opinion
CENTRE FOR EUROPEAN REFORM
Britain and the euro: how to reap the benefits By Katinka Barysch
★ The British government predicts that joining the euro would boost domestic investment, employment and growth – provided the economic conditions are right. It has promised to implement measures to ensure that Britain will benefit from the euro. ★ Yet the government’s strategy remains vague. Continued uncertainty entails costs. By setting a target date for eurozone entry, the government could still minimise the costs of delay. ★ If the Treasury re-examines the economic case for entry, it should reverse the burden of proof – only if new economic problems have emerged should the referendum be postponed further. The main thrust of the government’s euro announcement on June 9th surprised hardly anyone. Britain, the government concludes, would gain from eurozone entry in the medium to long-term, but is not quite ready to do so. Further reforms are necessary. The referendum has been postponed. The government still insists that its verdict is based on the economic pros and cons of British euro membership. Gordon Brown’s speech in the Commons on June 9th was backed up by 18 economic studies, amounting to almost 2,000 pages. And yet, few people believe that the government’s decision was based entirely, or even predominantly, on the outcome of the studies. Economic data are rarely ‘clear and unambiguous’. Economists and officials have to interpret the figures if they are to serve as the basis for forward-looking policy decisions. Inevitably, economists, journalists and politicians disagree about the interpretation of the Treasury’s background studies.
The Treasury concludes that two of its five economic tests have not been met. Coincidentally, these are the two tests that really matter, namely whether Britain has sufficiently converged with the eurozone to allow it to live comfortably with the interest rates of the European Central Bank (ECB); and whether the economy is flexible enough to deal with economic shocks that are not shared by its European partners. The Treasury’s assessment of the other economic tests – whether the euro would be good for investment, growth and employment – hinges on its verdict on the first two: only if there is sustainable convergence and sufficient flexiblity will Britain’s economy flourish within the euro area. The last test – whether the City would do better with the euro than without – was already met in 1997, and that assessment has not changed. The Treasury’s argument that the British economy has not yet sufficiently converged with that of the eurozone is difficult to reconcile with the political imperative to leave the door open