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12 Reasons for Joining the Euro

May 1, 2004 12:00 AM
By Chris Huhne MEP (now MP)

Chris Huhne MEP, (now MP) sets out twelve reasons why Britain should adopt the euro

1. A BETTER DEAL FOR CONSUMERS

The euro is finally completing a US-size single market in Europe, and ending companiesâ ability to charge the highest price each national market will bear.

US-style competition in one big market will end Îrip off Britainâ and give consumers year-round bargain basement prices. Already, big companies like Unilever are aligning their prices for goods like ice cream and soap powder, which can vary by as much as 30 per cent from one euro-zone country to another. Outside the euro-zone, Britain will continue to lose out.

2. LOWER INTEREST RATES FOR BORROWERS

Interest rates are just a little lower in the Euro-zone that they are in Britain: just 4.75 per cent against 5.75 per cent in the UK at the beginning of February 2001. If Britain adopted Euro-zone interest rates, homeowners with a £40,000 mortgage would currently save £33 per month.

3. REAL SOVEREIGNTY OVER OUR MONETARY AFFAIRS

If we get rid of sterling and adopt the euro, we will also get rid of sterling crises and sterling overvaluations. This will give us a real control over our economic environment.

Our manufacturers, farmers and other trading businesses would be able to rely on the exchange rate against our main continental trading partners staying unchanged forever. That would in turn mean that interest rates would not have to be raised sky-high to protect a plummeting pound, which is what has usually happened after periods when the pound is over-valued as at present. Remember that in 1986 Nigel Lawson had to hike interest rates not because of domestic economic conditions but because the pound threatened to fall to one-to-one against the dollar. The idea that we have been able to set interest rates suitable for domestic conditions is nonsense: they have often been buffeted by hot money flows.

4. INVESTMENT & JOBS WILL GROW WITH EURO MEMBERSHIP

Businesses will invest more because they will face fewer risks from volatile exchange rates. At present, foreign direct investment is staying high because companies believe that Britain will join the euro. But if we fail to do so, investment could plummet. We all know how anxious the Japanese are to be courteous and never to give offence, but Japanese businessmen are now increasingly blunt about the need for Britain to join. As Mr Hiroshi Nemichi, chairman of Mitsubishi Corporation (UK) plc says: ÎIf Britain were to rule out membership of the single currency, as the anti-Europeans seem to want, Britain would be less attractive to inward investors.

Regions like South Wales and the North West would be particularly badly hit if foreign investors went to the euro-zone rather than Britain, yet this is almost inevitable if we rule out euro entry. Given that up to 80 per cent of the output of many Japanese and US plants in Britain is aimed at the euro-zone market, why should they take the extra risk of the sterling exchange rate wiping out their profits?

5. BRITISH BUSINESSES RISK BEING SIDELINED OUTSIDE THE EURO

The biggest British businesses ö like Unilever, Shell, BP Amoco, Vodafone Mannesman will effectively become eurozone companies, doing most of their accounts in euro anyway. The eurozone market is a bigger slice of their turnover than the UK. There is now a merger wave going on in Europe as businesses try to operate on a continental scale: last year, the total value of mergers was more than 1 trillion euros, six times the level of the last peak.

But medium sized UK companies cannot take advantage of these trends. Their costs continue to be in sterling, even though they are increasingly forced to invoice in euros. Yet they cannot merge to get bigger economies of scale in the same way as their continental rivals because they would still be exposed to the ups and downs of the exchange rate in their main market. They therefore face the disadvantages of an independent currency without the advantages.

6. SAVINGS ON CURRENCY CONVERSION

Every tourist knows how their money dwindles in value when they convert into foreign cash for a holiday, but the same problem hits businesses every day of the week.

And transactions costs even for the biggest clients ö and both Mars and Tate and Lyle have complained - have become sharply higher since the euro was introduced as there is less competition in the UK-euro market. These savings alone will be worth about half a pence in every pound produced in the UK.

7. MORE PROSPERITY FOR THE CITY

The City would have the potential to become Europeâs financial centre, not just a big offshore centre. Although the City is doing well from the growth of the eurobond market, and from the mergers boom as europeâs businesses consolidate, the real prize will be a single market in financial services. This will allow British-based financial institutions to provide financial services all the way across the continent, effectively turning London into the New York of Europe. Yet that prospect ö which needs agreement on EU legislation - is much less likely if we fail to participate in the euro.

8. BETTER PENSIONS

Although old people often worry that the euroâs lower interest rates will hit their income, in fact pensioners would benefit. First, the value of their shareholdings in pension funds will tend to rise as interest rates fall. Secondly, pension funds will be able to spread their risks around the wider euro-zone, creating larger portfolios than ever before. This will reduce their risks and increase their returns ö and hence their pensions. More effective european capital markets are good news for savers.

9. THE EURO IS A WORLD CURRENCY

The US Treasury saves more than $10 bln a year because foreigners hold dollar bills ö effectively a free loan. As the euro becomes established, foreigners will also hold euros, making european governments a free loan. The euro has already become a major currency in which to borrow money: issues of international bonds denominated in euro rivalled dollar issues last year.

10. GREATER POLITICAL INFLUENCE IN EUROPE

The euro is not just a great economic boon, but it is also a key objective of our partners. Eleven of the fifteen European Union member states joined at the beginning of 1999. Greece joined in January 2000. Swedenâs Social Democratic party has backed euro membership and the Prime minister says it is no longer a question of if, but of when. Only Britain and Denmark ö where the Government recently lost a referendum on the euro - are the odd men out. Moreover, all 13 candidate EU members from central and eastern europe want to adopt the euro.

11. N0 EUROPEAN SUPERSTATE

The euro does not imply a european superstate. Ireland and Britain were in monetary union from 1921 to 1979, a period which encompassed such independent exercise of Irish political sovereignty as the end of Dominion status and neutrality in a war in which Britain was fighting for its life. Belgium and Luxembourg have been in monetary union since the twenties, but have entirely independent political systems. And between 1880 and 1914, the gold standard was effectively a world monetary union without any world government at all. Money is a convenience to make us richer, not a piece of national bunting to be waved. The Euro is just another word for cash.

12. ONE INTEREST RATE FOR A WIDE AREA WORKS

Setting one interest rate and one exchange rate for a wide area like the Eurozone ö the so-called Îone size fits allâ ö already works in an area just as big ö the United States. There are plenty of ways economies adjust without needing separate interest rates and exchange rates. For example, Texas benefited from monetary union even when the oil price fell, and unemployment rose in 1986. It was able to attract far more investment and new businesses than it would have done if it had a separate Texas dollar. And the idea that interest rates and exchange rates are useful levers for delivering happy outcomes is belied by our experience of sterling crises.

For more information, read Chris Huhne's case in favour of the euro in 'Both sides of the coin' (Profile books, £8.99)