and expert on international monetary economy, in which he refutes the prophecies. Finn Østrup states to Radio Denmark's 8 o'clock news that quite the reverse has happened: the difference in interest rates between Denmark and other countries has diminished, more foreign capital has been invested in Denmark and less Danish capital abroad during the last year than during the preceding years, and Danish shares have lost less of their value than most others (26 per cent as against 29 per cent in the USA, 38 per cent in France, 41 per cent in Germany, and 25 per cent in Britain). Finn Østrup's conclusion is that the No has had no influence, and that the Danish economy enjoys great confidence abroad. (EUobserver.com 1/10/01)
Danish industries are investing at full speed in Denmark despite the gloomy predictions for the future of the Danish economy and standard of living following the referendum on Euro membership on September 28 last year. Some major businesses, including Danisco, issued warnings about the consequence for employment in the case of a No vote. Today, almost six months after the referendum, it is "business as usual" for industries and until now the notices of dismissal have been left in the drawer. The consequences of the No to the Euro vote have moved to somewhere in the future, writes Politiken. Alf Duch-Pedersen, managing director of Danisco, was among the Danish business leaders who spoke up most distinctly before last year's referendum. He threatened to move Danisco away from Denmark in case of a No vote. Today he maintains that some of Danisco's activities in Denmark may be closed down. Despite this, Danisco informed the press a few days ago that there are plans to expand the production of emulgators in a number of countries - including Denmark. Economists agree that even with the best of wills it is difficult to point to tangible negative consequences. The interest rate is stable, and until now the krone has been able to hold its own against European currencies. (EUobserver.com 7/2/01)
Analysts say the EU Commission's rebuke to Ireland and the Irish budget plans offers a foretaste of the problems the euro-zone may face as central and eastern European countries prepare to join the European Monetary Union. There is a risk that inflation may rise if the new euro-zone members use tax cuts and higher public spending to increase the economic growth in an attempt to bridge the gap between then and the richer euro members. Before adopting the euro, new members of the EMU will be required to enter the EU's Exchange Rate Mechanism (ERM II) to show they are capable of maintaining a stable exchange rate. But loosing the ability to make exchange rate adjustments may tempt the newcomers to use other means to boost their economies, such as tax cuts, and this increases the risk of higher inflation. (Financial Times 30/1/01)
The National Institute for Economic and Social Research has estimated that membership of the euro would require Britain to increase taxes by the equivalent by 2p on income tax or to cut public expenditure by £12 billion. ("No" bulletin 26/1/01)
Replying to a question concerning the proportion of tax paid in euros, Dawn Primarolo gave the following figures (source, Hansard 27-11-00 Vol 357, No. 169 col 587W) Total tax collected 99-00 fiscal year: £139bn - paid in euros £10.8m - 0.0077% Given that the 'changeover expenses' are largely being incurred by government offices and agencies to collect euros and account in the currency - and that some £25m has been or is being spent to date by the government on this project - that shows that the costs of collecting each euro to date have been £2.31. (Eurofaq posting CJKA, 13/1/01)
Detailed preparation for introduction of the euro in the U.K. will extend planning to local authorities and other local public bodies in Spring 2001. This is consistent with the U.K. government's policy of 'prepare and decide' and the recognition that conversion to the euro is likely to work most smoothly if the planning and preparation are spread over several years. It is one of the next steps announced in the Fourth Report on Euro Preparations released by the U.K. Treasury earlier this month. In addition, the Treasury's Euro Preparations Unit (EPU) will lead consultation on a phased approach to a changeover on the basis of close monitoring of the experience of the euro area. It will also provide advice to the public sector by Spring 2001 on rounding and smoothing, historic data, auditing, accounting and banking. All Government departments will complete a survey designed to prompt further thinking on internal conversion strategies by Spring 2001. (EU Business/Eurofaq 17/11/00)
A survey by Nationernes Europa in Denmark compared the money spent by the "yes" and "no" campaigns for euro entry. The "No" campaign spent DK 17.52m and the "yes" campaign, which lost the vote, spent DK 38.35m. (Berlingske Tidende .5-9-00)
Workers face being thrown back to the dark days of the '70s if Tony Blair dumps the Pound, Britain's leading moneyman suggested yesterday. Bank of England boss Sir Eddie George warned there could be tough rules on wage rises and higher taxes as the Government battled the inflation caused by a switch to the euro. Experts said it would be just like the depressed '70s when Britain was the sick man of Europe. Then, the Government had to introduce rules to keep wages down as inflation soared to 26 per cent. There was a year-long waiting list for mortgages and holidaymakers were only allowed to take £50 out of the country. Even getting a loan for a car, like the popular Ford Capri, became a problem due to restraints. Unemployment rose to more than a million for the first time since the 1940s. The crisis was fuelled by outrageous pay demands from hardline union bosses. Britain ended up on a three-day week, there were picket lines and power cuts. Then in 1976, Labour Chancellor Denis Healey went cap in hand for a loan of $2.3billion to the IMF to avoid bankruptcy. Sir Eddie, giving evidence to the Treasury Select Committee, said that once Britain joined the euro "the techniques for influencing domestic inflation would have to look more to fiscal rather than monetary policy." (The Sun 29/11/00)
THERE is little chance of the euro returning above parity against the US dollar, and it may fall to 80 US cents or less before it turns around, a new analysis suggested yesterday. London brokers Lombard Street Research (LSR) said the common view that the dollar is over-valued is based on a very short-term view of the US currency's past performance. Analyst Charles Dumas says that, at present levels, the dollar is 14pc above its long-term average against major currencies in the past 28 years, when these statistics began. The reason the dollar looks "strong" is that it was well below that average in the ten years 1987-96, so it had to rise by a quarter to reach current levels. (Irish Independent 25/11/00)
According to the Electronic Telegraph former German chancellor Helmut Kohl has blamed his 1998 general election defeat on the unpopularity of the euro, admitting that he steamrolled the single currency through against the people's wishes
Danish economy has done very well since the Danish people decided not to enter the euro in a referendum in September and all predictions of disaster in case of a no-vote have proved to be wrong, reports the Swedish newspaper Dagens Nyheter. The krone has not been attacked in the markets, interest rates are stable and the stock exchange in Copenhagen went up by 30 per cent, one of the best developments in the whole world. (EUobserver.com 13/11/00)
THE Government was accused of spending £2 billion on buying up the euro in expectation of Britain joining the single currency - three times the sum it spent on the Dome. Sir Peter Tapsell (C, Louth and Horncastle) said during Treasury Questions that the Government and the Bank of England had bought "very large" amounts of the euro. "It's been estimated that the operation losses so far on this amount are something of the order of £2,000 million, or treble the loss on the Dome," he said. Gordon Brown, the Chancellor, denied the charges (Daily Telegraph 10th November 2000)
The president of Iraq, Saddam Hussein, has obtained from the United Nations one of his key demands: that his oil exports be calculated in euros rather than in dollars. Iraq had demanded the right to price its oil in euros instead of in "the enemy currency", the US dollar. The Iraqi president had threatened to stop exporting oil altogether unless he got his way, a move which would have driven oil prices up even further and damaged the American economy. The Iraqis think that by demanding that oil be priced in euros, they will be able to drive a wedge between the US and Europe and that Europeans will then be more friendly to Iraq than the Americans. [Handelsblatt, 1st November 2000]. The sixth largest oil producer in the world, Iraq pumps out about 2.3m barrels a day. With Brent crude trading at more than $30 a barrel, the Iraqi move means monthly demand for euros will increase by around E2bn ($1.7bn). This is equivalent to a reasonably sized merger and acquisition inflow into the euro-zone every month - helping to offset the haemorrhage of direct investment outflows that has undermined the euro since its inception last year. Mr Saddam could provide an even bigger boost to the euro by converting the revenues from previous oil sales into the European currency. Currently, the escrow account held in New York on Iraq's behalf is thought to contain around $10bn. Much is already committed to pay for contracts agreed as part of the oil-for-food programme after the 1991 Gulf war. No official request has yet been lodged but Iraq is thought to be keen to convert the rest into euros. Even if only half were to be converted, this would amount to roughly the same sum spent by the world's main central banks when they intervened to support the euro in September.. (FT 1/11/00)
TOP German economists last night launched a legal battle to save the Mark and ditch the sagging euro. They pounced on a 1993 constitutional court ruling that the Deutschmark can only be replaced by a "stable" currency. Far from being stable, the euro has COLLAPSED in value by 30 per cent since its launch last year - and it is still falling. Germany's former finance minister Hans Apel backed the challenge and said: "We should be like Britain and keep out of the euro. "We have no worries with the Mark - let's keep it that way." Professor Wilhelm Hankel, of Frankfurt University, is leading the battle to stop the Mark being replaced in January 2002. He said yesterday: "I am preparing a fully-blown constitutional case. It's not too late to get out of this thing." Prof Hankel warned there is NO sign of the euro stabilising. "It continues to perpetually fall," he said. (The Sun Monday, 30 October, 2000)
Lord Desai believes that the Euro should be suspended, because it obviously isn't working, and that the eurozone currencies should be allowed to find their own levels. After a while the position should then be re-assessed; if the currencies have stabilised at a stronger level against the dollar, the Euro could be re-established, if not, it should be abandoned. (BBC R4 Today programme, 28/10/00) - Lord Desai is professor of economics at the London School of Economics and a former Labour frontbench spokesman on the economy
There is undoubtedly a bottom to the price of the Euro, but it is not clear that the political systems of Europe can stand the strain of waiting for it to be found. There is a retreat path, although it is not yet openly discussed, the European Central Bank can be shut down; the Euro can be redefined as an accounting unit based on the weighted averages of its member-state currencies; and the mark, franc, guilder, and all the rest can be set free. All the Euro-denominated bonds and contracts issued since the inception of EMU can still continue undisturbed, and the Euro can still be used as an alternate designated accounting unit in pan-European contracts. The Euro notes already printed up can be sold to collectors as curiosities. (United Press International, bennett@anglosphere.com 27/10/00)
The euro has shed one-third of its value since its launch, sending the dollar to fresh highs. Meanwhile, the dollar is displacing European currencies the world over: it now accounts for 75 percent of all currency reserves, up from 64 percent in the days before the euro launch. For the short term, at least, the euro has not diversified or stabilized the global financial system. On the contrary, it has made it more vulnerable. Unless Europe can find a way to adopt reforms to arrest the euro’s fall, when the dollar next crashes, it will take everyone else with it. (Stratfor 21/10/00 http://www.stratfor.com/)
Tony Blair must now stop all government spending on euro preparation after his admission yesterday that he would vote "no" in a referendum. CARP (Campaign Alliance for Referendums in Parishes) said today that the prime minister's comments make the continued expenditure of public funds by central and local government totally unacceptable. According to estimates from a leading firm of accountants, more than £3.5 billion will be spent by the public sector on euro preparations - over £60 for every man, woman and child in the UK. It has been estimated that some £10 million has been spent already, much of it by local councils. Even worse, national health trusts across the country are being forced to divert money earmarked for medical care to unnecessary euro preparations, including the conversion of car parking machines to take the new euro coins. (CARP Press Release 20/10/00)
The euro's fall dragged down the Swiss Franc as well, which dropped to a 14-year low against the US currency. Also the euro plunged to a lifetime low against the Japanese yen, now worth just 89.29 yen. But the Danish crown was strengthened, which has been the tendency since the Danes voted no to join the euro in September. The Danish business newspaper Børsen describes this as "strange". (Democracy Movement 26/10/00 http://www.democracymovement.org.uk/main/ )
The Danes voted no for political reasons, not economic ones. They did not want to hand power from Copenhagen to Brussels and Frankfurt. We must continue to fight the euro on political grounds. Why? Because: The euro, here, would mean the end of Britain as we know it. The euro, here, would mean the end of power in Westminster. The euro, here, would mean an end to our independence. The euro means handing our lives, our futures, our very body politic to an undemocratic AND corrupt bunch of left-wing pen-pushers in Belgium. The euro is not just about economics. Elsewhere in Europe there may, one day, even be a decent economic argument for it. We are opposed to the euro for POLITICAL reasons - just like the Danes. That is the nitty-gritty, the heart, the very essence, the "irreducible core" of our argument. (The Sun 29/9/00)
A phrase which Robin Cook decided not to utter in Parliament for fear of offending Gordon Brown was included in his conference speech yesterday. In a passage calculated to reassert his position as one of the Cabinet's leading europhiles, the Foreign Secretary told delegates: "We will not let Britain lose out by staying out." (Daily Telegraph Wednesday 27th September 2000)
Romano Prodi, the commission's president, blamed the collapse of the euro on economic mismanagement by the Americans. He suggested that the US trade deficit was out of control, causing global disequilibrium. It was "in the American interest" to do something about the euro, and pronto. (Daily Telegraph Saturday 16th September 2000)
A SPLIT opened up yesterday between Sir Eddie George, governor of the Bank of England, and the Government over the single European currency. Diverting from the Government line that scrapping the pound was primarily an economic decision, Sir Eddie declared: "Monetary union is fundamentally a political project rather than an economic issue." The governor, long seen as a closet eurosceptic, warned that the potential downside of the euro was that a one-size-fits-all interest rate policy could set off inflation in some countries. (Telegraph 13/9/00) See also: FT 20/12/01)
The euro's short life has been marred by accusations of political interference. This week, Gerhard Schroder, Germany's chancellor, weighed in with a speech welcoming the economic benefits of a weak currency. Despite later attempts to backtrack on his comments, they have helped to drive the euro to new lows against the dollar. Even more important, though, is the deeper meaning which the markets may read into Mr Schroder's words. The statement indicates that the chancellor is happy to let the German economy rely on export growth alone. The implication is that he does not consider structural reform a high priority. Given the sensitivity of investors to any suggestion that European reform may be stalling, this is very dangerous territory. It can only intensify the chronic weakness of the euro. (FT September 7 2000)
Enthusiasts for the euro have to resort to more and more desperate arguments to support their cause - Ed. In his letter to the Financial Times on 31 August Mr E Goodyer complains that in selling a machine to the USA he has lost money because the pound has fallen in relation to the dollar. He argues that we could shield ourselves from a similar currency instability in EU markets by joining the euro. Next day, Mr T Frith points out in his letter that Mr Goodyer must be pulling our legs. If Mr Goodyer invoiced in pounds his profit remains the same. If he invoiced in dollars then he made a considerable exchange rate profit. If he had hedged the sale he would have offset any gain. (FT 1/9/00)
Greenland and the Faroe Islands are actually Danish territory. They are not a part of EU, but their people use the Danish Crown in day-to-day business. They do not have votes on 28th September, but they will probably have to use the euro-currency if Denmark votes Yes. The Danish left-wing party,the Red-Green Alliance, has demanded that the people of Greenland and the Faroes should be allowed to participate in the referendum if they have to use the euro afterwards. If they were permitted to take part, which will not happen of course, it would mean more votes for the No side, for these far-away places have traditionally been the most distrustful of all of Brussels and more Brussels centralisation. (Newsletter on the Danish Euro-referendum 20 August 2000)
The French Finance Minister, Laurent Fabius, this week set out the economic goals of the French Presidency of the EU. He said: "In the next six months, we will talk a lot about political union, and rightly so. Political union is inseparable from economic union." (Financial Times, 24 July 2000)
Eddie George, the Governor of England, this week attacked the idea that Britain has a "window of opportunity" to join the euro. He said: "I have to confess that when people start talking of windows of opportunity it makes me nervous. A window does not seem to me the right sort of analogy. We must put the emphasis on sustainability rather than transient opportunity." (Central Banking magazine, 24 July 2000). His comments were taken as a criticism of a recent statement by Wim Duisenberg, President of the European Central Bank. In evidence to the European Parliament on 20 June 2000, Mr Duisenberg claimed that a "window of opportunity is becoming increasingly open" for Britain to join the euro, due to increasing similarity of inflation, public finances and interest rates. (BfS Bulletin 27/7/00)
The third-generation mobile phone auction in Germany is being conducted in Deutschmarks, not euros. (D Telegraph 1/8/00)
Hitler boasted that his Reich would last a thousand years. Kohl went even further: E&MU would be for ever. (Bernard Connolly, Freedom Today)
Chantry Velacott DFK, accountants, have issued a report calculating the costs of the National Changeover Plan to prepare for the euro. There is no difficulty in estimating the cost of changing IT systems, and machines for handling coins, training staff and increasing marketing. Costs directly related to joining the euro would be between £32.2bn and £32.8bn for the private sector, and between £3.2bn and £3.4bn for the public sector. The estimate does not allow for savings in transaction costs, which are estimated to be up to £2bn. A study released by KPMG, the business services firm suggested the cost of entry would be £34m for companies employing more that 5,000 staff. However, according to a survey by ICM, 70% of business think the euro is not very important for them and more than two thirds think adapting to it is not very important. (FT 17/2/00) The ultimate cost of converting the whole country to the euro has been estimated at £36 billion - or 4.2% of our GDP. That is roughly equal to £650 for every man, woman and child in the UK. It is also roughly equal to the annual running costs of the NHS, double the amount spent on education and employment together, 1.5 times the defence budget, double the value of agricultural production from our farms, and double the sum spent by British industry on research and development. And all for a change few outside government want. ('Euro referendum now' campaign, 24/8/00)
The central bank governors of Germany, France and Italy were told they could not attend the Group of Seven lunch laid on by their Japanese guests. This is the latest in a series of humiliations. They were told to stay away because they no longer have the power to influence exchange rates, or interest rates. The mark, franc and lira have effectively been abolished. (D Telegraph 24/1/00)
The Prime Minister commented on "Question Time" that joining the euro will bring benefits in terms of influence. This confirms that the desire to join the euro is driven as much by political considerations as by economic ones, despite the claims of the government and some other euro-lobbyists to the contrary. (FT 21/7/00) In his leaked memo on Europe Mr Blair asserts the political case for joining the euro is overwhelming. (The Guardian Friday July 28, 2000)
The euro will fall apart and plunge Europe into a financial catastrophe, economists have warned. The four German experts claimed the launch of the EU’s single currency would eventually be seen as a failed experiment. "It’s possible European politicians and their scientific aides see and fear this catastrophe coming and are, therefore, trying to talk the euro up," they said in a joint statement. "But it can’t and won’t help". The economists former Bundesbank director Prof. Wilhelm Noelling, Prof. Wilhelm Hankel, Karl Albrecht Schacht-Schneider and Prof. Joachim Starbatty- said they were wary of the euro from the start. They warned the EU’s economic recovery and job market improvements were temporary as they were caused by the weak euro. (Metro London free daily 06/06/00
One of the most commonly deployed economic arguments in favour of the euro is price transparency. The euro is supposed, through being able to compare prices in a single currency area, to enhance price competition. But this is already happening on the Internet. Many websites provide instantaneous currency converters free of charge. Price transparency is there on a mouse click and price competition is fierce. Intelligent agents scour the world for the cheapest price for a particular good. Prices are obtained in various currencies and converted into and shown in the consumer's chosen currency. This power to compare prices dwarfs the effect that a single currency could ever have. Another argument for the euro is lower transaction costs. The cost of foreign exchange transactions between Britain and EU countries is very small at about 0.1 per cent of GDP. Online trading, e-commerce, will rapidly reduce these costs. For travellers and consumers, credit and cash cards already mean lower transaction costs compared with converting currency at banks or currency exchange shops. As competition among card companies and other payment systems (such as direct debit transactions from online banks over mobile phones) increases, these other costs will fall. (The Times 4/7/00)
On Wednesday 28 June, it was revealed that Helen Liddell, the Minister for Trade and Competitiveness in Europe, had said that the Government was seeking to manipulate the economy into convergence. In an interview with the German newspaper Berliner Zeitung, she said: "We are trying to make Britain fit for the euro.(BfS Briefing 30/6/00)
In a speech to the London Chamber of Commerce on 13 June 2000, Eddie George showed how the prosperity of the City has confounded the predictions of the pro-euro lobby. He said: "There were those who argued that the City would suffer if the UK failed to join at the outset. That clearly has not so far happened - quite the reverse." He added that further delay in joining would not damage the City: "It's euro-specific, with the implication that somehow or other obstacles will be put in our way. That possibility cannot be altogether excluded, but it would be illogical." He was supported by Sir John Craven, formerly a member of the Board of Managing Directors of Deutsche Bank AG and Chairman of Morgan Grenfell Group plc. He said: "The City's strengths have nothing to do with our national currency. But Economic and Monetary Union means locking into a system of higher taxes, higher employment costs and more regulation - a recipe for destroying the City's success." A survey of foreign banks, carried out by the London Chamber of Commerce, also disproved the pro-euro lobby's claims. British involvement in the euro ranked 21st out of 23 factors influencing location by foreign banks. 65 per cent did not believe that euro membership was necessary to safeguard London's position as an international financial centre. (BfS briefing 15/6/00)
The German government has agreed to French plans to strengthen the "euro-11", the committee of finance ministers of the 11 Eurozone countries. Laurent Fabius, French finance minister, had previously said that the French presidency of the EU would seek to turn the euro-11 into the "economic government" of Europe (8 May 2000).
"Germany last night accused Romano Prodi of sounding the death knell of the euro by offering Britain a get-out clause. In a sensational gaffe that threatens to wreck the whole euro gamble, Prodi said countries could sign up then leave if they got into trouble. He said, "there is no provision in the treaty for withdrawal" but added they could pull out, "if there were exceptional circumstances, and provided it was done in a way which was not hostile to the EU." The claim by Prodi was in a Spectator interview, and was seen as an attempt to reassure voters in Britain and Danemark - poised to vote on the issue in September. (The Sun 26th May 2000)
It is not widely appreciated that, although Britain still has an opt-out from the euro itself (stage three of economic and monetary union), we have already for six years been locked into stages one and two. This binds us into the EU's Stability and Growth Pact, under which Britain must meet various targets relating to government spending and debt, the so called "Maastricht convergence criteria", to fit us to join the euro if ever we decide to do so. The real reason why Mr Brown refuses to spend more on some items and cuts back savagely on others is not just that he is naturally "prudent". As is explained by Dr Brian Burkitt of Bradford University, one of the few economists who have tried to point out the crucial influence of our EMU obligations, it is because "while Britain's economy is doing well, Mr Brown is obliged to run up a huge budgetary surplus." This is so that, when the revenues fall, he will not have to borrow to plug the gap, as previous Chancellors had to do in the early 1990s." He can thus comply with "convergence criteria". (Sunday Telegraph 14/5/2000)
The US current account shortfall has to be funded by somebody. With a current account surplus and savers looking for more lucrative returns, the euro zone is only too delighted to oblige. The result: a huge capital outflow. It is no co-incidence that the euro zone surplus shrank from €85bn in 1998 to €57bn last year. The net annual long-term capital outflows from the single currency area is €240bn. Thirty per cent of all euro zone business investment takes place abroad. While direct euro zone business investment posts a negative balance of €130bn every year due to high taxes, over-regulation and in search of growth in outlets, personal savers are also opting not to buy European. A fast greying EU population, with savings it can now invest internationally, is choosing to do just that. It is estimated that there is a net euro-area deficit of €110bn in portfolio investment in stocks and bonds. (European Voice 11/5/00)
Romano Prodi, ahead of the September referendum, told Denmark that the adoption of the euro was irrevocable." You cannot enter into monetary union thinking that you do so for five years or so." Last month the Danish prime minister said Denmark could in theory adopt the euro and subsequently reverse the decision. (FT 13/5/00)
The Federal Reserve Board recently wanted to buy a substantial quantity of euros to purchase German government bonds (bunds). The ECB insisted that it could only spread its investment across a basket of single currency zone bonds. The Fed. has been watching the growing divergence between German and Italian bonds and it declined this kind offer. (10-year bunds have an interest rate of 5.43%; Italian bonds are 5.69% and have a spread of .34%). (S Telegraph 14/5/00 and FT 112/5/00)
The expectation is that at the next summit in June, Greece will be officially set on track to abandon the drachma and adopt the euro on 1st January 2001. The ECB has also, it seems, been squared. Naturally, everyone considers that it is well on the way to fulfilling the famous convergence criteria, even though Greek state debt is 104.5% of GDP. Never mind, though: the figures for Belgium last year were 114.4% and for Italy, 114.9%, even though they are already in EMU. [Handelsblatt, 3rd May 2000]
BRITAIN'S largest companies could be forced to list their shares in euros rather than sterling following a merger of the London and Frankfurt stock exchanges which is due to be announced today. The plan would be a massive blow for those campaigning to keep the pound and was attacked last night as a German-led attempt to "introduce the euro by the back door". The euro fell to new lows against the pound and dollar again yesterday and is worth 20 per cent less than it was when it was launched 17 months ago. (D Telegraph 3/5/00)
What, then, is the deeper reason for the euro's fall? It is impossible to escape the conclusion that much of the euro's recent weakness is attributable solely to the euro itself - and a fundamental lack of confidence on the part of global investors. The reasons for that lack of confidence are well known, if not shared in the euro zone: a tax to GDP ratio that is too high, labour market inflexibility, regulatory burdens, divergent inflation behaviour (Ireland) and performance. Europe is in serious denial about its problems. It is trapped in a political culture and rhetoric that refuse to countenance the seriousness of its crisis. It sees in every shortcoming and failure another excuse to step up the rhetoric and tighten the ratchet for yet more convergence: precisely the agenda for the Nice summit. For the endgame of the euro zone establishment is not economic performance but political union, with power concentrated in the hands of the European Commission and government overall accounting for more than half of all European income. Markets sense this museum socialism and suspect that economic performance is, and will always be, a secondary goal. Little wonder the disenchantment now spreads to the highest levels of the economics establishment. Last week Professor Jurgen Donges, head of Germany's "five wise men" think tank, openly criticised European monetary union and the behaviour of the participating countries. But the euro is a means to an overriding political end. It has weakened on the relegation of economics - and the more it does so, the less investors need to find new reasons to avoid it. Its very raison d'être is enough. That is what prompted last week's throwing in of towels. ( Bill Jamieson Sunday Telegraph 30/4/00)
Lord Brittan told the Today programme on 27th July that the introduction of the euro had caused inflation rates to be lower in most of Europe than in Britain. As with his famous declarations in the early 1990s that "Nobody is talking about federalism in Europe," the truth is diametrically the opposite of this. According to the latest figures from Eurostat, the United Kingdom in fact has the lowest (harmonised) inflation rate in the whole European Union, at 0.8%. In Euroland, by contrast, prices rose by 2.4% compared to 1.9% in May and 0.9% in June 1999. These latest figures are worse than those predicted by analysts. Although inflation is higher in the USA (3.7%) it seems stable at this rate, while the rate in Euroland is displaying a sharp rise. In certain euro countries, the rate is above this average: 5.4% in Ireland, 4.4% in Luxembourg, 3.5% in Spain, 2.7% in Italy (European Foundation Digest 27/7/00)
As the euro falls below US 95 cents, the rate of inflation has risen to 2.1% in Euroland in the last two months. It was around 1% when the euro was launched last year, in many countries below this. The highest rate is in Ireland (5%) and several countries have rates of 3% or more (Finland, Spain, Luxembourg, Denmark). Italy has registered the highest inflation rate since 1997, at 2.5%. For this reason, the Italian telephone company has announced that it will be reducing its charges by 25% over the next two years, no doubt to help the government hide the fact that the introduction of the single currency has brought both a loss in terms of external value, with the falling exchange rate, and a loss in terms of internal value with rising inflation. The lowest inflation rate in Europe is in … the United Kingdom, where it was 0.7% in March. [La Repubblica, 19th April 2000] The Spanish government blamed the euro's weakness for pushing inflation back up to a 12 month rate of 3% in April. (FT 13/5/00)
In another twist to the ongoing saga of online filing discounts, it has been revealed that the forthcoming Finance Bill will contain provisions for crediting the promised discounts in euros. Even though the UK has yet to sign up to the single currency, taxpayers receiving the discount will receive their euro credit in a new column appearing on a redesigned statement of account. Those people submitting nil returns or due tax refunds will also be paid in euros. To secure the cash back, however, it will be necessary for them to set up euro bank accounts, though it has been rumoured that the Revenue is considering automatically opening accounts for taxpayers. A Revenue official said, "the idea is to encourage the use of the euro in preparation for its eventual replacement of the pound. We want taxpayers to think globally." A leading tax expert said, "This is euro-commerce gone mad". (Accounting Web 1st April 2000)
Britain's membership of the European Union could be costing every household in the U.K. as much as £1,000 ($1,600) a year, a study claimed today. The Institute of Directors said the net cost of belonging to the 15-nation bloc is currently 15 billion pounds, and could be as high as 25 billion pounds. The cost would rise further if Britain joins the EU's single currency in coming years. The study concludes that Britain's membership in the EU confers benefits such as increased direct investment in the U.K. from overseas companies, which use the U.K. as a platform to sell their goods across Europe. However, these benefits are outweighed by the costs of contributing to the EU budget and the Common Agricultural Policy. If the UK were to join the euro and engage in simultaneous monetary and fiscal policy harmonisation, tax harmonisation alone could double the net cost - even before the effects of lost output attributable to an inappropriate monetary policy, it warned. (London, March 16 Bloomberg)
THE European Commission has given its clearest warning to date that Britain's longer-term membership of the European Union could be called into question if it remains outside the single currency. Pedro Solbes, the commissioner in charge of economic and monetary union, told Danish journalists in Strasbourg: "Part-time membership of the EU is not good enough. In the longer term it's not possible to be in the Union and outside EMU."(D Telegraph 16/3/00)
European Parliament's Constitutional Affairs committee' proposals for the next IGC include qualified majority voting on the EMU (including our entry to it): 19.2. the codecision procedure is thus extended to those legislative areas still excluded from it (in particular, the chapters of the Treaty concerning visas, asylum, immigration and other policies related to free movement of persons, agriculture and fisheries policy, budgetary, fiscal, economic and monetary policy, competition and cohesion, certain aspects of environment policy, harmonisation measures adopted pursuant to Article 94 of the EC Treaty and secondary legislation under Title VI of the EU Treaty). Ways of extending qualified majority voting on tax and social security rules that are needed to ensure proper operation of the single market are set out in a Commission paper agreed on the 14 March 2000. (Week in Europe 16/4/00)
ECONOMISTS at the International Monetary Fund have concluded that Britain does not form part of an optimal currency area with Germany and other "core" European countries and would be vulnerable to external shocks if it joined the single currency. In a report analysing the costs and benefits of membership, they point out that "the United Kingdom usually appears (with other Nordic countries) outside a cluster of core economies centred on Germany." The report draws attention to "differences between the United Kingdom's and the euro area's relative cyclical positions" and goes on to argue that membership of a single currency area could mean unacceptable swings in employment and output unless there was increased wage flexibility in Britain. The report's authors say that some of the Southern European economies have even less in common with the "core" European economies than Britain but have nevertheless opted for monetary union The IMF warns that one-size-fits-all monetary policy will not work smoothly. Interest rate changes have very different effects in different countries. Countries that are slow to respond are Germany, UK, Netherlands, Austria, Belgium and Finland. The others react quickly to change. The economic effects in the slow group are twice as strong as in the fast group for the same change in interest rates. (FT 30/12/97)
The euro-enthusiasts suffered a further setback yesterday when the Confederation of British Industry announced it was now up to the Government, not business, to make the case for joining the single currency. Digby Jones, the CBI's director general, said it was up to the Government to win the argument in favour of the euro. "It is for the Government to lead, not business," said Mr Jones. The CBI's change of approach coincided with an ICM poll for the BBC showing a majority of voters opposed to scrapping the pound. (Daily Telegraph 1/2/00)
Factors influencing the capital account have come to exert a much more important influence on the exchange rate than in the past. Chief among these is the rate of return on investments. Inferior returns to investment - a result of euro-zone's rigidities - largely explains the exodus of capital from the zone last year. In the first 10 months of 1999 European companies invested €151bn outside the zone, compared to just €53bn invested by overseas companies in the euro-zone. The net outflow of €98bn swamped the euro-zone's current account surplus of €38bn, and helped to drag the euro lower. Analysts say this outflow reflects two things. First, a desire by companies which are saddled by high wage costs and high taxation, to move to cheaper production locations. Second, concern overseas that attempts to take over euro-zone companies would meet political opposition e.g. Vodaphone's bid for Mannesmann. (FT 27/1/00)
For the first time since the Euro's birth last January, inflation in the Euro zone is creeping close to the annual rate of 2% which the European Central Bank defines as the ceiling for price stability. "The difference in economic growth and inflation rates in the Euro zone," says Stephen Lewis, economist at Monument Derivatives, "poses a more formidable threat to the success of the Euro than the fall in its exchange rate. The unitary Euro zone monetary policy seems likely to generate even more marked tensions within the zone in the year ahead."(Financial Times 19/1/00)
Euro-lovers in the South West had been waxing lyrical over the Brussels ruling that Cornwall should be given "objective one" status as a deprived area, thus entitling it to a lavish £300 million of EU funding over the next seven years. The Southwest Regional Development Agency will retain £24 million for administration costs. But even if every single euro of the £300 million were spent this example of the EU's benevolence is not all it appears. For a start, on the basis that we currently pay £1 into the EU budget for every 50p we get back, the £300 million from Brussels means that British taxpayers must first hand over £600 million. In addition, for every pound received in grants, another pound must be stumped up in equivalent elasticated funding, making another £300 million. And since, under the rules, most of the cash is handed over only when the work is finished, taxpayers must also pay to borrow the money in the first place. Thus Cornwall to get the £300 million will end up having to chip in around £1 billion: just so that Cornwall can be filled with hoardings covered by the ring of stars, proclaiming the infinite generosity of the European Union. (Sunday Telegraph 9/1/00)
The Euro has not been doing well on the money markets. The simple fact is that the Euro is bad not because it is too high or too low but that it is reliant on various economies and, crucially, on various central banks. The last factor seems to have been overlooked by most analysts who take at face value the control of the European Central Bank (ECB); the power to print money is not at the moment in the hands of the ECB but in the hands of the national banks. This may explain some of the weakness of the Euro. The European Central Bank, it is true, has set the amount of currency that is allowed to be printed, but the national banks are to do the printing. This has special potency when considering the case of France. France s Socialist government has recently insisted that all employees are to have a maximum thirty-five hour week. Other areas have also been legislated on, covering taxes, holidays and minimum wages, most to the detriment of the employer. What should happen? Unemployment should shoot up. What did happen? Unemployment has gone down. This has, to say the least, baffled many economic commentators. The euro did it. The pro-Europeans may be uncharacteristically right, although characteristically for the wrong reasons. The French are now in the Euro, and now control the printing presses. A modest inflation in the Franc will not immediately show, as it is translated into other European currencies at an artificial rate. For a government intent on reelection, it seems to have found the Holy Grail, growth without consequence. The voters will not punish them for cutting welfare or working rights and the markets will not punish them, much, as long as they are not found out. (Ian Geldard's Distribution List 16/1/00)
The "development of a more liquid bond market has been one of the great success stories of the single currency". In terms of size may be. But at what cost? The only reason the Euro-denominated bond market expanded at the rate it did was because it offered a unique opportunity for borrowers to cash in on a liquid, depreciating currency carrying a low rate of interest. The result has been a massive transfer of resources out of the Euro-zone at bargain prices, with investors left holding Eurobond assets that had depreciated 15% in value, and offer a tiny yield. Had the euro capital markets achieve their size under more normal conditions, they would indeed be cause for congratulation. But there can seldom have been an international sell-off on the scale that occurs in the Euro-zone last year. (FT 6/1/00 letter from D Lascelles, Centre for the Study of Financial Innovation.)
The European Commission announced that euro-zone consumers are making only 0.8% of payments in euros and that only 0.4% of bank accounts have been converted into the single currency (ft.com 4/1/00)
Despite predictions that exclusion from the single currency would harm the City, London has kept, and in some sectors increased, its share of European capital market transactions. A report published by the Bank of England said London's share of the euro-denominated bond markets grew from 48% to 58% during the year. Most US investment banks had increased their presence in London and cut teams in Frankfurt and elsewhere. (FT 14/12/99)
BMW has demanded that its major UK-based suppliers be paid in Euros, but at an exchange rate based on a value of DM2.60-DM 2.70 to the pound. The current exchange rate is about DM3 to the pound. One major supplier said, "What they are asking for is simply impossible. They want it both ways: 65,000 BMWs were sold in the UK last year. Will they settle for DM 2.60 not DM3 on those?"(FT 15/10/99)
Despite predictions that exclusion from the single currency would harm the City, London has kept its share of European capital market transactions. In a report published on Monday, the Bank of England said London's share of the euro-denominated bond markets grew from 48 per cent to 58 per cent between the first and third quarters of the year. The City has boosted its share of foreign exchange trading compared with Frankurt and Paris, despite aggressive attempts by both to capture business. Trading volumes between the euro and other global currencies have declined by between 15 per cent and 30 per cent, said the report. (FT 14/12/99)
The City of London has not been disadvantaged by the UK's failure to join the euro and has prospered since the currency's launch, the governor of the Bank of England said on Tuesday. Eddie George dismissed suggestions that the City's position as Europe's leading financial centre was at risk while the UK stayed out of monetary union. His view is significant because the government's five economic tests for assessing whether to join the euro after the next election, due in 2001 or 2002, include an assessment of the impact on the UK's financial services industry. He added: "I have every confidence in the ability of the City to thrive in this competitive environment . . . and in that context suggestions that we should be somehow artificially disadvantaged are irrational." Mr George's remarks follow similar comments last month by Lord Levene, the lord mayor, who also said the City was thriving outside the euro. (The Financial Times 8 December 1999)
TONY Blair will resign as Prime Minister if he loses a referendum on the single currency, he has told close colleagues. However, although he will veto Euro-taxes in Helsinki, Mr Blair has told friends that winning a referendum on the euro is the most important part of his political plan for Britain. He has also admitted that he would regard failure to gain the endorsement by the British public as a blow to his authority as Prime Minister. (The Sunday Express, 05/12/99). TONY BLAIR made clear yesterday that he wants Britain to have scrapped the pound before the end of the next Parliament, even if tactical considerations force him to delay a referendum on joining the euro. (Telegraph 17 January 2000)
Entering the euro could seriously damage Britain's influence in Europe and across the world, one of Britain's most senior diplomats said. Sir John Coles, who headed the Diplomatic Service until two years ago, said that joining the single currency would diminish the power of the British Parliament and lead to a "major surrender of decision-making powers". The introduction of the single currency marked a big step towards establishing a central government of Europe. Sir John said that by staying out, Britain could help to stop the concentration of EU power in Brussels. By rejecting the euro, Britain's influence on other EU policies would not diminish. "They will always need us, as a major economy and a major trading power, as a country with a serious defence capability, special international experience, acknowledged diplomatic skills and so on." (Daily Telegraph 12/11/99)
The Government faces a tough warning today that its stand against a Europe-wide tax on savings may jeopardise Britain's prospects of joining the European single currency. Mounting anger at the Government's stance in blocking the "withholding tax" is expected to boil over today when the Chancellor, Gordon Brown, confronts his colleagues at a crucial meeting in Brussels. In the clearest sign yet that other countries are raising the stakes. Italy has warned that Mr Brown's obstinacy could hamper the pound's chances of joining the euro after the next election. The Finnish presidency of the EU argues that the UK is isolated and that its position will scupper a wider package designed to eliminate around 60 unfair tax breaks across the EU and the removal of taxes on cross-border interest and royalty payments. Some are talking privately about making acceptance of the tax package a pre-condition of UK entry into the euro. Another danger is that the Commission may try to launch legal action against UK tax havens such as the Channel islands on the basis that they are benefiting from illegal breaks. (Independent 29 November 1999)
The government's failure to veto European Union plans for a withholding tax on savings is hitting the City's international bond market. Swiss bankers have been reporting unprecedented capital inflows since the spring of last year. (FT 27/11/99)
The euro fell on Friday to its lowest level against the dollar and yen since it was launched in January, reaching $1.008 around the middle of the European trading session. Some analysts also said the Europe's fall called into question the commitment of euro-zone governments to economic restructuring, and could threaten the policy credibility of the European Central Bank. "Recent events such as Gerhard Schröder intervening in the Vodafone-Mannesmann take-over have received a lot of attention in the market," said Ray Attrill, search director at the economic consultancy 4Cast. "They encourage a feeling that Europe is not open for business." Mr Attrill said large foreign direct investment capital flows out of the euro-zone, largely into the US, were no longer being countered by overseas investors buying euro-zone assets. The resulting capital flight from the euro-zone had driven the currency lower, he said. George Magnus, chief economist at the investment bank Warburg Dillon Read, said that it had become increasingly clear that deep-seated economic weakness within the euro-zone was a central reason for the euro's fall since its launch. "Notwithstanding the current account surplus, there is a structural outflow of capital from the euro-zone," he said. "This is essentially due to the fact that there are much better investment opportunities in the US and the UK."(Ft.com November 26 1999)
By any objective measure, modern France's most pressing problem is too little work, not too much. Despite vast job subsidies and public sector make-work schemes, this month's Lombard Street Research Survey puts national participation in the labour market at a miserable 39 per cent. France is preening itself at the moment as a eurozone success story; it chalked up growth of 3.2 per cent last year and expects 2.25 per cent for 1999; yet 2.82 million people are registered as unemployed, a rate of 11.2 per cent. Worse, all but 2 per cent of that total is "structural", which means that, without radical reforms, growth is unlikely to make much of a dent; and disturbingly, France's structural unemployment has got worse, not better, since 1990. Yet Lionel Jospin's Socialist Government is to mark the new millennium by a dramatic addition to French leisure time. Starting on the symbolic date of January 1, 2000, it is to cut the French working week, by law, from 39 hours to 35, with an annual 130-hour ceiling on overtime. But this latest bit of socialist engineering, based as it is on a load of naive and costly economic misconceptions, is likely to have consequences that are nothing like so benign. The bill, in a country where public spending exceeds 50 per cent of GDP, will be stiff. The deficit is pushing the Maastricht ceiling. Even after levying £2.5 billion in new pollution and profits taxes, the Government admits it will have to find another £3 billion of revenue next year. For sustainable growth and more jobs, France should be cutting income, capital and wealth creation taxes - where the top marginal rate is 75 per. This lunacy spells trouble for the future. But for the socialists, the beauty of monetary union is that for the moment, and in contrast to the Mitterrand pump-priming in the early 1980s, they can get away with it. Then, even with capital controls, the financial markets took fright and forced the Government into a U-turn. But today, although capital flight is still a factor, EMU saves France from fretting about either exchange or interest rates. It can pursue policies that would have forced the franc down and interest rates up without a care in the world. This should give the advocates of EMU indigestible food for thought. They have long argued that EMU would have the great merit of imposing competition and efficiency, because it would make the eurozone economies more transparent. That may be true for the private sector; but the French example suggests that in public spending, EMU provides a pretty effective camouflage. It makes free riding possible; the costs will inescapably be shared with the rest of euroland. EMU thus enables France to land ten other countries with much of the bill for an "asymmetric shock" that it has quite deliberately engineered. The German nightmare has come true and a new kind of moral hazard, hidden profligacy, has been invented. (The Times 17/8/99)
According to Insee, the official statistics agency, France has exceeded the Stability Pact's public debt ceiling of 60% of GDP (FT 10 July 1999).
Astra and Zeneca, the Swedish and UK pharmaceutical groups are planning to adopt the dollar as the companies' main accounting currency. (Financial Times 20 January 1999)
There are, one gathers, loop-holes like the one in article 104c (of Maastricht) used by Terry Palmer in his political "fiction" novel "Euroslavia", Pallas Publishing, (it is classed as fiction, but is actually pretty near the knuckle). Basically this says that if the Council *thinks* that there is a *risk* of one of the States exceeding a Maastricht economic criterion, it can, by Majority voting, make a "recommendation", in secret, - virtually obligatory - for "measures" that should correct the perceived danger. The wording gives the Council broad discretionary power. In the novel, the Council said that since Britain now had a Labour government, and Labour governments traditionally overspent, it *thought* there was a danger of Britain's exceeding a Maastricht criterion, and so the measure "recommended" was for Britain to.... adopt the Euro! (Eurofaq posting T Dick-Erikson 8/7/99)
If someone asked the governor of New York whether it was in the interests of his state to be a member of the US currency union, he would find the question absurd. Being part of the currency union is a consequence of being American. The Prime Minister rejects this view of the European monetary union. He does not say that UK membership of the single currency follows from the British people's will to merge within the European Union. He could not say so because there is no such will. He says, instead, that the question is one of national interest. Membership of EMU offers a poor relationship of economic reward to downside risk. It is impossible therefore to make a compelling economic case in favour of entry into a permanent currency union. Membership of EMU would not, in any case give the UK much of a say. On the European central bank the UK member would have one vote, or possibly 2, out of 20 and would, in any case, be enjoined not to act as a national representative. British influence on the monetary policy that affects it would, in short, be obviously far smaller inside than outside. The UK's say on European Union labour market policy would be virtually unchanged. Within the Group of Seven leading industrial countries, an individual member of EMU would have less influence (because it would enjoy less freedom) than if it kept its own currency. In a world of floating exchange rates, the gains to any one country from being able to influence global monetary policy via its say on the euro must be tiny. The conclusion then is that the additional influence and power it would accrue from membership of the euro is very small, and may well be negative. Who, after all, has greater influence upon the world, the Prime Minister of Canada or the Governor of New York? The "former" is the right answer. The evidence from history is compelling. Currency unions are neither created nor endure for economic reasons. The theory of optimal currency areas, over which economists have spilled much ink, is irrelevant. The Bundesbank president has declared "that a European monetary currency would lead to member states transferring sovereignty over financial and wage policies as well as in monetary affairs. It is an illusion to think that states can hold onto their autonomy over taxation policies ". (Financial Times Martin Wolf 9 June 1999)
EU committees have already discussed Exchange controls. In May 1998 an employment committee (during the UK presidency) held privately in Bristol did just that. The French delegates said that the UK will be forced to change its employment policies, and financial ones, because exchange controls will be imposed once all members of the EU are inside the single currency. Also, interestingly enough, there will be limits on the permission given to EU 'citizens' to leave the EU with their assets. (Private communication 05/06/99)
EDDIE GEORGE, Governor of the Bank of England, disclosed his growing concerns about the single European currency yesterday by agreeing with MPs that it would be an "act of faith" for Britain to join. He said, "the jury was still out" on the question of how well monetary union was working and whether it would suit Britain. His comments came as the euro faced another day of turmoil on the foreign exchanges, dropping to a new low against the dollar. It has fallen 11 per cent since the launch on Jan 1. Ministers report growing strains between Mr George and Gordon Brown, the Chancellor, who is pushing for Britain to abolish the pound soon after the next general election. Mr George and Mervyn King, the Bank's deputy governor, revealed their worries about European monetary union to the House of Commons employment select committee. Mr King said it was impossible to know for sure at what rate the pound could be linked to the euro if Britain were to join. He said: "You would need probably 200 or 300 years of data. You will never arrive at a point when you will be confident that the cycles have genuinely converged. It will always be a matter of judgement."(Telegraph 28 May 1999)
European countries have played with monetary union schemes before. In 1834, there was the Zollverein monetary union, which led eventually to the political union between the German states. The success of this monetary union, which created a federal Germany, was based upon a common language and culture. Between 1861-1920, there was the Latin Monetary Union that was fairly successful until socialistic ideas began to take hold and government debts began to rise. During this century, we have also seen the Scandinavian Monetary Union, which lasted until 1924. England, on the other hand, never participated in European monetary union schemes. For this reason, the history of the pound sterling extends back some 1,300 years compared to most European currencies which date back only to the end of the Second World War. (The Euro-Bank Report Princeton Economic Institute 28/5/99)
The Italian government has devised a new way to plug its budget deficit with plans to issue £3 billion of bonds backed by unpaid social security contributions. This is a vital step if the government is to keep within the Maastricht criteria for the single currency. It would also mark the first occasion a European government has securitised so-called "delinquent" payments to boost current revenues, and is likely to have a strong impact on Europe's rapidly growing bond markets. Although European governments have securitised future income streams in the past, these have been small and have not involved tax or social security arrears. Others are thought to be planning to follow Italy's lead. Spain is hoping to securitise electricity surcharge payments. (Financial Times 22 April 1999)
In 1960 Robert Mundell defined the conditions required for successful monetary union. These are: geographical mobility of labour, wage flexibility, and a central budget large enough to offset economic shocks. The United States clearly meets all these conditions whereas the European Union does not. Mobility within European countries is a quarter of that in the US. Mobility between countries is lower still. Europe also fails on the second count, wage flexibility, and for good reasons. Benefits in Europe provided a floor below which wages cannot fall. More important, these are open-ended. The EU fails the third test, a large enough central budget to cope with economic shocks. The EU budget is just 1.27% of the combined GDP of its members, with most going to the Common Agricultural Policy. One popular argument is the capital mobility will, within a single market, bypass the need for labour mobility. So it could but only if wage flexibility exists. Capital is not going to move without a powerful signal in the form of lower labour costs. The conclusion is that Europe needs to reform to make a success of the single currency. The pity is that Europe has decided to have a single currency first and is at best lukewarm about the need to reform later. (Management Today May 1999)
The introduction of the euro could destabilise the economies of participating countries unless they tackle the problem of labour market inflexibility, said the Paris-based Organisation for Economic Co-operation and Development. The benefits of the single currency are neither automatic nor likely to come quickly. They would take years to achieve and will require new policies from European governments. The OECD adds that it can find no example of a monetary union that has succeeded without political union. Labour mobility is seen as the key to the success of monetary union in America. But in the European Union only 5.5 million live outside there own state, including those seconded to Brussels. (Daily Telegraph 25 March 1999)
A European directive requires countries to include earnings from illegal as well as black economy activities in national accounts. This includes prostitution, drug dealing, illegal gambling, etc. Fencing stolen property should be included but not the theft itself. This will add a further 2.5% to our Gross Domestic Product. (Guardian 8 August 1998)
German production workers are some 50% more expensive than those in any other member of the Group of Seven leading industrial countries. Worse, because of economic and monetary union, there is little Germany can do about it on its own. The powerhouse of Europe has fallen into a trap. It's only escape is a weak Euro. German output per hour in manufacturing is not high enough to offset the cost disadvantage. Since companies must earn an internationally competitive return on capital, it must dispense with jobs in which workers are not productive enough to offset their cost. Companies are adjusting to high costs by dispensing with less productive activities and workers. And there has also been a huge rise in the stock of German investment abroad. Germany needs a weak Euro. It also needs sterling to enter the Euro-zone at as high a rate as possible. Few analysts noticed that Europe's most important economy was about to lock itself in at what seems to be a significantly overvalued real exchange rate. France, Germany's chief rival and partner, has won game and set. But whether it goes on to win the match depends on how Germany responds to its plight. (Financial Times 31 March 1999)
The fundamental structure of EMU is completely unsound. In its present form, lacking a centralised control over fiscal spending in each state, a single currency cannot possibly survive. Some might dispute this, however, there are those among the political elite of Europe with whom we have discussed this matter and they admit that this statement is fact. Nonetheless, EMU in its current form is not intended to be a final version of their grand design - only a mere stepping stone along the way to a fiscal union as Phase II followed by a political union in perhaps 20 years away. Their primary reason for not disclosing such a grand scheme is their fear that popular support has not yet been acquired. It is believed that with time, the people will grow accustomed to the idea and that a federalised EMU will indeed emerge by 2007 if not by 2004. It is this calling in the wild that has lured Tony Blair to surrender the proud British tradition for the grand idea of one Europe. (Martin A. Armstrong Princeton Economic Institute March 12th, 1999)
Britain's 2.5 billion euro annual rebate on its payments to the European Union will be left entirely intact until 2002 and reduced by a maximum of nine percent by 2006 through technical adjustments, agreed early Friday at a summit of the 15-nation bloc's heads of state and government (March 26 1999 AFP). British officials said that minor concessions had been made to show that Britain was being "commaunitaire". After a day of tough talking, Mr Blair agreed that part of the increased costs of admitting Poland, Hungary, the Czech Republic and other central European countries to the EU, would not qualify for the "abatement". He also accepted that an estimated benefit to Britain of £68 million a year from a technical change to the way contributions are calculated would be given up. (Electronic Telegraph 26/3/99)
Lord Hollick, who launched the Britain in Europe pressure group which advocates abolition of the pound sterling, was interviewed by Andrew Neil on Radio 5 Live's early morning Sunday programme. Andrew Neil asked Lord Hollick if he agreed with Chancellor Schroeder's, and other's, assertion, that the euro was a major step on the way to political unification. Lord Hollick evaded the question many times but finally replied "I have no problem with that". (BBC Radio 5 Live 14/3/99)
Writing in Le Monde, Foreign Office private parliamentary secretary Denis MacShane said the prime minister had taken the crucial decision to adopt the euro. "It has happened," he said. "Tony Blair has said yes to the euro. Sterling will disappear at the start of the next century. "Great Britain will now begin its preparations to join the euro." "Instead of endless debates on the minute details of the euro, instead of the famous pragmatism or the habitual attitude of 'wait and see', Blair has told his concerned people straight that their future lies inside the European project. "It is the declared ambition of the Blair government to drain the anti-European element out of the British body politic. (BBC news online 3/3/99)
The introduction of the euro and the associated single European monetary policy are not isolated steps, but a part - albeit a very important one - of the process of European integration which effectively started immediately after, or even perhaps during, World War II. (Wim Duisenberg 5 March 1998)
The only benefit from joining the EMU is the saving on lower transaction costs. For the UK a realistic figure is 0.15% of GDP. Such a saving, even if received in perpetuity, would be more than wiped out by the one-off cost of transition alone. Any stability that would benefit the small proportion or trade with the EU would be offset by the instability of the euro with the rest of the world and the volatile domestic cycle. (Eurofacts/European Research Group 7/8/98)
Chancellor Gordon Brown portrayed the establishment of an independent Bank of England as a decisive and courageous act. Actually it was a condition laid down in the Maastricht Treaty: Art. 109 (ex-108) and Art 116 5. 'During the second stage [of the move to emu] each member State shall, as appropriate, start the process leading to the independence of its central bank, in accordance with Art. 109. ARTICLE 108 Each Member State shall ensure, at the latest at the date of the establishment of the ESCB, that its national legislation including the statutes of its national central bank is compatible with this Treaty and the Statute of the ESCB. (Eurofaq posting 10/2/99)
Wirral Council (calls itself Eurowirral now) has made provision for' £500 000 for preparation for the euro. (Eurofaq posting 2/9/00)
THE Government is to spend tens of millions of pounds preparing Whitehall for Britain's entry into the European single currency even before it decides to call a referendum on the issue. The scheme will be the most controversial measure set out in the Treasury's "National Changeover Plan" setting out the measures for transition to the euro early in the next century. (Sunday Telegraph 7 February 1999). Ireland, which is a committed member of the eurozone and HAS to change over to the single currency (by 2002), has a government programme by the title of ... The National Changeover Plan. (D Telegraph 8/2/99). In 1999 the government spent £8m on converting to the euro, in 2000 it will spend £20m (BBC R4 News 9/3/00)On December 31st, 1998 one Euro was politically finagled to converge in value to one ECU. While this simple financial swap was easy to accomplish by increasing the basket of EMU currencies to equal the value of an ECU, the technical consequence of this conversion has raised some very interesting problems to say the least. The ECU was of course the last attempt by Europe to create a single currency that ended in a dismal failure. This new introduction of the Euro had to also address all the outstanding bonds that had been issued in terms of ECUs. A failure to swap the old ECU for a Euro would have left a defunct currency somewhere in the middle of Limbo... The Euro is NOT the ECU in terms of historical value, technical perspective or economic history. While the marketplace may be taking the position that the Euro is merely a continuation chart of the ECU, our models suggest otherwise. Attaching the Euro to the previous history of the ECU is largely incorrect due to the inclusion of the British pound and other EC currencies in that are excluded in the new Euro... Due to the fact that the ECU reached a high during 1992, the ECU continuation for the Euro would imply that a 6-year bear market has already been in place. The technicals are clearly warning that the Euro is not off to a good start and that a reality check is not far behind. (Martin A. Armstrong Princeton Economic Institute 5/2/99)
The Department of Health has told the NHS that there is "no need" to tell the Conservative Party how much they are spending on preparing the NHS for conversion to the euro. (D Telegraph 30/10/00). NHS Trusts are now required to purchase goods and services ONLY from companies who are or who pledge to be "euro-ready". (Eurofaq posting 7/11/00)
The MOD, which spends £12 billion a year on military hardware and services, also makes clear that it will accept contract bids priced in euros, even though it acknowledges this could lead to a 'foreign exchange risk' for the Government. (D Mail 17/8/00)
The Department of Health has told the NHS that there is "no need" to tell the Conservative Party how much they are spending on preparing the NHS for conversion to the euro. (D Telegraph 30/10/00)
The NHS is budgeting to spend £200m over three years as part of the government’s National Changeover Plan for the euro. (D Telegraph 25/7/00) The government tells us continually that they are spending more on the Health Service. Yes, but what are they spending it on? Even before the British public has voted on the Euro it is costing the Health Service millions of pounds as computers, printers, financial forms, stationery, and new machinery for car parks, cashiers and vending machines are made ready for the changeover which may never happen. This money has been diverted from healthcare. One NHS trust says the preparations are bringing a huge amount of work and substantial costs without any known source of funds at present. There are no known benefits of the Euro to the NHS. The plans will require substantial extra work from staff at a time when we are facing disintegration through the loss of mental health services, community hospitals and services... Management consultants may be needed to complete the process. {S.Telegraph 18/6/00}
Leaked NHS documents have shown that hospitals are being forced to divert £80+ millions of pounds from patient care to preparing for the euro. Malcolm Cassells, director of finance, procurement and information at Salisbury Healthcare NHS Trust, wrote in an internal report that there are "no known benefits" of the euro to the NHS. However: "The plans will require substantial extra work from staff at a time when we are facing disintegration through the loss of mental health services, community hospitals and community services … The most significant risks relate to the availability of staff time, given the major reorganisation facing the trust over the year ahead." (Sunday Telegraph, 18 June 2000). The total cost to the public sector of preparations for the euro has been estimated by Chantrey Vellacott DFK to be £3 billion. The total cost to the whole economy is estimated to be £36 billion, equivalent to the annual cost of the National Health Service. (BfS briefing 22/6/00)
It will be virtually impossible to leave the Economic & Monetary Union as Britain left the ERM. Because everyone's debts will be in euros, the only currency of euroland. Leaving the ERM was a great relief to, for instance, homeowners in Britain with sterling debts. This was because freedom from the ERM straitjacket allowed British interest rates to fall. It did not matter that sterling initially went down against the German mark. But from 1999, for the unfortunate family in say, Spain, or Ireland, or Finland, recreating their own currencies to get out of euroland would mean that the burden of debt - in euros - shot up. Leaving euroland, far from easing a crippling burden of debt on homeowners, farmers and small firms, would make it worse. Widespread bankruptcy, social distress and civil disorder would ensue. Thus the euro puts the peoples of the economic colonies entirely at the mercy of their Franco-German masters. Once in euroland, total financial collapse becomes a certainty for the so-called 'peripheral countries' (everyone except the components of the original empire of Charlemagne) unless the masters agree to bail them out. (Freedom Today Dec 98 Bernard Connolly)
THE European commission sanctions the British government's budget policies as being consistent with membership of the single currency. Under the EU stability and growth pact, all EU countries must present annual budget and economic policy forecasts to Brussels for vetting by EU finance ministers. A draft statement from the commission said: '"The programme reiterates the government's commitment in principle to a single currency and stresses the relationship of its macro and micro economic reforms with prospective EMU entry. This is welcome." The statement said that Britain had met all the criteria for joining the single currency, except for membership of the European exchange rate mechanism. However, the statement indicated that the ERM issue would not stand in the way of eventual British membership of the euro, despite the fact that the Maastricht criteria for joining demands at least two years of ERM membership. (Morning Star 3 February 1999)
The government is already passing new laws to prepare for the introduction of the euro, although Britain has not agreed to join, because ministers say they fear organised forgers may be targeting Britain. Quietly, measures have been passed forbidding counterfeighting of euro coins and notes in Britain or to use the forged currency inside the UK. The move has outraged Eurosceptic MPs, who say the euro is being introduced into Britain by the back door. The UK has not yet had a referendum on whether to join the single currency. The Treasury says euro notes and coins will be valid in Britain when they become legal tender in other European countries into 2002. They will be legal tender. The government has also taken the unusual step of extending its jurisdiction outside the UK to catch criminals who forge euro in Britain. Until now, Britain has exercised its power only for very serious offences, including crimes against humanity or compromising national security. (The Independent on Sunday 6 June 1999)
Lombard Street Research castigated euroland's fiscal and monetary policies as "absurdly deflationary". Growth in 1999 will be no more than 1 1/4 per cent and prospects will be crippled unless the 3% Maastricht budget deficit ceiling, which Germany, France and Italy will have trouble meeting this year, is suspended. (FT 13/1/99)
Jean-Pierre Gerard of the monetary policy committee of the Banque de France said that the point of the single currency is to suck capital out of the US, force US interest rates up, create unemployment in the US and force the US to accept exchange-rate management. (Forbes Global Business 2/11/98). The US has recently rejected the German proposal for currency band management with the dollar.
It is within the realms of possibility that exchange controls could be imposed through the EU. In the Maastricht Treaty responsibility for exchange controls is taken out of the hands of nations and is lodged firmly with the EU. Britain has no veto over the process. (Mail on Sunday 13/9/98)(FFP23)
Internet Company WorldPay warned British companies that they may be breaking European law if they fail to use the euro to calculate foreign currency invoices from January as required by the Maastricht Treaty. (D Telegraph 23/11/98)
British Petroleum, ostensibly pro-Europe, is to re-denominate its capital in US Dollars. (Eurofacts 20/11/98)
Germany has become an Eldorado for investment fraudsters in the run-up to the euro launch. They are exploiting the great uncertainty among the population about what will happen to savings when the mark is replaced. People are being duped into escaping the euro. (D Telegraph 29/11/98).
The arrival of Oskar Lafontaine has been good news for private bankers in Switzerland, Liechenststein and Luxembourg who are benefiting from the rush by rich Germans to get their money out of the country. Bankers expect the steady stream to increase to a torrent next year when many legitimate tax shelters will be closed down by the governments. The government's clamp down on tax avoidance will be replaced by tax evasion. The mood amongst the German small and middle-sized business community is one of fury. (European 14/12/98). Oskar Lafontaine has had to resign.
Tony Blair moved to avoid isolation at the Vienna summit by suggesting for the first time to an Austrian newspaper that the UK's budget rebate could be up for negotiation. He also insisted to the BBC that the rebate is not up for negotiation. He had previously told the House of Commons that the British rebate would stay. (FT 11/12/98 and Helen Liddell, Treasury Minister said our rebate was "written in stone". The UK budget rebate is worth £2bn a year. (S Telegraph 12/12/98)
State aid rules for tax breaks. Tax breaks benefiting particular regions or sectors of business fall within the EU's state aid rules, the Commission clarified yesterday. Any 'specific' tax advantage thus requires prior approval under EU rules, it says in a Communication drawn up as part of an initiative against harmful tax competition. Wider fiscal rules that have general economic policy aims and apply to all enterprises, however, escape state aid rules. Exemptions can also apply to aid for regional development and environmental protection. The Commission can require a Member State to recover aid that is put into effect in breach of EU law. [IP/98/9831] (The Week in Europe 12/11/98) So we do not have complete control over tax policy - Ed
On Line Chat on the Enterprise Zone with Eddie George. Roderick Jones asks: Given the enormous stresses resulting from EMU -and the sheer cost of it - do we not have an enormous advantage in remaining out? ....Do other Central Bankers display any secret envy of our position?
Response from Eddie George: Well, If I am honest, I think that there are some feelings of that kind. (12/11/98 www.enterprisezone.org.uk)
De Gaulle recognised that ...UK membership of Europe's political and economic institutions brings on the awkward squad. The first instinct of Britain's business and political class is to ask what they can get out of Europe, not what they can put in. At home, British politicians of all colours strut about, lecturing Europe from a safe distance while explaining that they really lead it; pathetic and untrue. In the years leading up to British membership of the ERM few voices were raised in opposition. As soon as we were in the debate began about whether to come out - which we did. The greatest danger for Europe is that Britain's membership of the EMU could be a Trojan horse. At the first whiff of trouble EMU will incur Britain's blame. A corrosive debate in one of the largest member states would destabilise any monetary union. The capacity of such a debate to wreak havoc is even greater if it is being conducted in the currency zone's largest financial centre, London. Europe could well ponder whether Britain's record as a troublesome child might cause the project to collapse. (The European 9/11/98)
The IMF has warned that the economies going into the EMU are at different stages of the economic cycle. More than half - Austria, Finland, Ireland, the Netherlands, Portugal and Spain representing about 25% of Euroland's GDP - have closed their output gaps and are operating at or close to full capacity. They need policy tightening to prevent overheating and asset price bubbles. The others are less cyclically advanced. In Belgium, Germany, France and Italy the IMF estimates that output gaps are close to two per cent. The right kind of monetary stance in these economies is different. (European 12/10/98)
Customs & Excise is to hold further meetings with the Business and Accounting Software Developers Association on the software problems threatening firms trading in the euro from next year. The association led a group of 40 members last week to ask the department to review its policy of insisting VAT accounts are settled in sterling. They told the taxmen this could mean firms adopting the euro will lose out if the euro-sterling exchange rate changes between the sending of an invoice and a tax refund. Unless Customs revises its rules, most business software developers will have to adapt their products in the next few months. Few, if any, will be able to complete this before the euro becomes a valid currency on 1 January. As result, their customers who adopt the euro will find it difficult to sort out their VAT affairs from next year. (Computer Weekly, 29 Oct 1998)
Fund managers across Euroland have been told the introduction of the euro will signal the end of performance history. The European Federation of Financial Analysts issued the order. It will be impossible to chain-link performance figures across the currency conversion. For example, former Italian funds will appear to have outperformed German funds because of high inflation and interest rates. The introduction of the euro will create a statistical fog. Funds will have to be stopped from stringing together different currency histories in order to create table-topping performance. (FT 30/9/98)
As the countdown to the launch of the euro enters its final phase, several countries face the humiliating prospect of being fined billions of pounds for breaking the single currency's rules. These countries are forecast to break the Maastricht guidelines. The main offenders are France and Italy, which are pursuing extravagant spending policies. Even Germany could be affected. All countries must keep budget deficits below 3% GDP. Fines will be determined in the council of Finance Ministers by qualified majority voting. (Sunday Telegraph 11/10/98)
German debt: Germany's receivables from Former Soviet Union regions (which must include what appear to be loans to Eastern German entities but where the effective debtor is in the FSU) are in deep trouble. The bad debts are estimated privately in senior banking circles I have checked with to be about $60bn. This is way in excess of the amount published in the press ($20bn). However, I have heard from some very good sources in the FSU that the original deal was for the Bundesbank to underwrite these debts to the main German banks - Deutsche, Commerz, Dresdener, etc. - which is why they have not suffered the downgrading on their credit ratings which, all other things being equal, should have happened. For it is CERTAIN that Russia or other FSU countries in which Russia has influence will NOT repay the debts. (e-mail christopher.arkell@virgin.net 12/10/98) 'Coming Credit Crunch' by Jean-Michel Paul - EU banks account for fully 68.5% of all lending to Emerging and Eastern European markets.. so says the BIS. (Wall Street Journal Intl 12/10/98)
GDP per capita and contribution per capita to the EU
|
GDP per Person (ecu)Net Contribution per Person |
(ecu) |
|
|
|
Luxembourg: |
34,701.1 |
Netherlands: |
152.9 |
|
Denmark: |
28,293.7 |
Germany: |
121.6 |
|
Sweden: |
23,511.6 |
Sweden: |
78.3 |
|
Austria: |
23,285.6 |
Britain: |
38.9 |
|
Germany: |
23,225.5 |
Austria: |
24.7 |
|
France: |
21,748.7 |
Italy: |
22.6 |
|
Belgium: |
21,649.7 |
France: |
6.8 |
|
Netherlands: |
21,316.6 |
Finland: |
-19.4 |
|
Finland: |
21,299.7 |
Denmark: |
-37.8 |
|
Britain: |
21,102.9 |
Spain: |
-154.9 |
|
Ireland: |
18,993.5 |
Belgium: |
-176.3 |
|
Italy: |
18,209 |
Portugal: |
-283.2 |
|
Spain: |
12,501.6 |
Greece |
: -387.9 |
|
Greece: |
9,895.9 |
Ireland: |
-622.3 |
|
Portugal: |
9,043.1 |
Luxembourg: |
-1,875.7 |
(The Economist, October 3rd - 9th 1998) (sources: Centre for European Policy Studies and Eurostat).
The EMU is leading to pressure to create unified economic policies such as - the same wage for the same type of work. This would be a grave error, according to Prof. Siebert of the Institute of World Economics because of divergent productivity levels in the euro-zone. An Europeanisation of wage formation would lead to more unemployment. Although UK productivity is 71.7% of the German level our costs are only 68%. The divergence in labour productivities makes clear the costs of social security systems must also be different. This means social security benefit cannot be harmonised. A social union must be a pipe dream. (FT 7/7/98). A review of the German currency unification states that deals for wage equalisation between east and west were pushed by trade unions and were intended to prevent east Germany becoming a cheap labour region. While this imparted a sense of fair play, a days work was worth the same everywhere, it contributed to the erosion of productivity and tarnished the eastern region's attraction as a place to invest. A startling effect has been the decline in the population, 1.5m have left in search of a better life elsewhere. Even within the region there have been waves of depopulation away from structurally weak areas such as Vorpommern. (FT 13/10/98). In September 1998 unions from Belgium, the Netherlands, Germany and Luxembourg met in Holland to hammer out a common wage bargaining strategy. They will set up an information network. The imposition of European Works Councils covering all companies employing over 1,000 staff could lead to the formation of strategic alliances between trade unions that could precipitate company-based collective bargaining. (FT Living with the Euro -13?/10/98). At the Vienna summit France has raised the possibility of an EU-wide minimum wage. (S Telegraph 13/12/98). The European Metalworkers Federation representing 7m metal workers is developing a joint collective bargaining strategy in response to the arrival of the euro. (FT 6/12/98)
France is pushing other members of the European Union to move towards targets for employment, to work on a harmonised minimum wage and a common tax on savings, Finance Minister Dominique Strauss-Kahn said on Thursday. (PARIS, April 15 AFP)
85% of Britain's leading bankers and insurance, fund and corporate asset managers believe that EMU could collapse within the first five years. (European 20/7/98)
Consider this: "It is an economic and financial issue not an emotional one. An independent nation with its own policies needs its own currency to implement economic decisions" Eritrean ambassador in the US, Semere Russom, on Eritrea's breaking away from a single currency with Ethiopia. (National Geographic July 1988.)
And this: The political union that was Czechoslovakia broke up in 1992 and the monetary union between the two newly independent states lasted only six weeks. Because the countries had different growth rates fiscal transfers had to be made to the Slovak region. That, said former premier Klaus, would have been impossible without political union. (Eurofacts 17/7/98)
All previous governments have protected the sovereignty of the UK in its domestic tax affairs. Blair, however, has given it away under three heads. He has granted the European Commission the right to regulate business tax laws and their administration in the UK; to place such regulation under the legal auspices of articles of The Treaty on European Union dealing with state aid and therefore not subject to unanimity in the Council of Ministers; and to introduce Directives on personal taxation. Short of handing the budget box to Commissioner Monti and asking him to write Gordon Brown's annual homily to the underclasses, no more comprehensive abandonment of British fiscal independence could have been devised.(Eurocritic Journal/ C Arkell 7/98)
Far more of British trade is denominated in US dollars than in the future euro-zone currencies. Far more investment in Britain is from the US than the EU and within Britain American companies account for a far higher proportion of British GDP. If Americans threatened to pay their staff and suppliers in dollars it would be regarded as outrageous American arrogance. The British government, however, is encouraging our own and foreign companies to invoice their customers in euros. (Eurofacts 5/6/98)
European taxpayers will be paying the salary of Wim Duisenberg, President of the European Central Bank. He has decided that what he is paid will be kept a secret from them; the names of the members of the panel deciding his pay is also a secret. (European Voice 2/7/98). ). Duisenberg has been stung into declaring his salary, $246,000. (European 26/7/98). His EU-tax averages 19%. (E Voice 23/7/98)
The European Single Currency is the indispensable instrument to counterbalance the imperialism of the dollar (Le Figaro18 July 1997)
Money Supply. One disadvantage of the EMU is that nobody, inside the Central Bank or outside, can have the vaguest notion of how many euros balance the economic activity in euroland. Too few and growth will be stopped. Too many and inflation takes off. But a convincing measure of inflation across euroland is well nigh impossible. (D Telegraph 1/7/98). EU ministers agreed new measures aimed at turning the European-wide inflation index into a state of the art measure. A vital economic statistic for the euro-zone. The new index will include health and education, refuse collection, sewage, water supplies, social services, insurance and financial services and house rentals. All previously omitted from the harmonised index. It will exclude owner occupied housing. Cross border shopping will be covered in the country where the purchase was made. (FT 22/7/98)
EMU is claimed to lead to uniform prices throughout the EU. A survey of the road freight cost of reaching customers shows that there is an enormous variation. It costs 26 times more to get a product to Norway or Ireland than to the Benelux countries. Little chance of uniform prices between those countries-Ed. (Atlas of Freight Transport in Europe/FT 8/6/98)
The Italian government has put forward a proposal to stave off a global slump by injecting almost $150 billion of spare cash into the European economy. The core of the idea would be to deploy "excess" central bank reserves of the 11 countries due to launch the euro on Jan 1st. The money would be spent on Europe's infrastructure and telecoms; on promoting research and development, thus stimulating demand (Guardian 30th Sep 1998 p23)
The Bundesbank is in a dilemma. In order to counter the shock of the Russian crisis it should cut interest rates to stem equity declines. Germany is the largest investor in Russia and the government guarantees most loans. On the other hand German interest rates should be raised to bring it more into line with the rest of Europe. (European 31/8/98)
International standards officials have still not agreed a common code to ensure the EMU sign for Europe's new currency can be used on computers throughout the world. The committee of national representatives failed to agree on the unique binary code, which must be assigned to the new icon to enable it to be transferred between and recognised by different computers. The general public will probably have to wait at least two years for computer keyboards with an EMU key. Ironically the much-detested Microsoft Corporation in the new Windows '98 operating system provides for the EMU sign. (European Voice 17 March 1998). Very few software projects for handling the euro have attended to the problem of installing the typefaces or reconfiguring printers with the euro symbol. A survey of 450 corporate sites showed 70% had not started installing the symbol. Modifying printing and document management systems to handle the euro could cost as much as £1,742 per terminal. Some platforms will require man-years of effort to support the symbol. (The European 26/10/98)
The European Commission has stated that the 11 chosen member states meet the key convergence criteria for EMU. Public debt should not exceed 60% of national wealth. In 1991 the debt ratio in Germany was 41.5% of GDP. The debt ratio has steadily increased since then reaching 61.8% in 1997. (The European 16 March 1998) So the German debt level is just above the 60% target but the Commission said that it is a temporary blip. (Daily Telegraph 26 March 1998). Germany has flagrantly undertaken one-off measures to get published figures of the budget deficit down in 1997. Land belonging to the state railways was sold; and payments to the Social Security system were temporarily cut; and public investment mysteriously fell by 10%. Net contributions to Brussels of DM5bn were deferred and re-placed by receipts of DM469m from Brussels. The true deficit should have in 3.2% not 2.7%. (The European 16 March 1998). Portugal passed the convergence test for public debt by including, illegally, a dividend from the corporation set up to privatise public assets. This reduced the budget deficit by 0.5%. (European 20/6/98). According to a member of Italy's audit court, the government used budgetary tricks to drive down its 1997 deficit to qualify for the euro. Without these tricks the deficit would have been 4.4%, well above the 3% target (European 21/9/98)
Sweden does not have an opt-out from EMU but public opinion is strongly against membership. The EC has devised a ruse to keep Sweden out of the first wave. The Commission decided that although Stockholm had obeyed all the entry rules it had failed to comply with the requirement that its currency must be in the Exchange Rate Mechanism. Italy and Ireland were not held to this condition to qualify for the first wave. They have joined the ERM, but not for long enough. This means that the UK has to join the ERM before entry to the EMU, but it can do it at the last minute. As the UK Chancellor of the Exchequer said " We have no intention of rejoining the ERM". (European Voice 26/3/98). Britain and Sweden are coming under increasing pressure to join the ERM, or ERM2 as it is called. France wants all non-euro participants to join ERM2 to strengthen monetary stability of the EU. New fluctuation margins are set at 2.25% of the central parity for the Danish krone and 15% for the drachma. (FT 28/9/98)
A condition of UK entry into the EMU is currency stability. The pound has been stable against the dollar but the French franc and D-mark have devalued by nearly 30%. Under the rules of the ERM a currency can fluctuate by 15% either side of the mean. It is said that we need to devalue the pound by at least 17% before entry and this is quite permissible within the ERM bands. We could actually devalue by 30% if we claim the pound is at the top of its band. (Personal letter from FT 15/4/98). It is taken as read that the pound has to fall to DM2.50 to DM2.60. No one seems interested in how the government will deliver two years stability against the euro. The Bank of England targets inflation, rather than the exchange rate. It is left to the hand of fate to stabilise sterling. The Governor of the Bank of England told MPs that he would absolutely not be shadowing the euro. The Maastricht Treaty grants an equal say for the euro countries in deciding the pound's entry rate. (FT 29/6/98) In November 1999 there were DM3.07 to the pound (FT 3/11/99).
The Institute of International Economics says the pound is 25% above its long-term sustainable level. This implies that typical estimates of the exchange rate at which Britain could safely join the EUM are dangerously ambitious. Sterling's equilibrium exchange rate against the D-mark lies between DM2.10 and DM2.50. (FT 3/6/98). The Institute of International Economics says the pound is 25% above its long-term sustainable level. This implies that typical estimates of the exchange rate at which Britain could safely join the ERM are dangerously ambitious. Sterling's equilibrium exchange rate against the D-mark lies between DM2.10 and DM2.50. (FT 3/6/98). Lombard Street Research says the pound is still overvalued by about 25% despite the recent fall in value. The currency's purchasing power parity exchange rate value is DM2.34. (FT 22/9/98). The value of the Deutschemark on the 31 March 2000 was DM3.26 to the pound. (http://pacific.commerce.ubc.ca/xr/data.html)
The fact that sterling is overvalued is no secret. The size of the problem has just been underlined by Keith Church of Warwick University. He has run the Treasury's own model of the economy and concluded that the pound is 23% over-priced. This is even worse than when sterling was forced out of the exchange rate mechanism on Black Wednesday. The stupidity of going into the ERM at the wrong price probably did more to damage the Tories than anything else." As few things helped Tony Blair more on his path to Prime Minister, he should be anxious not to repeat John Major's mistake. As Church points out in the National Institute of Economic & Social Research's Economic Review, going into the euro at the wrong price is likely to be 'costly in jobs and output'. Decisions that are 'costly in terms of jobs and output' are also costly in votes. (Evening Standard 11/8/99)
A major advantage of the currency is said to be stability. In the mean time the ECU has devalued against the dollar by a substantial amount. The majority of UK exports, 56%, and our investments, 79%, are outside the EU so we will be seriously affected by EMU/dollar/yen fluctuations. The Chief Economist of the Bundesbank asserted that the EMU would not have a fixed link to the dollar, or the yen. He said that a flexible rate would create the necessary scope to absorb divergent developments between the EMU and other zones. (Eurofacts 26/9/97). In the last two years the Deutschmark has devalued against the pound by 27% but the pound has only appreciated against the Dollar by 9%. (The Times 2/6/98)
Under the terms of the Stability Pact Britain, even though it is not joining the EMU initially, is required to budget for convergence. It could be fined for running an economy that was too competitive relative to Europe (Times 22/11/97)(FFP)
Italy's political establishment was stunned by the murder of a senior adviser to Italy's labour minister, the first political assassination for more than a decade. A 20-page article sent to a Rome based newspaper by the "Red Brigades" claimed that the reason for the assassination was several recent labour reforms. (FT 21/5/99) The Italian economy is in recession as a result of trying to meet the Maastricht economic guidelines and the Stability Pact. These will probably generate more social unrest - Ed
The finance ministers meeting in York discussed tax harmonisation. The German Finance Minister suggested that members of EMU should draw up their 1999 budgets in close co-operation with each other. He suggested that unexpected budgetary surpluses should be used for debt repayment; probably one of the most interventionist taxation proposals has attempted on the EU level. Co-ordination implies the possibility of foreign finance ministers raising objections, perhaps even in public, to national budgets. EU officials proposed the harmonisation of corporate taxes and savings taxes. Last week's UK budget contained elements that brought the UK more in line with its European partners. UK commentators had difficulty making sense of some of the changes. (FT 24th March 1998)
The introduction of EMU will create a quantum jump in the amount of funds moving within the EMU area. At present national institutions hold up to 90% of regional assets. In future, with no currency risk, investment can stream into areas with the highest return. The banks on the receiving end of this movement can borrow at the EMU area rate and will lend enormous amounts of currency to finance the boom led by the high rate of return on assets. This will lead to asset price inflation on a huge scale. The EU has not developed a mechanism to deal with such movements in private capital. It has concentrated on state finances and deficit control. The European Central Bank looks at euro-wide data; it cannot do anything to restrain the boom. After the boom comes the bust with immense pressure to bail out the banks landed with non-performing loans. (FT 20/2/98). The effects of monetary growth are already evident in Ireland. Interest rates are dropping due to convergence, private sector credit increased 24% in a year and house prices have increased by 25% at the same time. (FT 7/3/98)
The Bundesbank in its report to the German Federal Cabinet published in April 1998 said that the euro is doomed to failure. The euro project, on technical grounds alone, is a hazardous and reckless venture. - Not least because the necessary conditions supposedly required to ensure its success do not exist. (Eurofacts 3/7/98)
The German Bundesbank is concerned that it will lose £33bn a year under the distribution of central bank profits after the EMU is introduced. They overlooked this during Maastrict treaty negotiations. (FT 11/11/97)
France's candidate for the post of Governor of the European Central Bank said that the single currency would lead to more centralisation of economic policy than is the case currently in Germany and the USA. The Council of Ministers will have more power over the budgets of member states than the central federal institutions of those countries. (FT 19/2/98)
European banks face costly changes from secretly drawn up new regulations on the way they report financial flows. The EU's 15,000 financial institutions will have to report monthly instead of quarterly, as in Germany. These changes will cost hundreds of millions of pounds in addition to the GBP6.28bn cost of preparing for EMU (FT 20/6/96). The UK is refusing to implement the changes. (FT 11/7/96)
Under the EMU companies will have to revalue their assets denominated in foreign currencies and can be forced to realise significant gains which will be taxable. The Federation of European Accountants says this is a serious issue that many companies have barely considered yet. (FT 6/11/96) Companies with a year-end on the 31 December will have to account for gains and losses in 1998. (FT 21/1/97)
It would cost British banks well over £1bn if Britain adopts the euro, and retailers would have to spend £3.5bn, according to evidence given to the Trade & Industry Committee of MPs. The British Bankers Association said that from the experience of banks in Belgium and the Netherlands, it would add 3% and 6% to operating costs. The British Amusement and Catering Trades Association, which looks after gambling machines, said the cost was £244m. (Daily Telegraph 19/7/00)
EMU will cost large companies GBP29bn in transition costs. (FT 8/12/97). The costs of converting the nation from Pounds to euros is estimated at £36.2 billion to update all computers, vending machines and tills as well as staff training and merchandising. This figure is equal to almost 2/3rds of the whole cost of the National Health Service. This estimate is from a report by the accountants Chantry Vellacourt DFK. In Whitehall alone the cost is £3,400,000 or the same as 1p on income tax. The government has so far not ventured an official estimate, with Tony Blair merely dismissing the cost in the House of Commons as an airy "tens of millions".{Times 17/2/00}
Under EMU, all bank holidays will have to be harmonised (FT 31/12/96)
When the EMU is installed governments will lose the vital levers for controlling their economies. All that remain will be the option to transfer massive amounts of money to the poorer areas, or allow labour to move from areas of unemployment to where the work is. The EU central budget is only 1% of the combined GDP. However, research by an EU advisory group has found that apart from language difficulties, there are severe impediments to the movement of labour. These include petty local bureaucracy, reluctance to employ foreigners in the public sector, discriminatory tax and pension treatment, problems relocating family members and difficulties getting professional qualifications recognised. (FT 19/3/97) From next year, any country, or region, which suffers an economic shock will be unable to lower interest rates, or devalue. The Stability Pact severely limits the scope to increase borrowing. EU workers are reluctant to move to find a new job, or lower wages. Mobility in the US is three times that within France. (FT 28/1/98)
The number of people moving from one EU member state to another has actually declined in recent years, despite the huge acceleration in the movement of goods, capital and some services. Secondly, although the United States has a famously underdeveloped welfare system, federal personal taxation and social security do work to offset the effects of economic shocks. If, for example, a factory closes in Arkansas, and the people who worked there lose their jobs, they stop paying tax and some of them become eligible for various welfare benefits. For these two reasons the total outflow of capital from the state is reduced. In other words, the region automatically receives a kind of aid. In addition the state might also benefit from inflows of capital in the form of government investment, deliberate relocation of federal government jobs, and so on. In the EU, this simply will not happen to anything like the same extent. Jacques Delors calculated that for the Union to be able to compensate member states in a way comparable to the US, it would need to have at its disposal at least 5 to 7% of total GDP. Currently the figure is below 2% and there are no immediate moves to increase it. Such moves will come, of course, when EMU is in place. (Spectre)
Switching to a single currency will cost retailers £3.5bn. This is equivalent to £60 per person according to Euro-Commerce, the EU retailing body. This will be highly inflationary, costing around 2% of annual turnover. (FT25/10/96)
EMU will cost large companies £29bn in transition costs. (FT 8/12/97). A revised estimate of the Information Technology costs of converting to EMU, over a seven-year period, is up to £240bn. The cost will exceed the precautions against the millennium bug. The effect on European IT business is a freeze on new development projects. (FT 27/5/98)
Italy and Belgium have debt ratios nearly twice the Maastricht Treaty's 60% ceiling. About half of Italy's public debt was due for re-payment within a year while Belgium's short-term debt was about quarter of the total. This maturity structure could very quickly cause conflict over monetary policy if the European central bank had to raise interest rates. (FT 4/4/98)
To meet the Maastricht EMU entry criteria Italy introduced a special one-off euro tax in 1997. The government promised to repay 60% of the tax by the end of 1999. Now the government intends to repay the tax early to stimulate the economy. (FT 27/8/98)
France and Germany have agreed to create a new Council of Finance Ministers to co-ordinate the economic policies of the EMU zone. It is called the Euro Club, or EuroX. It will deliberate on tax and spending matters, structural policies, wage costs, labour market flexibility and trade relations. This Council will embrace the entire sweep of economic policy making. The boundaries of national economic management will be eventually erased. In other words, European Government. (FT October 1997). The UK has been refused a permanent place in the group; it will be excluded when certain matters are discussed. Even documents might not be available to the UK if we do not join the Exchange Rate Mechanism. (PA 17/11/97). Being asked to leave the EuroXI meeting will particularly gall Mr Brown, Chancellor of the Exchequer, who regularly claims that we are leading Europe in the economic debate. The EuroXI agenda is already far more substantial than the Ecofin one. (D Telegraph 6/6/98)
It is assumed that the removal of exchange rate variability under EMU will promote economic growth. Studies by the IMF and OECD demonstrate that there is no relationship between exchange rate variability and the growth of trade and investment. (Eurofacts 10/10/97). The pound/dollar relationship is relatively stable. The pound/DM relationship is very variable.
The EMU zone and will be a closed territory, imports from outside accounting for a small proportion of the zone GDP. The European Central Bank will not need to pay much attention to the exchange rate given its statutory obligation to pursue price stability. With neither the EMU nor the dollar being managed with exchange rate stability as an objective it is inevitable that the rate between them will be volatile. This volatility it would tend to increase if the EMU becomes a reserve currency since it would then become one of the major homes for the massive volumes of footloose international liquidity. (Eurofacts 6 March 1998)
Prof. Martin Feldstein of Harvard is pessimistic about the likely success of the EMU. A formal political union is no guarantee against an intra-European war. Henry Kaufman, economist, says localised recessions would be all but inevitable causing countries to seek to re-establish their own currency. The early years will be especially volatile and dangerous. The system will be unable to cope with localised economic shocks. (FT 19/11/97)
Trying to stay in the Exchange Rate Mechanism cost the UK GBP70bn. In order to qualify for the common currency after the next election the UK will have to re-enter the ERM.
The European Commission, with the support of France and Germany, is determined to stop Britain gaining a commercial advantage if it decided to opt out of monetary union and retain the pound. There is growing concern in Brussels that Britain will be at a competitive advantage within the single market if London is allowed to devalue the pound against a strong European currency....Senior EU figures are giving warning that there will be "difficulties" if Britain remains outside. Some officials claim that it may be impossible to retain the single market... if some countries have the advantage of competitive devaluation. (24 July 1995 Daily Telegraph) When this was written there were DM2.21 to the pound, on the 31/3/00 there were DM3.26 - Ed
The Maastricht treaty requires all member states to treat their exchange rate as a matter of common interest. The aim is to prevent "competitive devaluations. We should not forget the turmoils of 1992, including the fierce assertion that those who gained competitive advantage from devaluations could not expect to enjoy the benefit of unfettered exports to other member states within the single market. The UK government would be within its rights to introduce demand-neutral measures to redress the current distortion in the relative prices of euro-zone and UK manufactures. (Letter FT 10/5/00)
Trying to stay in the Exchange Rate Mechanism cost the UK £70bn. In order to qualify for the common currency after the next election the UK will have to re-enter the ERM for a two-year period.
It is assumed that the removal of exchange rate variability under EMU will promote economic growth. Studies by the IMF and OECD demonstrate that there is no relationship between exchange rate variability and the growth of trade and investment. (Eurofacts 10/10/97). The pound/dollar relationship is relatively stable. The pound/DM relationship is very variable.
