Rt. Hon. Neil Kinnock
President, European Bank for Reconstruction and Development
On: The Euro in Relation to the European Movement
18 February 2002
“Thank you my Lord (Lord Judd) for that lovely introduction. It was so nice; I thought for a moment that I was dead. Not to be reading such praise in an obituary is especially pleasurable. (laughter).
The only attribute that you left out in your list of ‘Qualities required by Leadership’ was the one I consider to be much the most important is the one recommended by Napoleon as being above all others: luck. All of the other things can be present en masse but if you haven’t got the luck, they don’t really count in the end.
Can I firstly congratulate this long-standing group for having the title, European-Atlantic Group? I say that because one of the most irritating of absurdities – and there is a fair list of those – in the controversies that surround the relationships between the UK and the EU and the USA is the idea that they are alternatives. It is of course particularly absurd in the case of the UK. Due to the unfolding of history and connections of geography, culture and temperament in war and peace, we find ourselves uniquely placed to have huge opportunities by virtue of our extraordinary relationship on both sides of the Atlantic and both sides of the English Channel. We should never be considering the two relationships as alternatives but should be celebrating and perpetually – in the very best sense – exploiting the massive potential that arises for the UK out of our unique situation.
For brevity, I begin with three basic and raw points about the EU and Monetary Union. They are:
- The Euro will always be the currency of the EU and the Single Market
- The UK will always be part of the EU and the Single Market.
- The case for the UK being in monetary union is the same as the case for the UK being in the EU and the Single Market.
Of course, absence from monetary union during its early years will not inflict any major or lasting disadvantage. It is simply sensible for HMG to make a two-year analysis and to seek to gain the most favourable conditions for entry into the euro. That is the least that could be expected of any responsible Government.
Extended absence over a period of several years would however carry different prospects. It would put Britain at a serious disadvantage in the Single Market in terms of currency competitiveness and economic stability, it would deter investors from both inside and outside the UK – investors who naturally want the least currency risk in, and the easiest and lowest cost access to, that Single Market – and it would exclude the UK from crucial policy making and from political powers that need to be exercised in the EU.
Whilst absence will inflict all those difficulties, absence would not however insulate the UK from the realities of being directly affected by the decisions, the activities, the interest rates and the strategy of the euro zone. In short, to be in the EU but not in the euro is to bear all of the obligations of membership and feel all the consequences of the currency decisions but without having any of the influence over monetary issues necessary to affect the policy effects flowing from that euro zone decisions.
If that is ‘independence’, smoking is a health supplement and alcohol aids sobriety. (laughter).
The basic fact is that our county lives, and will live, in the euro zone neighbourhood. If the UK stays out of the euro for several years, the country might have fiscal and monetary separation but it would not have meaningful fiscal and monetary sovereignty. There are obvious reasons for that:
First, the monetary fact of life is that the UK outside the euro zone could not afford any great incongruity from euro zone interest rates simply because UK interest rates that were much higher than euro zone rates would push up the pound further and devastate British international competitiveness. We have had some rehearsal of that in recent years. Meanwhile UK interest rates that were much lower than euro zone rates would make the pound unstable and Britain would experience the all too familiar consequences of currency volatility. The result of that reality is that outside the euro, the UK will have to conform organically with euro monetary zone policy without having authority in euro zone monetary policy.
Those conditions would not be a product of anyone’s diktat or imposition but because of organic reasons. I emphasise the word ‘organic’. It arises from our neighbourhood relationship with the countries that will continue to be our largest trading partner by very large dimensions, and our nearest rivals for mobile investment capital by a large margin.
Those conditions would continue, not least because of the relative scale of the exposure of the British economy to currency volatility. Consider this: in the US economy, nearly 90% of all business is done in dollars. Well over 80% of all the business of the new euro economy is done in euros. In both cases, those huge economies, those huge currency areas, are much less prone to external currency volatility and speculation than is Britain, which conducts less than 70% of its business in pound sterling. The UK currency will be much more prone to speculation. The danger, as George Soros, Roy Denman and many others have pointed out, is that sterling could be expected to “bob up and down between the dollar and the euro like a small boat between two great ocean liners.” To some, that might look like independence. It reality, it means persistent sensitivity to actions and decisions in the USA and in the euro zone over which no UK authority could be expected to have any influence, let alone any control. The monetary fortunes of this economy are then decided much more by market sentiment than by sovereignty.
Meanwhile it is clear to everyone on both sides of the single currency debate that sound fiscal policy requires government revenue and government expenditure to be in reasonable balance in or out of the euro. And public borrowing (except in explicit conditions of recession) must be for investment not consumption in or out of the euro. The UK could not therefore afford any great divergence from the euro zone fiscal standard without taking ruinous risks with credibility and with market confidence. The result of that reality is that outside the euro, the UK will have to confirm with euro zone fiscal policy without having authority in euro zone fiscal policy.
Now I know that recognising the need to accept those fiscal standards produces the strange idea that participation in the euro would be lethal for public services. Those claims are wrong and I will give you a few reasons why I say that.
First, I think it clear to everyone – it certainly is to Mr. Duncan-Smith – that no one can claim that public services are not at least as good or better in euro zone countries like the Netherlands, France, Germany, Austria, than they are in the UK. No one can claim that the governments in those countries are willing to, or intending to, cut good standards of public provision. Secondly, no one can show any decision, declaration or rule of the European Commission, or of any euro zone country, or of the ECB that asks or intends to ask any member state to cut or to postpone any investment in any public service or provision in order to meet euro requirements. Thirdly, and absolutely vital in this whole debate: for decades, the economic roller coaster of currency fluctuations and instability has sabotaged sustained investment in public services in Britain and in essential infrastructure. Under Conservative and Labour governments, we have repeatedly been told that economic conditions, particularly the state of the pound, were imposing constraints that forbade spending on public infrastructure at the levels needed, or over the time needed, or both. The claims from the Conservatives and Labour governments were basically true. Currency volatility did prohibit public sector investment. It gave an alibi to political and economic interests that didn’t want much public spending and it arrested the efforts of those who did want a higher standard of sustained investment in essential services. Everyone here knows, and lives, with those results. They left us starting this century with massive accumulated needs in public services and huge deficiencies of investment in essential infrastructure. That is the reality. It is the story of our times. No one should forget it. That is why I say that one of the best arguments for joining the euro is that it will effectively end currency instability. Therefore it will enable successive governments of any kind to keep sustained investment and financing infrastructure for the public services particularly like health, education and transport.
There are of course really serious arguments to be had about the management of the euro, the maintenance of levels of stability that will facilitate sustained growth, about the accountability of the money managers in the ECB, about the case for strengthening the economic and finance ministers Council in order to emphasise the ‘economic’ in Economic and Monetary Union, about fiscal transfers for regional development inside the currency union. And there is a serious case to be put for requiring the ECB to emulate the US Federal Reserve and place the promotion of employment and growth as well as price stability as stated objectives; for giving ECB a target of 2.5% inflation like the Bank of England in place of the 0.2% target that is followed now; and of improving accountability by making the ECB publish monthly minutes like the Bank of England Monetary Committee. There are serious debates to be had about those and many other items. But there is no serious way of evading the reality that evolutionary reform in the system of Monetary Union can only be put with authority and effectiveness from inside the euro zone. To influence one has to be in, there is not such thing as ‘outfluence’.
There is no serious argument to support the claim that joining the euro zone means exchanging independence for impotence. The UK does not have the former now and its not had it for many, many years. Don’t you remember the decades in which we followed the Deutsch mark when the decisions directly influencing this country, and our standards of economic performance, were not even from Europe as a whole but determined by the Bundesbank? Doesn’t anyone want to replace that relationship if they have aspirations for independence in the modern sense – not in some antediluvian dream of what might have been decades ago, but living here and now for our children and grand-children? Doesn’t anyone want to influence the direction of affairs so that stability, security and productivity are normal features of the conduct of affairs instead of occasional break-through when from time to time we get our sums right. I think the patriot, someone fundamentally interested not just in saluting the flag, but in respecting the people who live under the flag, would want to respect the change that gave us the security, stability and opportunity by exercising the appropriate influence that is afforded in this international adventure that is without precedent or equal.
Of course, I don’t argue that participation in the euro will mean there are no pressures, or possibility of downturn. I’m advocating monetary union, not utopia. But it is also true, in or out of the euro, that the UK will obviously have to continue to work for its living. There is never any choice about that. There are however serious choices between two different courses:
One course will require the continuous euro alignment of sterling and it will require alignment of UK interest and inflation rates. Any significant divergence will dissolve competitiveness and confidence. For the same reason, that course will demand that UK fiscal policy certainly in terms of spending policy, certainly in terms of borrowing, conforms to euro zone performance on borrowing and revenue. That course will also need some magical strategy for anchoring investment that will otherwise be pulled away from the UK to the euro zone part of the Single Market where currency volatility has effectively been abolished. And that stratagem will of course have to avoid transgressing against Single Market rules. In practice, that course means accepting “one size fits all” policies without having any amount of influence over the size they have to fit.
The other course is to join the euro and to have the advantages of stability, of increased trading with the rest of the Single Market because sharing currency multiplies trading three fold – as the US experience has amply shown over decades. It offers the advantages of productivity, choice, and price benefits that come with greater trade volume, of the extra growth that even conservative estimates put at £15B a year. It will mean access to a home market of 340m people that is not only free of trade barriers but free of £4.5B of annual transaction costs, it will mean avoiding currency disincentives to inward investment, and it will mean gaining Britain’s rightful share in decision-making on stability and growth strategies and on interest rates and on wider monetary issues of the market.
My view of the best course for our country is obvious. When Britain is faced by choices in a euro referendum, I hope that is the course that will be taken. If the country decides on the basis of realism and if people focus on the future not on nostalgia, I believe that the course that people will democratically choose.”