In this exchange from 2002 Lib Dem leader Nick Clegg, then an MEP, debates the single currency with Gideon Rachman of the FT
Nick Clegg addresses the Lib Dem spring conference in 2010
From Gideon Rachman
22nd November 2001
The euro is a huge economic and political experiment. Nothing like it has been done before so we cannot know how it is going to work out; the only responsible policy is caution.
Why should the British be cautious when our partners have taken the plunge? For good historical reasons. Britain has a political system which has delivered stability for centuries. It has never fallen to fascism or dictatorship. Unlike the French, the British have not been scarred by three German invasions in 70 years. I do not attribute this happy record to intrinsic British virtue-it is probably luck. But whatever the reasons for Britain’s stability, the country has, as a result, less reason to gamble with its political system. And let us be clear. The euro is, as Joschka Fischer says, “a profoundly political project.”
This is not to say that Britain has nothing to learn from the rest of Europe, or nothing to gain from European integration. We can agree about the superiority of Dutch schools, the Belgian health system and French trains. But making the trains run on time is not the measure of the health of a political system. Long-term peace, stability and prosperity are what count. On that score Britain, for all its faults, has an enviable record. For these reasons, it is right to treat a “profoundly political” project like the euro cautiously.
At this point, British supporters of euro entry respond by saying that any talk of the euro driving political integration is only scaremongering. The issues that matter to people, they argue, are the economic ones. So let me explain why I think Fischer is right to stress the political nature of euro-membership-why politics and economics are inseparable.
Some of the consequences of the euro are already apparent; others may emerge later. Let’s deal with what we know. A member of the eurozone will lose the ability to set a national interest rate and will be subject to the budgetary constraints of the stability and growth pact. The lessons of the last 30 years of British politics are that issues such as the level of interest rates and state spending are indeed “profoundly political.” One of the reasons for widespread alienation from the Tory party in Scotland was the feeling that the Tories were running an economic policy that suited a booming south, which needed high interest rates, but was crucifying industry in Scotland. If different views about the appropriate level of interest rates could cause such ill-feeling within a long-established country like Britain, what might they do across the EU? Take budget deficits. In the second Tory boom-and-bust cycle, Britain moved from a budget surplus in 1988 to a deficit of more than 5.8 per cent of GDP by 1993. Such a deficit would smash the 3 per cent limit imposed by the stability and growth pact and-in theory-subject Britain to fines of billions of euros. Try explaining that to your constituents.
Some people claim that interest rates will cease to be a political issue because the euro will usher in a new era of permanently low rates. Others say that the stability and growth pact will scrapped, or will be so effective that the fines will never be required. If those scenarios prove accurate over the course of the next decade, that would indeed make joining the euro more attractive. But, given our recent history, it is a huge leap of faith.
How it goes will depend not just on the known political effects, but also on those around the corner. Lionel Jospin has called for “social and tax harmonisation.” Gerhard Schroeder has said that “monetary union requires decisive advances in political integration.” Guy Verhofstadt, the Belgian prime minister, has ascribed the weakness of the euro to “the absence of a common socio-economic policy and a genuine political union.” He and others now favour a directly-elected president of Europe.
Confronted by quotes like these, chaps like you respond in one of two ways. They either say, “they don’t mean it, it’s just European motherhood and apple pie”; or “the only way to prevent these malign ideas from gaining ground is for Britain to leap aboard the euro train to apply the brakes.” To take the former argument first: “it will never happen” is what Brits said about the formation of the European Community and what John Major said about the euro. It is a British illusion.
The second “influence” argument deserves more considered refutation. First, the euro is such an important issue in itself that the decision must surely be taken on its own merits-not to preserve influence over some subsequent decision. It is absurd to abolish your own currency so as to preserve your influence over the third European directive on horse-boxes. As for preserving influence on the political consequences of monetary union-we have a recent example of the “influence” argument in Tony Blair’s decision to end the other British opt-out from the Maastricht treaty over the “social chapter.” It is not encouraging. We signed the social chapter on the basis that we could then influence social legislation from the inside. But look at the way the social policy votes go: it is clear that the British and Irish-with their distinct traditions of labour market regulation-are in a permanent minority. We have had the information and consultation directive shoved through despite British protest and we are soon to have commission-imposed restrictions on the use of temporary workers. When Britain signed the social chapter, Europe gained influence over British social policy-not vice versa.
Of course, there are other areas of policy in which Britain is influential-the economic liberalisation agenda is not to everyone’s taste but there are probably more countries with us than against us. It is easy to get mystical about “influence”-and to forget that what counts is whether enough countries agree with you on a given policy issue to secure a majority vote. “Influence” is not an immutable given, based on how Europhiliac you are-it is a shifting calculation, depending on the issue and the coalitions of votes than can be assembled: against Britain on labour markets and for it on liberalisation. If other countries have different interests or views, they will vote against us even if we are in the euro-and the number of areas on which we can be out-voted is liable to increase as a result of euro-membership. Conversely, if other members of the EU can advance their own interests through a strategic alliance with Britain, they will do it-whether or not we are members of the euro-zone.
I once heard Pauline Neville-Jones (the eminent former diplomat) say that when the euro got going Britain would “have its nose pressed against the glass.” All I could think was “speak for yourself.” Foreign office types equate influence with “having a seat at the top table,” to use one of their favourite clich? But they gloss over the price of admission and the question of what will be on the menu. There is more at stake than making life interesting for mandarins.
From Nick Clegg
24th November 2001
I, too, used to think that the euro was the wrong priority at the wrong time. When EU governments were slashing budget deficits to squeeze into the Maastricht criteria, I was sceptical. Why, I thought, should Europe consume so much political and economic energy in launching a single currency when, a decade after the fall of the Berlin Wall, the (unfinished) business of EU enlargement was surely the priority?
I accept that it is baloney to pretend that the single currency is not highly political. Equally, I share some of your scepticism about the “influence” argument. Not everyone attaches the same importance to the idea of strong British influence in Brussels. For those who are already in two minds about the euro, or the EU in general, saying that UK Plc needs a stronger voice in the EU will hardly serve as a clinching argument.
But there our agreement ends. Let me put three simple points to you: sovereignty; the role of monetary policy; and Europe’s single market.
First, sovereignty. British monetary sovereignty is not all it is cracked up to be. It is fanciful to suggest that the plucky pound sterling is in full control of its own destiny when set against the dollar, the yen, and now the euro. Eddie George is more at sea than you think. He has been unable to control the punishingly high level of the pound against the euro. If currency traders decide that sterling is a safe bet they drive it up, irrespective of his wishes. If they decide, as one day they might, that it cannot hold its own, they will let it drop, regardless of his feelings.
If larger currencies can hold their own more effectively in the volatile, global markets of today, we will gain greater control over our own affairs by joining the euro. By pooling sovereignty, we will be able to extend sovereignty over economic forces which have long moved beyond the reach of national monetary policy. That has been the logic of European economic integration since the 1950s. Macroeconomics has gone supranational, especially since capital movements were liberalised in Britain in 1979, followed later in the rest of Europe. So it is logical and necessary that our own monetary policy should go supranational too.
Second, the role of monetary policy. The most important function of monetary policy is to provide stability. Economic activity cannot thrive without it. On that criterion alone, I am sure you will agree that British monetary policy for the last several decades has been hopeless, from the devaluation crises of the 1970s, to the wild oscillations in the early 1980s, to the recent gyrations which pushed sterling up from a low of DM 2.18 in May 1995 to a peak of DM 3.43 in May 2000.
The euro, despite the foolish assumption of many commentators that it should be judged according to its external level with the dollar, has already provided great internal stability to the eurozone. The external value of the euro is less important than the external value of sterling because so much trade is now done internally within Europe, making it less sensitive to changes in external exchange rates. Sterling, meanwhile, is in the worst of both worlds since Britain relies overwhelmingly on trade with the eurozone, whilst retaining significant trading links with the US. Its value has been unstable and uncompetitive with both the euro and the dollar.
Year on year, output growth in the eurozone has exceeded British growth in every quarter except two since the euro was born in January 1999 and 5.25m new jobs have been created in the eurozone, far outstripping US and British employment growth (admittedly, from a lower starting point). An unprecedented spate of cross-border corporate mergers has also occurred in the eurozone, in part driven by the advent of the euro. This dynamism occurred despite significant external shocks, notably the rise in oil prices last year. And did you notice the way the US Federal Reserve, the Bank of Japan and the European Central Bank co-ordinated interest rate cuts in response to 11th September-a classic example of the globalisation of monetary policy reacting to global events. The Bank of England was left to play catch-up by cutting rates a day later. Can you explain why it is worth paying the price of higher interest rates, an overvalued pound, and hundreds of thousands of lost jobs in our manufacturing export sector to pay for this privilege?
Third, Europe’s single market. You, I assume, accept that the single market is a good thing. It has eroded barriers to trade, increased competition and exploited economies of scale. You will be aware, then, of the huge political and legislative steps which were necessary to bring it into being. Mrs Thatcher signed us up to the Single European Act. In doing so, she agreed to pool sovereignty in a bewildering array of public policy areas, from consumer health, environmental protection, to all the national norms and standards which served as obstacles to trade. Surely, this was the great giveaway in sovereignty? By comparison, a decision on which collection of central bankers sets our interest rates seems a sideshow. Fretting about the threat to national self-determination from European monetary policy, whilst supporting the far reaching economic and political integration of the single market is inconsistent.
Like the single market, the single currency, far from being an agent of continental style corporatism, is probably the greatest export vehicle of Anglo-Saxon economics. The euro has done more to enforce budgetary discipline, to promote privatisation and force through labour and product market liberalisation in the rest of Europe than any number of exhortations from the IMF, the OECD, or the editors of The Economist. It is not lost on policy makers in the eurozone that a borderless single market, now reinforced by a common interest rate, forces them to enshrine budgetary discipline and build flexibility into their economies. This, incidentally, is one reason why I do not understood the left’s enthusiasm for the euro.
My pro-euro argument is more prosaic than your concerns about fascism. This is, perhaps, because I believe in the end the euro is about money. It is not about our national character, our fundamental liberty, or our democratic values. Money is important, but it is not the determining emblem or feature of a nation or a culture. It is a means by which economic value is calculated and goods, services and property exchanged.
Introducing the euro will not be simple. There will be teething problems. Some countries will inevitably feel that eurozone interest rates are not fully appropriate for their national needs all the time (much as British interest rates have been inappropriate for much of northern Britain). The decision-making structures of the ECB will also need to become more transparent and accountable.
Nor would I claim that if Britain stayed out of the euro it would suffer a nervous breakdown. Rather, if we remain outside the euro, we will simply continue to subside into a position of relative poverty and inefficiency compared to our more prosperous European neighbours. Remember, we are already only the tenth richest nation in the EU in terms of national wealth per head. Yet you seem to think that such relative decline is a price worth paying for the sentimental satisfaction of retaining increasingly meaningless “control” over our own interest rates.
Yours, as ever
From Gideon Rachman
26th November 2001
Let me answer the three questions you raise. Sovereignty. As you may have noticed, this is not a word I used. My real concern is not with sovereignty, but with legitimacy. We appear to agree that with the euro, the EU crosses the line into areas that are “profoundly political.” The question is will the EU have the political legitimacy to command support for its decisions? There is a considerable risk that it will not. Look at the furious Irish reaction to the mild reprimand the commission issued earlier this year over Irish budgetary policy. That seems to me just a foretaste of what may be down the road.
This “legitimacy gap” could well be a problem, even if monetary and economic sovereignty is the illusion that you claim it is. Deluded people can still be angry, especially if they feel they are being messed around by foreigners. However, I think you overstate the meaninglessness of British economic sovereignty. If you traced a graph of British and European interest rates since the ERM fiasco, you would find that they do not mirror each other as they would if the Bank of England were simply shadowing the ECB. Nor has the eurozone been as impervious to external shocks as you claim. Germany is in recession, in part because of the US recession.
As for relative economic decline-Britain still has an unemployment rate well below the eurozone average; gets more foreign direct investment than any other EU country; will have the fastest growing economy in the G7 this year and, according to a recent Anglo-German study, the City has not suffered by being outside the eurozone. You say Britain is 10th out of 15th in the EU prosperity tables. But the figures for most countries are closely grouped and based on national statistics translated into purchasing-power-parity-this is not an exact science. I am not saying that your dire predictions of decline are wrong. But there is no hard evidence yet.
From Nick Clegg
30th November 2001
It strikes me as pessimistic, even condescending, to assume that people will be unable to understand that Europe-wide interest rates will not always provide a perfect match for their needs, much as present British interest rates suit some regions better than others. It assumes that people cannot grasp the compensating benefits of monetary union.
I meet many people in my constituency who are perfectly articulate about the benefits of the euro (especially those working in manufacturing or farming, sectors being hammered by our exclusion). They know that hovering outside the euro costs jobs. You also overlook the extent to which the referendum would itself confer legitimacy. Imagine the different climate after a referendum is held, the argument is ventilated, and a majority accept that the long-term advantages of the euro outweigh their immediate fears.
As for statistics, I would be wary of the Whitehall hype. You repeat the selective figures used by governments of all parties, to “prove” British supremacy. Yet if you were to take a range of other indicators-productivity, child poverty, literacy, public health, wealth distribution-the evidence of comparative British decline is sadly overwhelming.
In the end, our differences are an expression of one of the enduring faultlines in politics between conservatives and progressives: you believe change is dangerous and should be treated with caution; I believe change is inevitable and should be treated as an opportunity. Opinion polls show that most British people fall between the two-a significant majority agree we will enter the euro, but an equally large majority would prefer not to do so too soon. So the battle for the euro is a battle for the competing instincts in the British temperament. Tradition versus change; familiar versus unfamiliar; reticence versus self confidence. All we need now is the leadership to take this battle forward. But that is another story.
Yours, as ever
From Gideon Rachman
1st December 2001
My point is not that people are stupid and will react irrationally to the euro. It is that in any economic system, at any given time, there are winners and losers. The system needs an inherent legitimacy to see it through hard times. My fear is that a pan-European monetary union-imposed on a Europe in which people still think in national terms-will not have that legitimacy. I agree that a decisive yes vote in a referendum might close the legitimacy gap. But there might be a backlash if Blair runs a campaign based on cheaper mortgages.
Finally, it is absurd to say that I am opposed to change. The question, surely is, what sort of change? I believe that the political changes involved in joining the euro carry enormous risks. I do not think it is “progressive” or “self-confident” to take those risks. On the contrary, it requires great self-confidence to stand aside from an experiment that our neighbours assure us represents the inevitable sweep of history.
From Nick Clegg
2nd December 2001
Monetary union, we agree, is of great political significance. But political significance does not mean that the euro will result in a preordained political reconfiguration of Britain, and of Europe. Ireland and Britain were in a monetary union from 1921 to 1979, during a time of great political tension between the two nations. The gold standard prevailed over a wide range of political systems.
Monetary policy does not fix the political institutions, cultures and traditions of nations. That is why I keep reminding you of interest rates. Your task was to justify why you think common European interest rates, the heart of monetary union, will have the power of a Napoleonic blueprint for Europe’s political future. I do not believe you have.
Your real argument is not with the euro, it is with what you assume will be the future of the EU. You believe that by remaining aloof we will escape the wider debates on the political future of Europe. But the debates will continue irrespective of Britain’s membership of the euro. The only way to escape them is to withdraw from the EU altogether. If that is your objective, you should say so.