Europe: Enter at your Peril

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Tony Blair's government was due to announce the result of the Treasury's 'five economic tests on the euro' on 9 June, after bitter rows within New Labour.

We have come a long way since the Tories seemed to have a monopoly on being torn apart by arguments over the euro and Europe. Labour's official policy is that it will call a referendum and then argue for entry if it is 'in Britain's economic interest to do so'. The problem is that this supposedly 'economic' judgement on the five tests is in fact also about politics. And there are three deep splits behind the reluctance either to decisively reject the euro or to leap into the unknown of a referendum.

The first split - and perhaps the most fundamental - is within the British ruling class. Should the British economy look across the Atlantic to the US or across the Channel to the 12 countries that have adopted the euro? In practice Britain has opted for a mixture of the two during the postwar period. The City of London consolidated its position as a financial centre by becoming a sort of offshore tax haven for capital markets, and Britain followed the US in making it easy for bosses to fire workers, and cut spending on public services. In this sense the last Tory government's non-policy of 'wait and see' was a compromise based on a real division, just as the circus performer who rides two horses is fine unless they veer apart.

The second split runs down the middle of Britain's political class, and can be seen in the Labour Party and trade unions as well as among the Tories. The leaders of unions representing manufacturing workers tend to be more keen on the euro, while public sector union leaders see a threat to their members from European limits on government spending.

The third split is among the people of Britain. The commonsense view is that any referendum would be lost because a substantial majority is against the euro. Though this seems likely, it is not as clear-cut as it first appears. Many people have not yet made their minds up and some of those who say they are decided may change their minds in the course of a concerted pro-euro campaign (which we have not yet seen).

So what would the euro mean for the British economy? Firstly it would take away the Bank of England's power to set interest rates and give it over to the European Central Bank's (ECB) governing council - composed of one central banker from each country. The ECB's president repeats each month his mantra about the need for wage moderation - and he is not talking about the GlaxoSmithKline chief executive's £22 million 'golden parachute'.

New Labour is not worried about unelected bankers setting our interest rates. Within a week of coming to power in 1997 Gordon Brown handed control of monetary policy over to a newly independent Bank of England, while merely setting its target for inflation. In practice all the world's major central banks informally coordinate their monetary policy, with the US Federal Reserve leading the way. In the wake of the financial panic after 11 September, this coordination even became formal as the Federal Bank, the Bank of England and the ECB all cut rates within hours of each other to pump money into the markets and avert a financial collapse.

As for governments being able to run budget deficits of more than 3 percent, Britain is ahead of France and Germany in its orthodoxy. Because Labour stuck to the Tories' harsh spending targets when it first came to power, and because of Gordon Brown's attachment to 'prudence', Britain is on the right side of the ECB's rules on deficits even though it is outside the euro.

Here too there are clashes taking place on the continent, because the two countries central to the European project, France and Germany, are among the countries breaking the budget deficit rules. France has not only ignored the rules, but is making little pretence of caring. In the short term, the French government is unlikely to change its stance, since its economy expanded in the first three months of this year while many other European economies stagnated. Germany has gone into a second recession in the last six months.

Right wing papers froth at the mouth at 'Blair's betrayal of Britain'. It is tempting to say if the 'Sun' is against it socialists should be in favour of it. But there is an alternative on offer, which has recently been glimpsed on the streets of France, Austria and Germany as thousands have demanded decent pensions rights and a halt to deregulation. The slogan of 'A social Europe, not a bosses' Europe' can connect with many of those workers who are fed up with years of cuts and privatisation.

This month's G8 meeting in Evian may attempt to bridge some of the deep divisions in the European ruling class that were exposed by the Iraq war. But they will face mass protests raising the possibilities for another kind of continent.