HM Treasury News Release
126/97 27 October 1997
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STATEMENT ON EMU BY THE CHANCELLOR OF THE EXCHEQUER
Attached is the official text of the Chancellor's statement to
the House of Commons this afternoon.
Notes for Editors
1. The Treasury's assessment, "UK membership of the single
currency: an assessment of the five economic tests", will be
available from the front door of the Treasury, after the
Chancellor completes his statement. Thereafter, media
requests for copies of the document should be made to the
Treasury Press Office on 0171 270 5238 and non-media requests
for the document should be made to the Treasury's Public
Enquiry Unit on 0171 270 4860/4870/4880.
2. If you have access to the Internet, you can find this
document at http://www.hm-treasury.gov.uk. Material on other
Treasury issues can also be found at this address.
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CHANCELLOR'S STATEMENT ON EMU: MONDAY 27 OCTOBER 1997
With permission, Madam Speaker, I want to make a statement
on Economic and Monetary Union.
Since the end of the Second World War Britain has faced no
question more important and more contentious than that of
our relationship with Europe.
Divisions within governments of both parties, and hence
indecision, have made British policy towards Europe, over
many years, inconsistent and unclear.
The economic consequences of these weaknesses have been a
loss of international initiative and influence, recurrent
instability and continuing questioning of our long-term
economic direction.
To break with this legacy, and to establish clear national
purpose, which has eluded us for decades, economic
leadership is essential, and Britain must now make the
difficult decisions on Europe, however hard.
The decision on a single currency is probably the most
important this country is likely to face in our generation.
Yet until now, there has been no detailed examination by
government of the practical economic issues of EMU. There
has been no proper preparation for a decision, because no
previous Government could agree on whether they supported
it in principle, nor whether there was an overriding
constitutional objection on grounds of sovereignty or not;
nor whether, even if a single currency worked and worked
well, the Government would wish to be part of it. Forms of
words like 'keeping the option open' - while no
preparations were ever made to render the option
practicable - have similarly served as a pretext for
postponing the hard choices
Now is the time to make these hard choices and set a long
-term direction for our economic future in Europe.
So I will deal, in turn, with the question of principle,
the constitutional implications of EMU, and the economic
tests that have to be met. In each area, I will set down
the Government's policy.
When we came into Government I asked the Treasury to carry
out an assessment of the economic tests that have to be
met. Accompanying my statement is this comprehensive and
detailed Treasury assessment which I am publishing today,
copies of which are available in the Vote Office.
ISSUES OF PRINCIPLE
I start with the question of principle. The potential
benefits for Britain of a successful single currency are
obvious: in terms of trade, transparency of costs and
currency stability. Of course, I stress it must be soundly
based. It must succeed. But if it works economically, it
is, in our view, worth doing.
So in principle, a successful single currency within a
single European market would be of benefit to Europe and to
Britain.
Secondly, it must be clearly recognised that to share a
common monetary policy with other states does represent a
major pooling of economic sovereignty.
There are those who argue that this should be a
constitutional bar to British participation in a single
currency, regardless of the economic benefits it could
bring to the people of this country.
In other words, they would rule out a single currency in
principle, even if it were in the best economic interests
of the country.
That is an understandable objection and one argued from
principle. But in our view it is wrong. If a single
currency would be good for British jobs, business and
future prosperity, it is right, in principle, to join.
The constitutional issue is a factor in the decision, but
it is not an over-riding one. Rather it signifies that in
order for monetary union to be right for Britain the
economic benefit should be clear and unambiguous.
So I conclude on this question of principle: if, in the
end, a single currency is successful, and the economic case
is clear and unambiguous, then the Government believes
Britain should be part of it.
There is a third issue of principle - the consent of the
British people. Because of the magnitude of the decision,
we believe - again, as a matter of principle - that
whenever the decision to enter is taken by government, it
should be put to a referendum of the British people. So
whenever this issue arises, under this Government there
will be a referendum. Government, Parliament and the people
must all agree.
So we conclude that the determining factor as to whether
Britain joins a single currency is the national economic
interest and whether the economic case for doing so is
clear and unambiguous.
THE FIVE ECONOMIC TESTS
I now turn to the Treasury's detailed assessment of the
five economic tests that define whether a clear and
unambiguous case can be made.
These are:
1. Whether there can be sustainable convergence between
Britain and the economies of a single currency.
2. Whether there is sufficient flexibility to cope with
economic change.
3. The effect on investment.
4. The impact on our financial services industry.
5. Whether it is good for employment.
I. Economic Cycles
Of these, the first and most critical is convergence: can
we be confident that the UK business cycle has converged
with that of other European countries so that the British
economy can have stability and prosperity with a common
European monetary policy? That convergence must be capable
of being sustained and likely to be sustained - in other
words, we must demonstrate a settled period of convergence.
Currently Britain's business cycle is out of line with our
European partners. Interest rates here are 7 per cent.
This is the level the Bank of England has set in order to
achieve our inflation target. But in Germany and France
interest rates are close to 3 per cent. Across the
continent, because business cycles are more coincident,
short-term interest rates have been converging for some
time.
This divergence of economic cycles is, in part, a
reflection of historic structural differences between the
UK and other European economies, in particular the pattern
of our trade and North Sea oil. These differences are
becoming less distinct as trade with the rest of Europe
grows and the single market deepens.
But divergence is also a legacy of Britain's past
susceptibility to boom and bust: the damaging boom of the
late 1980s and the severe recession of the early 1990s.
Since coming into office, the Government has introduced
long-term measures to ensure that we are capable of
maintaining stability by giving operational responsibility
for interest rates to the Bank of England and by
implementing our deficit reduction plan for public
borrowing.
We will need a period of stability with continuing
toughness on inflation and public borrowing. The
Treasury's assessment is that, at present, the UK's
economic cycle is not convergent with our European partners
and that this divergence could continue for some time. To
demonstrate sustainable convergence will take a period of
years.
ii. Flexibility
To be successful in a monetary union, countries will need
even more flexibility to adjust to change and to unexpected
economic events once the ability of countries to vary their
interest rates and exchange rates has gone and the Euro and
a single European interest rate are in place. Flexibility
may be particularly important for the UK if there is any
risk that our business cycle has not fully converged with
those of the other EMU members.
The Treasury assessment of the second test is that, in
Britain, persistent long-term unemployment and lack of
skills - and in some areas lack of competition - point to
the need for more flexibility to adapt to change and to
meet the new challenges of adjustment. The Government has
begun to implement a programme for investing in education
and training, helping people from welfare into work and
improving the workings of our markets.
Of course, other European countries need to tackle
unemployment and inflexibility to make sure Europe as a
whole is able to withstand any shocks that arise. The
government will continue to argue that employability,
flexibility and stronger competition policies must be a top
priority so that monetary union can be successful.
iii. Investment
The third test is investment: whether joining EMU would
create better conditions for businesses to make long-term
decisions to invest in Britain. The Treasury assessment is
that, above all, business needs long-term economic
stability and a well-functioning European single market.
It concludes that membership of a successful single
currency would help us create the conditions for higher and
more productive investment in Britain.
But the worst case for investment would be for Britain to
enter EMU without proper preparations and without
sufficient convergence and with all the uncertainty that
would entail.
Iv. Financial services
The fourth test asks what impact membership of the single
currency would have on our financial services industry.
EMU will affect that industry more profoundly and more
immediately than any other sectors of the economy.
The Treasury's assessment is that we can now be confident
that the industry has the potential to thrive whether the
UK is in or out of EMU, so long as it is properly prepared.
But the benefits of new opportunities from a single
currency could, however, be easier to tap from within the
Euro zone. This could help the City of London strengthen
its position as the leading financial centre in Europe.
v. Employment
For millions of people, the most practical question is
whether membership of a successful single currency would be
good for prosperity and jobs. The Treasury assessment is
that our employment-creating measures, and welfare state
reform, must accompany any move to a single currency.
Ultimately, we conclude that whether a single currency is
good for jobs in practice comes back to sustainable
convergence. A successful single currency would provide
far greater trade and business in the Europe.
The Treasury assessment is that in vital areas the economy
is not yet ready for entry and that much remains to be
done. The previous policy of keeping options open, without
actively making preparations, has left parts of the economy
un-prepared.
Our overall assessment is that Britain needs both a period
for preparation and a settled period of sustainable
convergence. Both require stability.
THE GOVERNMENT'S CONCLUSIONS ON EMU
Applying these five economic tests leads the Government to
the following clear conclusions.
British membership of a single currency in 1999 could not
meet the tests and therefore is not in the country's
economic interests. There is no proper convergence between
the British and the other European economies now. To try
to join now would be to accept a monetary policy which
would suit other European economies but not our own. We
will therefore be notifying our European partners, in
accordance with the Maastricht Treaty, that we will not
seek membership of the single currency on 1 January 1999.
The issue then arises as to the period after 1st January
1999. We could simply leave the options open, as before,
but with no clear direction either way for the rest of the
Parliament. That would be politically easy but wrong.
There would be instability, perpetual speculation about "in
or out", "sooner or later", which would cause difficulties
in the financial markets and for business and industry.
It would make it harder to prepare for the possibility of a
single currency because every step in preparation, every
time the issue was discussed, would feed fresh bouts of
speculation.
It must be in the country's interest to have a stable
framework within which to plan.
And we are fortified in this because on the economic tests
we have set out, the practical difficulties of joining a
single currency in this Parliament all point to the same
conclusion.
There is no need, legally, formally or politically, to
renounce our option to join for the period between 1st
January 1999 and the end of the Parliament, nor would it be
sensible to do so. There is no requirement under the
Treaty for this. What is more, no government can ever
predict every set of economic circumstances that might
arise.
What we can and should do is to state a clear view about
the practicability of joining monetary union during this
period. Applying our economic tests, two things are clear.
There is no realistic prospect of our having demonstrated,
before the end of this parliament, that we have achieved
convergence which is sustainable and settled rather than
transitory. And Government has only just begun to put in
place the necessary preparations which would allow us to do
so. Other countries have for some years been making
detailed preparations for a single currency. For all the
reasons given, we have not.
Therefore, barring some fundamental and unforeseen change
in economic circumstances, making a decision, during this
Parliament, to join is not realistic. It is also therefore
sensible for business and the country to plan on the basis
that, in this Parliament, we do not propose to enter a
single currency.
There are those who urge us to seek consent, in principle,
in a referendum now or soon, but with a view to entering
sometime later. Any serious gap between the referendum and
the actual entry date would undermine the conclusions of
the referendum.
Because the essential decision is economic, it can be taken
only at a time when government and then the people can
judge that sustainable convergence has been established.
So in our view the interval between the decision to join
and our joining must not be unduly protracted.
PREPARATIONS
I have said that if a single currency works and is
successful Britain should join it. We should therefore
begin now to prepare ourselves so that, should we meet the
economic tests, we can make a decision to join a successful
single currency early in the next Parliament. At present,
with no preparation, it is not a practical option. We must
put ourselves in the position for Britain to exercise
genuine choice.
The questions of preparation are immense - practical
questions for business, as well as for government. Euro
notes and coins will, for example, be circulating across
Europe from January 1st 2002. Some companies, like Marks
and Spencer, have already decided to prepare to accept
Euros in Britain. Others, will want advice on what is best
for them.
Because both the Government and business must prepare
intensively during the next years, we will:
commence work on the detailed transition arrangements
for the possible introduction of the Euro in Britain,
including the introduction of notes and coins, should
we wish to enter;
step-up the work on what business should do now to
prepare for the introduction of the Euro in 1999,
whether we are in or out;
work with business on what government must do to
prepare for EMU, should we decide to join it in the
next parliament.
To help with essential preparations, I have invited the
Governor of the Bank of England and Sir Colin Marshall, the
President of the CBI, to join me and the President of the
Board of Trade in leading a standing committee on
Preparations for EMU. I am pleased to say that they have
agreed. I am also inviting the President of the
Association of British Chambers of Commerce to join us. I
can also announce that, from January a series of regional
and sectoral conferences on preparations for monetary union
will be held.
Also, the Prime Minister has today decided to extend Lord
Simon's Treasury responsibilities to include European
Business Preparations in the government, covering the long
-term planning of the new standing committee.
In addition to these practical preparations, there are
reforms we can take which are both right in themselves, in
the national economic interest, and which will help us to
meet the five economic tests.
We will promote greater flexibility in the UK economy and
in Europe through our "Getting Europe to Work" initiative;
We will be introducing new competition legislation, which
draws on the best of European and wider international
policy and practice as well as continuing to negotiate to
secure the best interests of our financial sector and for
the opening up the single market in financial services.
We will set as one of the key objectives of our EU
Presidency completion of the European single market.
In my Mansion House speech I said that if we succeed in
strengthening the ability of the British economy to sustain
growth with low inflation, and if international conditions
permit, I would hope to lower the inflation target. So we
will monitor our inflation target and do so in the light of
the European Central Bank;
And we will ensure that our fiscal rules, and our deficit
reduction plan, continue to be consistent with the terms of
the stability pact, thus underlining our commitment to
avoid an excessive deficit under Article 104c of the
Treaty, and supporting greater coordination in ECOFIN;
In Britain's interests, we need to keep inflation low and
public borrowing firmly under control.
The single currency will affect Britain, in or out of it.
It is in the British national interest for it to work.
Vital decisions will be made during our EU Presidency in
the first half of next year. We will use our position
constructively and supportively and we will play a full
part in ensuring its launch is successful - something that
is in Britain's interests as well as Europe's.
CONCLUSIONS
To sum up:
we believe that, in principle, British membership of a
successful single currency would be beneficial to
Britain and to Europe; the key factor is whether the
economic benefits of joining for business and industry
are clear and unambiguous. If they are, there is no
constitutional bar to British membership of EMU;
applying the economic tests, it is not in this
country's interest to join in the first wave of EMU
starting on Ist January 1999 and, barring some
fundamental and unforeseen change in economic
circumstances, making a decision, this parliament, to
join is not realistic;
but in order to give ourselves a genuine choice in the
future, it is essential that the Government and
business prepare intensively during this Parliament, so
that Britain will be in a position to join a single
currency, should we wish to, early in the next
Parliament.
On Europe, Madam Speaker, the time of indecision is over.
The period for practical preparation has begun. Today we
begin to build a new consensus - modern and outward
looking - for a country that throughout its history has
looked outward to the world.
We are the first British government to declare for the
principle of monetary union. The first to state that there
is no over-riding constitutional bar to membership. The
first to make clear and unambiguous economic benefit to the
country the decisive test. And the first to offer its
strong and constructive support to our European partners to
create more employment and more prosperity.
The policy I have outlined will bring stability to
business, direction to our economy, and long term purpose
to our country. It is the right policy for Britain in
Europe. More important it is the right policy for the
future of Britain and I commend it to the House.