When the economic conditions are right

The Liberal Democrats’ surge in the opinion polls has led to increased interest in their policies. One area of focus in this week’s leaders’ debate on international affairs is likely to be Europe, including the issue of UK membership of the euro.

The Liberal Democrats are rather more enthusiastic abut this prospect than the other two main parties. The Conservatives are opposed in principle and Labour has put forward a set of conditions that effectively allow them to shelve the issue indefinitely. But the Liberal Democrat manifesto says: ‘We believe that it is in Britain’s long-term interest to be part of the euro. But Britain should only join when the economic conditions are right, and in the present economic situation, they are not. Britain should join the euro only if that decision were supported by the people of Britain in a referendum.’

Putting aside the remote likelihood of a ‘yes’ vote in a referendum and concentrating on the economic issues, when might the conditions be right?

One argument put forward by the antis is that the depreciation of sterling since the beginning of the financial collapse has helped limit the impact on the UK economy (in contrast to, say, Greece). There is an element of truth in this argument but, although sterling fell by 24 per cent against the euro in 2008, the effect on the economy, in terms of stronger exports and weaker imports, appears to have been modest. Furthermore, although sterling is now 10 per cent higher against the euro compared to the end of 2008, it could be argued that the best time to join the euro is immediately after a sharp fall in sterling, so that any gains in competitiveness are ‘locked in’.

But joining the European Monetary Union does not just mean adopting the euro: we’d also share a common monetary policy, and in particular a common short-term interest rate, with other members. That would not be a problem at the current time. Interest rates are rock bottom in the UK and Europe. Indeed, there could be benefits from the UK joining the euro now, in the form of lower long-term interest rates.

But it might be a problem in the long term. When economic conditions return to something approaching normality, the UK authorities will be desperate to avoid, among other things, a renewed spurt in house prices and surge in mortgage lending. Setting interest rates at an appropriate level will be one means of achieving this aim. But that option would not be available if interest rates in the UK were being set by the European Central Bank based on economic conditions across the whole of the euro-area.

Ironically, joining the euro in the present economic situation would probably have little effect on the UK economy; the risk of such a move would only become apparent in the long term.

Tony Dolphin

A 'leading role' in the EU?

Shadow Foreign Secretary William Hague said yesterday that Britain would play a 'leading role' in the EU in his speech to the Royal United Services Institute in Whitehall. Hague has made no secret of his deep-rooted Euro-scepticism in the past, but perhaps he is coming round to the idea that, though useful as a populist rallying cry in the safe haven of opposition, distancing Britain from the EU would be a risky strategy in government.

So, if the Conservatives really do wish to play a 'leading role' in the EU, how would their recent policies stack up with EU members? Campaigning for a ‘no’ vote on a UK referendum of the Lisbon Treaty would have incurred the wrath of some European leaders. Leaving the European People’s Party, by far the biggest party in the European Parliament, has left them with far less influence over policy areas decided by simple majority (Ordinary Legislative Procedure), from the single market to fisheries. Instead they have allied themselves with small fringe parties which have little credibility in the Parliament. Meanwhile the Tories’ plan to introduce a UK Parliamentary Sovereignty Bill would have no real impact aside from giving the rest of Europe (and of course the UK public) the perception that the Conservatives are not invested in the European project.

In fact, the pressure of the anti-EU Tory backbench and the perception of an anti-EU public sentiment have infiltrated virtually all Conservative policies and conversations with regard to Europe. So much so, that French President Nicolas Sarkozy will tomorrow warn Cameron to engage over the future of Europe, or risk French non-cooperation in key areas of policy. This is not the first time France has criticised Conservative policy on Europe.

If a Conservative government is going to play a leading role in Europe it will need to mend some fences with European allies as the idea that their political movements have gone unnoticed in Europe is clearly not the case.

Ellen Bloomer, intern, ippr