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

THE STORY SO FAR

The fuse leading to full monetary union in Europe was lit in 1970 with the publication of the Werner Report. This report, under the chairmanship of the Prime Minister of Luxembourg, Pierre Werner, proposed full monetary union by 1980. In the words of the Report, the Community was to achieve the 'total and irreversible convertibility of currencies, the elimination of fluctuation in exchange rates, the irrevocable fixing of parity rates and the complete liberation of movements of capital.'

The Werner Report emphasised the need for economic control to be exerted at Community level. The size and financing of national budgets would be decided by a body responsible to the European Parliament. As a child of its time it also provided for a joint incomes policy. The report was adopted by the Finance Ministers of the six Community countries and received endorsement from the new candidate countries which were negotiating for entry, including the UK.

The Werner Plan received a severe blow when the Bretton Woods system, which had governed global exchange rate arrangements from the end of the Second World War, collapsed in 1971. It was the first of many external blows to fall on plans for monetary union.

The following year European leaders agreed to establish instead the currency 'snake' whereby their countries' currencies would move against each other within a 4.5% limit. This was part of a phased process of monetary union, as explained by Edward Heath to the House of Commons in October 1972 when reporting the outcome of the Paris Conference on enlargement:

"The meeting agreed on the need for Community mechanisms to defend the fixed but adjustable parities between Member countries' currencies which will be an essential basis for economic and monetary union... The Community should move to the second stage of economic and monetary union on January 1, 1974, with a view to its completion by the end of this decade." (Note 2)

Instead, the oil price shocks of 1973-74 caused the economies of participating countries to diverge, and one by one their currencies dropped out of the snake to float freely. The UK's membership lasted two months. Italy and then France withdrew; and the non-Member States of Sweden and Norway - who had at first associated their currencies with the system - were then forced to withdraw. The Deutschmark was revalued three times.

Nevertheless negotiations were renewed in the late 1970s to try and design a more stable European exchange rate system, and relaunch the concept of monetary union. The European Commission, under the Presidency of Lord Jenkins, strongly promoted these ideas and called for greater powers of taxation to be vested in the Commission.

A significant development in this direction was the 6th VAT Directive, agreed in 1977. This was a bold harmonising measure designed to bring the VAT systems of Member States into line. It originally included a proposal to give the Commission its own directly levied tax revenue but this was eventually dropped. The scope of this Directive, coupled with ambiguities in the text, have since been the source of endless litigation, both in national courts and in the European Court of Justice.

In 1979 the European Monetary System was launched. Its central feature was the Exchange Rate Mechanism (ERM) whereby a loose grouping of European currencies and economies moved to an ever more rigid system of currency management with fewer and fewer realignments. At the same time the European Currency Unit ('ecu') was made the system's accounting unit and the forerunner of a single currency. The UK stayed out until 1990.

There were several realignments in the early years before the system appeared to settle down. However, this stability was bought at the price of German domination. Germany was accumulating large trade surpluses but the ERM prevented a revaluation of the Deutschmark. Instead the currencies of the ERM as a whole were dragged up higher than they should have been against the dollar. This hit exports and growth at a time when unemployment in Europe was rising.

The reaction, especially in France, was not to abandon the project but to seek a new system which would prevent the Bundesbank effectively determining monetary policy for everyone by replacing it with a more representative institution. French political opinion came to view monetary union not as a loss of national decision making but a way of regaining influence over events which France had already ceased to control.

The French Finance Minister, Edouard Balladur, wrote in January 1988:
"The fact that some countries have piled up current account surpluses for several years constitutes a grave anomaly. This asymmetry is one of the reasons for the present tendency of European currencies to rise against the dollar and the currencies tied to it. This rise is contrary to the fundamental interest of Europe and its constituent economies. We must therefore find a new system under which the problem cannot arise." (Note 3)

Accordingly, the European Council meeting in Hanover in June 1988 agreed to set up a committee, chaired by Jacques Delors, to examine how monetary union could be achieved. The Report was published the following year and asserted that the creation of a Single Market in Europe would require monetary union. This was to be achieved in three stages: the first stage would involve a greater convergence of economic performance; the second, the transfer of responsibility for economic and monetary policy from Member States to the Community. The final stage would start with an irreversible locking together of exchange rates and be followed rapidly by the replacement of national currencies by a single currency. With regard to national policies, the Report was clear on the need to 'place binding constraints on the size and financing of budget deficits'.

The Delors Report was discussed at the Madrid summit in June 1989 and the Prime Minister, Margaret Thatcher, reported the outcome to the House of Commons. She accepted the Report only 'as a basis for further work' and warned that 'stages two and three of the Delors Report would involve a massive transfer of sovereignty which I do not believe would be acceptable to this House. They would also mean, in practice, the creation of a federal Europe'. (Note 4)

The Delors Report formed the basis of the intergovernmental discussions leading up to the Maastricht Treaty. The three stage process was adopted, although the content of each step was modified. The Treaty laid down the economic criteria for judging the readiness of Member States to join the third stage. Other articles dealt with institutional aspects, and in particularly the creation of a European Central Bank to take control of monetary policy from the start of stage three. 1997 was specified as the start date for this decisive stage, provided a majority of countries qualified. At French insistence it was agreed that if this first date was missed, stage three would start in January 1999 in any event, even if only a small number of countries qualified. Spain succeeded in getting the EC budget amended to provide more regional assistance and to set up a 'cohesion fund' to subsidise the efforts of Spain, Portugal, Greece and the Irish Republic to meet the necessary economic criteria.

With great foresight the UK Government, led by John Major, obtained an 'opt-out' from stage three. Under a protocol to the Treaty, the UK cannot move to this final stage without a separate decision to do so by the British government and Parliament. Until this is activated, the UK has virtually the same status with respect to the Treaty as any other Member State. However, while this was being negotiated, external events were again making themselves felt.