25 October 1999
SPEECH BY the ECONOMIC SECRETARYTO THE TREASURY, MELANIE JOHNSON MP , TO THE RIIA EMU CONFERENCE.
Introduction
First of all, I would like to thank the Royal Institute of International Affairs for inviting me to address this conference on EMU. I am delighted to see such a large audience and such an impressive array of speakers from the world of banking, industry, education and, of course, from our European Union institutions with Professor Otmar Issing whom I welcome to London today.
I want today to set out Government policy towards the euro, addressing the important question of UK membership.
The Launch of the Euro
The launch of the euro has marked a significant turning point, both for the world economy and for the development of the European Union. It is a change which is being felt not only by the countries which have chosen to join Economic and Monetary Union, but by countries elsewhere in Europe and around the world. Overnight, the introduction of the euro created the world's second largest single currency zone, with nearly 300 million consumers. The EU accounts for around one fifth of global trade and GDP - a currency bloc of almost equivalent size to the United States. So those who choose to ignore the arrival of the euro do so at their own risk.
The UK cannot afford to underestimate the link between the economic future of the UK and that of Europe. The euro-zone and the UK are each other's largest trade and investment partners. So the success of the euro is vital to the prosperity of the British economy whether we are a member or not.
The euro will bring about increased competition. Exchange rate risk and uncertainty within the euro zone will be eliminated. Transaction costs will fall. Consumers will find it much easier to compare the prices they pay at home with the prices in other euro-zone countries. And these trends will be magnified by technological change. Telephone sales and the Internet will make it easier for consumers to compare prices and to indulge in cross-border shopping. In short, barriers to competition within the single market will be reduced even further.
And by helping to sustain a zone of economic stability across Europe, a successful single currency should reduce the harmful effects of volatility on investment, employment and ultimately economic prosperity.
This Government wants the single currency to succeed. Because of our strong economic ties, there is no other sensible option to take. And the Government remains fully committed to doing all we can to ensure the success of the euro, regardless of whether we are a member ourselves.
UK Policy
The question of British membership of the single currency is the most important choice this country is likely to face for a generation. So, on taking office in 1997, the Government took several key decisions.
- First, we announced our commitment in principle to economic and monetary union, and our belief that the decisive test for UK membership should be whether there is clear and unambiguous economic benefit to this country.
- Second, we spelled out our firm intention to lead a period of preparation to ensure there is a genuine choice to decide on membership early in the next Parliament.
- And third, because of the magnitude of the issue, we said that - as a matter of principle - if the decision to enter is taken by Government, it should be put to a referendum of the British people. Government, Parliament and the people must all agree. That final decision on membership should be taken at a time when it is possible to judge accurately the economic benefits.
Our position on Britain's entry into the single currency has always been crystal clear. The policy was set out by the Chancellor in October 1997, and restated by the Prime Minister in February of this year. And it is a policy that has stood the test of time. This is the first time that a British Government has accepted that, in principle, British membership of a successful single currency would be beneficial to Britain and Europe. Our position remains that we will recommend joining only if it is in the national economic interest to do so.
Five Economic Tests
This Government's central economic objective is to achieve high and stable levels of growth and employment, and any decision to join the single currency must be judged against this objective. To help that evaluation, the Chancellor set out 5 economic tests for membership - which I am sure you are all familiar with - and we are committed to a new evaluation of them early in the next Parliament. Only if this Government is convinced that they are met will it recommend entry.
As you know, the first assessment in 1997 concluded that it was not in Britain's interest to join in the first wave. We had neither sufficient convergence with the euro-zone economies, nor flexibility in our economy to live with interest rates determined by the European Central Bank. And to have joined without the necessary convergence or preparations would have been a recipe for instability that would have been damaging for Britain and damaging for Europe. Britain needs that period of stability and sustained convergence before membership can be considered.
But the Government is committed to giving the British people a genuine choice about EMU. And this means we need to make intensive preparations now so that we can make an informed decision about where our economic interests lie. The sheer scale, nature and complexity of the task requires that it be given considerable time and thought. So we are preparing on a macroeconomic level, preparing on a microeconomic level, and helping with preparations in the business and the public sectors.
Economic Preparations
First, on a macro-economic level, we have introduced a programme of economic reforms which are in the national interest, and which will help to provide the stability and flexibility to prepare us for membership. We have put fiscal and monetary policy on a firm, long-term footing as the platform for lasting economic stability. And the changes we have made - in our reforms to the Bank of England and the Code for Fiscal Stability - are already delivering results. For over a year now, inflation has remained within 0.5 percentage points of the Government's target. Short-term interest rates peaked at half their early 1990s level and mortgage rates are around their lowest level for over 30 years. Public borrowing has been reduced by £30bn over the past two years and we remain on target to meet the fiscal rules. This greater economic stability should provide an essential platform for closer convergence of the economic performance of the UK and other member states.
We also remain committed to monitoring our inflation target in the light of European Central Bank practices. And we will continue to ensure that our fiscal rules remain consistent with the terms of the Stability and Growth Pact - even while we are not a member of EMU - underlining our commitment to avoid an excessive deficit.
Second, on a microeconomic level, we have taken many steps to improve the economy's flexibility. For example:
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programmes for investing in education and training;
- helping people into work through the New Deal and Welfare to Work schemes;
- reforming the tax and benefits system to make work pay, and
- improving the functioning of markets.
These measures are right for the British economy regardless of whether we join EMU. But at the same time they will deliver the flexibility the UK needs to adapt to changing economic circumstances in EMU if we do join.
Our economy is more stable as a result of the policies that this Government has introduced. But we cannot yet claim that our economic tests have been met. We need to be able to judge that convergence is capable of being sustained.
Business Preparations
Third, whether or not we join EMU, the euro already exists and affects all British businesses who deal with the European Union so we are committed to helping UK businesses, particularly small firms, adjust to the new economic landscape. Over the last two years, we have worked consistently with the business community and the public sector to raise awareness of the issues involved. UK businesses must be prepared to trade and handle the euro. And they must be prepared to deal with the practical aspects of possible UK entry.
That is why we launched a nationwide information campaign to raise awareness of the issues involved in preparing for the single currency and to persuade businesses to take action. Ministerial seminars and focus groups have also been held throughout the country for small and medium sized businesses. And we have established a network of 12 regional euro fora, chaired by prominent businesspeople, which bring together public and private sectors, representatives of the employers and the employed, to help coordinate and stimulate preparations at a local level.
Our Revenue Department worked hard to ensure that from the beginning of this year, companies based in the UK could pay taxes, file accounts, issue shares, and receive certain government grants in euros. So real progress has been made. Many more businesses are making preparations for the euro, and as the level of awareness rises, the understanding of the issues involved deepens.
These are all sensible preparations even if the UK were not to join. But to deliver a genuine option of membership for the British public, preparations need to be made now. That is why the Prime Minister launched the first Outline National Changeover Plan in February of this year, which summarised the work done so far, and the steps which would need to be taken if the UK did decide to join the single currency early in the next Parliament.
And because of the Government's leadership, I am glad to announce that preparations are on track. Legislation has been introduced to enable key Government departments such as Customs and Excise, Inland Revenue, and the Department for Social Security, to spend on preparations for the euro ahead of a referendum. All Government departments and some key agencies are preparing outline changeover plans by the end of the year.
We plan to release an update to the Changeover Plan next year. These measures show that Government is putting its policy of prepare and decide into practice.
Helping the Euro Succeed
The Government wants the single currency to succeed, regardless of whether or when the UK joins. So we will offer constructive support to ensure that success.
Only by being involved - and constructively engaged in the debate - can we influence and shape the arguments. As the Prime Minister said two weeks ago, the truth is that Britain is stronger in the world if it is stronger in Europe. You can't expect to lead in Europe if you are marginalised in the debate, as Britain has been so many times in the past.
When we came into power, our first priority, and our continuing obligation, was to build a solid platform of economic stability based on openness and transparency. On the continent of Europe, the same lessons are being learnt though monetary union:
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a commitment to fiscal sustainability through the stability and growth pact of the European Union;
- a system of multilateral surveillance within Europe involving more commitment to fiscal targets and rigorous peer review;
- and a commitment to monetary stability through the creation of the independent European Central Bank.
The ECB has a key role to play in this framework, and we welcome their efforts to make the decision making process more open and transparent. With its press releases and monthly bulletins, the ECB has already gone further than required under the Treaty.
But if the euro is to succeed, it needs more than sound macroeconomic management. The euro must be supported by well functioning markets. We stand by our statement in October 1997 that other European countries need to tackle unemployment and inflexibility to make sure Europe as a whole is able to withstand any shocks that arise. We will continue to argue that employability, flexibility, more structural reform of the product, labour and capital markets, and stronger competition must all be a top priority so that monetary union can be successful.
These measures are the foundations for a modernised, high-skill, high-productivity European economy. They are the foundations for growth and job creation across Europe. They are ideas which lie at the heart of this Government's agenda both domestically and in Europe, not only because of the euro, but because they make sense in their own right. Britain is already playing a key role in taking them forward.
The City of London can also play an important role. By offering transparent, liquid, innovative, but well regulated markets, the City is well placed to help ensure that the euro takes its place as an international trading and portfolio currency, alongside the dollar. The financial markets of the City of London are as much a European asset as they are a national asset.
It is encouraging to see signs of cyclical recovery in the euro area. Germany is starting to grow and the European economy as a whole is starting to make its contribution to world growth. But Europe must maintain the momentum of reform so it has the flexibility and strength to cope with the demands of a single currency for the long term.
Conclusion
So in conclusion, as the Chancellor made clear in October 1997 and the Prime
Minister repeated in February 1999, the Government believes that in principle, British membership of a successful single currency would be beneficial to Britain and to Europe. The key factor is whether the economic benefits of joining for business and industry are clear and unambiguous. And that remains our policy.
Europe is where we are, where we trade, and where thousands of businesses and millions of jobs come from.
In or out of the euro, the UK has a clear interest in the success of the euro. I hope you have fruitful debates the rest of today and tomorrow. Debates like these should help deliver that success.