Why the United Kingdom must say 'No'
By Rt Hon. David Heathcoat-Amory, MP E-mail: david@wells.tory.org.uk

CONCLUSION

A single monetary policy cannot deal with the differences, divergences and cyclical variations in the European economies. National currencies provide an adjustment mechanism, and allow governments to use interest rates to respond to events. A single European currency would remove these options. Instead, a single European interest rate, set by the European Central Bank in Frankfurt, would apply indiscriminately to the whole single currency area. This creates the problem of how a participating country could adjust to a shock or economic development specific to that country.

The labour market in the EU is neither mobile enough nor flexible enough to take the strain of adjustment. Indeed the EU spends much of its time legislating to make the European labour market even less adaptable, as shown by the unacceptable level of structural unemployment in the EU.

Nor could EU governments rely on their national budgets to alleviate a local or cyclical recession. The Treaty lays down strict compulsory borrowing limits. An active policy of cutting taxes or increasing public expenditure could lead to penalties and fines. Even a passive policy of allowing the budget deficit to rise during a recession could breach the limit and require tax increases and expenditure cuts. So instead of stabilising the situation, the effect would be to compound the problem and create more unemployment.

With monetary policy given away, and these restrictions on borrowing, countries in a single currency would be left with transfer payments between Member States. At present these transfers, in the form of structural and cohesion funds, are used to subsidise the poorer EU States. The UK is a very substantial net contributor. In a single European currency transfer payments would take on the much larger task of trying to compensate for changes and shocks affecting the various economies of the currency area. The present EU budget, at 1.2% of GDP, is far too small for such a role.

Advocates of a single European currency who point to the success of the US Dollar are in fact making this point. The US federal budget, through its direct taxation and expenditure powers, exerts a powerful stabilising influence on the varied states and regions of the USA. A single European currency would require an equivalent EU budget, many times larger than has ever been officially recognised.

A single European currency is, in economic terms, highly unlikely to work. To have any chance of success, it would require the completion of a federal European state with its own budgetary powers. This time, Parliament and the electorate must be aware of the real implications of joining a single European currency.

We must say 'No', and say it now.