Britain is still on course to join the euro despite the narrow rejection of formal membership by Denmark in last week’s referendum. Denmark is Europe’s second-smallest country, represents only 2 percent of European gross national product, and anyway has already tied its currency, the krone, to the euro. Whether this will continue when the currency speculators pounce and the European central banks rightly stand aside is another matter.
The British position is entirely different, and when Britain votes it will be for British economic and political interests. On balance — and it is a balance, as there are costs as well as benefits involved — there is a clear case for membership. Chancellor of the Exchequer Gordon Brown has paid many of the costs trying to get the economy back on track, while those to come in parts of the financial sector and elsewhere do not outweigh the enormous potential benefits to the economy and the public as a whole. This has not as yet been sold to the electorate.
Were membership of the single currency zone to be ruled out, Britain would not only lose international investor confidence, but the strength of British companies and the security of British jobs would be threatened.
Japanese investors have been relatively relaxed about Britain’s exclusion from the euro in the short term, but their long-term strategy assumes Britain will be part of a fully integrated European market. Foreign companies are making it clear that unless this occurs, their future in Britain is at risk. New investment in manufacturing is almost entirely on hold, waiting for a decision. It is only in the financial sector that Britain continues to look attractive. Prime Minister Tony Blair reassured Japanese investors when he met with Japanese Prime Minister Yoshiro Mori, and made it clear that the Labor government is committed to joining the single currency when the five economic conditions laid down by the Treasury in 1997 are met.
Currently, Britain has more direct foreign investment than any other country in Europe. The main attraction for investors is access to the world’s largest market — there are currently 380 million consumers in the EU, and following the next wave of enlargement, there will be approximately 100 million more. If, for any reason, Britain were to remain outside the euro, its natural advantages of language, labor and location would be overwhelmed by the uncontrolled risks of currency fluctuations. Britain exports over 78 percent of its goods to the EU, compared to 14.9 percent to the whole of the North American Free Trade Area.
Furthermore, the British market would be a much less attractive location for export manufacturers aimed at the European market. Companies would radically rethink the location of their European operations headquarters. Continental Europe is already implementing structural reform in the labor market and taxation that will remove many of the informal disincentives to investing in Britain’s European competitors. As British-based companies attempt to participate in an increasingly dynamic European market, they will be penalized by the costs of hedging against exchange-rate risk. These are far from ideal conditions to manufacture for export, especially when there is an easier option.
Current difficulties with the euro confirm this analysis. The strong appreciation of the pound has hit manufacturing companies disproportionately hard. Japanese car manufacturers in Britain have felt the negative impact on profit margins in particular — loss of profits translates into reduced investment and job losses — leaving companies such as Nissan and Toyota seriously considering relocation. Kunio Nakamura, president of Matsushita, warned that “if Britain does nothing to solve the problem, foreign companies, regardless of whether they are Japanese, American or whatever nationality, may exit the country.”
While the benefits of being inside the euro-zone are clear in terms of trade, transparency of costs and currency stability, the British government faces challenges that are not purely economic. The pooling of sovereignty that comes with joining the euro involves highly political areas of exchange and interest-rate policy. Therefore, many believe that the five economic conditions will be seen to be met when it is politically convenient. Polls show that a large majority of the electorate today would vote against the single currency. It is set to become a key issue in the next general election, with the Conservative Party putting all its political eggs in the “save the pound” basket, desperate for any issue on which it is more popular than the government.
The forces of anti-Europeanism and xenophobia may make the “yes” campaign in the promised referendum difficult. But Britain’s long-term future is in Europe. Its inability to join the single currency in the first wave has already reduced its influence over external economic events. Despite the direct effect on Britain’s economy, decisions are currently made at the European Bank and at the Euro 11 Committee of Finance Ministers without British representation.
The political case for Britain in a developing Europe is strong. Britain should be at the heart of the process shaping the future of the EU. The economic case is overwhelming. Britain must chart a course to join the euro because inward investment is the cornerstone of Britain’s economic success and no government can afford to lose foreign investment and the prosperity it creates.
The uncertainties surrounding future participation in the European Monetary Union will remain in the short term, but after the next general election, the long-term vision of the Labor government should be, without doubt, Britain at the heart of Europe.
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