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European Affairs
European Perspectives
Britain Is Still in No Hurry to Join the Euro
By William Keegan
So where does Britain go from here? The missing link in Britain's relationship with the rest of the continent is membership of the euro, the European Union's single currency. But despite the frequently expressed desire of Prime Minister Tony Blair to lead his country into the euro zone, that day seems as far off as ever - particularly since Mr. Blair's government announced this summer that its economic conditions for joining the single currency had not yet been met.
Britain's absence from the euro, in the company only of Sweden and Denmark (both of which have rejected the euro in referendums) among the European Union's current 15 members, is just the latest example of an enduring British habit of lagging behind its neighbors in the postwar drive to European integration.
The British waited until 1973 to enter what is now the European Union, founded by six pioneering continental countries in the mid-1950s. Britain joined the European Monetary System in 1979, but not its principal instrument, the European Exchange Rate Mechanism (ERM). When the British finally got around to joining the ERM, in October 1990, they did so at what is now widely agreed to have been the wrong time, the wrong rate and for the wrong reasons. Even before the country made an ignominious exit from the ERM in the "Black Wednesday" currency crisis of September 16, 1992, the government had already secured an "opt-out" from the single currency enshrined in the Maastricht Treaty that had been signed by EU leaders earlier that year.
Now both Mr. Blair and the opposition Conservatives are pledged to a referendum before joining the euro, which in the current state of British public opinion is a major obstacle. Although Mr. Blair in June once again promised to work hard to meet the economic conditions for euro entry, and to win around public opinion, he has made such pledges in the past with little real follow-up.
Since then, Mr. Blair has had to face other troubles, mainly caused by the political fall-out from Britain's participation in the war in Iraq, and there is not now expected to be a referendum on the euro before the next election. That has to be held by 2006 at the latest, but will probably be in 2005. In any case, taking major decisions by referendum is not a traditional British constitutional practice, and any prime minister would approach such a poll with caution. By August 2003 the prospect of an early referendum seemed to have receded even farther. It was widely reported that public trust in Mr. Blair had fallen so low that Britain In Europe, a group that has been campaigning to rally support for the euro, had more or less abandoned its efforts for the time being.
The first senior politician to call for a referendum on the single currency was Margaret Thatcher in 1991, after she had been deposed as leader of the Conservative Party in 1990. John Major, her successor as party leader, and Prime Minister from 1990 to 1997, was under constant pressure from the Conservative Party's Euroskeptics. Although he expressed a wish that Britain should be "at the very heart of Europe," he said he was "personally unenthusiastic" about the single currency.
Mr. Major, however, thought it would be in Britain's interest to join a successful euro zone, and committed himself and his party, in April 1996, to a referendum on the issue. The Labour Party, then in opposition, felt it had to match this commitment. Thus it came about that after Mr. Blair became Prime Minister in 1997, with his powerful friend and ally Gordon Brown as finance minister (Chancellor of the Exchequer), the constant question in British politics became: "When are they going to hold a referendum?"
Vast quantities of newsprint have been consumed in covering the great euro debate in recent years. Yet the problem is quite simply stated: Mr. Blair desperately wants to join the euro zone, confirming his credentials as a European statesman, but he is not prepared to call a referendum unless he feels sure he can win one. The British public, however, has so far proved steadfastly anti-euro, and Mr. Blair has not dared to invest the political capital necessary to change public opinion.
The popular impression in Britain is that Mr. Blair made a crucial mistake in allowing Mr. Brown an effective veto on joining the euro. Mr. Brown made sure that his department, the Treasury, would first have to grant its seal of approval, which was to depend on the results of a comprehensive economic assessment known as "the five tests" - and Mr. Blair went along with this. Because the tests have not been met, as the government announced in June, the general assumption is that Mr. Brown is preventing Mr. Blair from making a decision to join in the national interest.
The truth is more complicated. It suits Mr. Blair to hide behind Mr. Brown on the issue. But it is not true that Mr. Brown is as anti-euro as he is customarily portrayed by the British and European media. This portrayal may be politically convenient for him when he is seeking the support and approval of such anti-EU media tycoons as Rupert Murdoch and Conrad Black. But Mr. Brown is basically pro-Europe and, as a Scot, does not have any hang-ups about adopting a single European currency (Scotland's currency was subsumed into the British pound several centuries ago).
During his first few months in office in the summer of 1997, Mr. Brown was quite keen on joining the single currency, which was then only in the planning stage. He saw euro membership as a kind of insurance policy should his own economic policies run into trouble. The Labour Party had been out office since 1979 and was very nervous when it assumed the reins of government in 1997, notwithstanding its huge parliamentary majority and the widespread adulation heaped on Mr. Blair.
Once Mr. Brown's "prudent" fiscal policy was accepted as serious, and his plan for an independent Bank of England was seen to be working quite well, everything changed. Whereas the Thatcher government had joined the ERM because its domestic economic policies (various forms of monetarism) had failed, the Blair/Brown government found it had its own alternative to the stability offered by the euro zone. In conjunction with the unambiguous message of the opinion polls - two to one against the euro - Mr. Brown's apparently successful economic policy formula became a reason for not joining the euro zone, or at the very least, for delaying the decision.
The anti-euro case was strengthened by almost universal agreement that the pound was too strong against the euro for the desired goal of sustained convergence, the principal requirement of the "five tests," to be achieved.
More recently, however, the pound has weakened, and the performance of the British economy has been less impressive than it was between 1997 and 2002. There have been tentative signs that policy makers in the euro zone may be beginning to relax some of the constraints on economic policy that have so far made the zone a less attractive option for Britain. In particular, these constraints are the deflationary biases of both the European Central Bank's monetary policy and the European Stability and Growth Pact that governs fiscal policy.
It is important, however, to emphasize that Mr. Brown, who is still seen as Mr. Blair's natural successor, takes a very long view of such matters. On the one hand, he is more favorably disposed toward Britain's joining the euro zone than is widely realized; on the other hand, he is a cautious politician, and in no hurry to close the deal. The essential point to remember is that he is very definitely not anti-euro in principle, however else he may sometimes be portrayed.
William Keegan is senior economics commentator at the London Observer. His latest book, The Prudence of Mr. Gordon Brown, is to be published by John Wiley & Sons in October.