Europe on the Brink: Democratic Values and the Single Currency

Europe on the Brink: Democratic Values and the Single Currency

Mini Teaser: The EU is not democratic. Neither the EC, nor the Council of Ministers, nor the European Central Bank is democratically accountable; and they cannot be made so, because Europe is not a nation.

by Author(s): Michael Portillo

Some of those who think that the right response to global competition
is to create a bigger state also believe in a bigger role for the
state through more interference and regulation. That frame of mind
has produced the Social Chapter, and is a strong influence within New
Labour. Such people believe that global competition will whittle away
worker protection and social standards in the developed world, and
that we must create a large European corral in which they can be
defended against outside pressures. True, New Labour is divided on
this issue, and it also spends a part of its time arguing against
such protectionism, advocating the spread of flexible labor markets
instead. In that second view they are right. Flexibility, along with
rising educational standards, will enable us to compete and to
improve our social standards. Excessive interference by governments,
whether at national or European level, is clumsy and unresponsive,
and it has already played a large part in creating unemployment
levels in Europe well above those of the United States.

We are being led toward a Europe that displays many of the
characteristics of Britain twenty years ago, a Britain, let it be
remembered, that was reduced to borrowing massively from the imf.
Europe is populated with over-manned and protected nationalized
industries. In many places private sector managers are in thrall to
trade unions. Business is tied down by government bureaucracy and
interventionism. Public spending is appallingly high. There persists
the belief that Europe can go its own sweet way, unaffected by the
assault from international competition, provided that the fortress
walls are built high enough. Twenty million unemployed Europeans give
mute testimony--mute up until now--to the failure of those policies.

To present all of this as forward-looking is indeed a triumph for the
spin doctors. It is completely misleading.

Britain's Interests

There are those who argue that even if it is true that the single currency requires the centralization of important policy-making, and even if the sort of representative democracy to which we have become accustomed in our nation-states cannot be re-created at the European level, we are likely to get better decisions from the European Central Bank than we have had from our own governments in the past, and that will make people happier.

That is hard to believe. Unaccountable bureaucracy does not produce better decisions than democracy. The corruption and inefficiency in Europe's Common Agricultural Policy is surely sufficient proof of that. Furthermore, there is no evidence that a single currency will lead to better policies, greater stability, or greater economic success for its members. The single currency will be traded in world markets against other currencies. Whether it is more stable than the national currencies it replaces will depend on how good the policies are of those who control it. There has been no stability between the currencies of the United States and Japan - the world's largest and second-largest economies. Currency stability is an illusion, and in Asia there are now on display the scalps of many men who declared that their currencies would hold their values.

The case for Britain joining a single currency has lost whatever appeal it might have had when first presented a few years back. Five or ten years ago it was plausible to argue that Britain would be forever dogged by inflation, and therefore doomed to resort continually to devaluation in order to maintain competitiveness. Unemployment in the UK was stubbornly high. By contrast, Germany appeared to have discovered the secret of non-inflationary growth, and was able to compete successfully in the world on the basis of quality, despite the strength of its currency. How much better, the argument went, for Britain to give up control over its own economy in order to reap the benefits of the German economic miracle. Things look rather different now. Britain has gained control of inflation by its own efforts. It has lower unemployment than most of its European neighbors, and that is just one of many indicators that it is competing successfully. The current concern is not with devaluation, but with the strength of the pound.

Mr. Blair has said that he wishes to decide whether to enter a single currency solely on the basis of an economic assessment of Britain's best interest. I have argued that this misses the point of what is really involved in the decision. But, in any case, the economic case is very weak. It has been argued that the single currency is the logical completion of the single market. It is not. The greatest trading partners in the world, Canada and the United States, do not have a common currency and have no plans to establish one. At present, none of the countries with which Britain trades has the same currency as we do, and yet our trade with them goes on rising. I can see that there would be a small saving on transaction costs for companies trading within Europe if we were all to have the same currency, but it would be marginal. Against that, British industry should ask itself whether it really wishes to enter the next recession with the currency locked at its present level, and with the British government powerless to vary interest rates.

The grave danger for Europe, economically speaking, flows from the consequence of introducing a single currency where no single labor market exists. A single currency means that, in the future, variations in economic performance between one region and another cannot result, as they do today, in a downward adjustment of the currency in the less successful areas. Interest rates will have to reflect policy established at the center, not local conditions. The full impact of recession will therefore fall on unemployment.

In the United States, a vast area covered by a single currency, labor is very mobile. People who lose their jobs in a depressed area can and do move to another state in search of a job, however inconvenient it may be. But in our continent people cannot move at will to find new work. They face barriers related to language, qualifications, local culture, and plain prejudice. Some of those can be reduced with the passage of time, but most will prove intractable. Indeed, with the so-called Posted Workers Directive, approved under the Social Chapter, EU labor ministers seem determined to reduce labor mobility across borders.

There is another danger. Britain currently receives a notably high proportion of the inward investment coming from the rest of the world into Europe. Those investors clearly see value in Britain's membership of the and free access to its markets. But they also see it as an advantage that the British economy is more flexible and deregulated than most others in Europe, and over the last eighteen years has offered them stability and reassurance. In other words, Britain derives an advantage from not embracing all European economic policies.

If we join the euro, this advantage will be lost, as economic policy in Britain will be determined principally by events in the geographical center of the EU. There may well be a mismatch between conditions in Britain and Germany. Interest rates that suit Germany and France could be inappropriate to British economic circumstances, as they were when we were in the ERM. That will represent a bad risk for investors. It may then make more sense for them to invest where local economic conditions and interest rates are most closely related, that is in Germany. Imagine the impact upon British public opinion if unemployment is high, inward investors are drifting away, the government is powerless to vary interest rates, and the electorate is unable to change anything by electing a new one.

The Question of Security

I began by recognizing the importance of European security. All other objectives are secondary. The principal guarantor of peace in Europe has been NATO, which has provided a wholly credible deterrent against attack. With American troops positioned in Europe, and the awesome U.S. military capability evident, any potential adversary was wise to believe that America would go to war to preserve the territory of its European allies.

The establishment of NATO did not infringe upon the sovereignty of its members. Its treaty is explicitly an agreement of sovereign states who undertake, in accordance with Article V, to regard the violation of the territory of another member state as though it were a violation of their own and to respond with such action as they deem necessary.

NATO has no federalist destiny. In the half century since it was founded, and unlike the EU, it has passed no laws that bind its member states, and no court has extended its influence. In no way has it increased its powers since 1948, and the democratic accountability of its member governments has not been affected.

NATO is now responding to the new situation created by the end of the Cold War, recognizing that the greatest contribution it can make to security is to strengthen the new democracies of Europe. Membership in either NATO or the EU, or in both, can help underpin those democracies. The EU should follow NATO's example. It should be lowering the barriers for entry by the countries of Eastern Europe, not creating an inner core that requires qualifications that those countries cannot hope to attain. Negotiating admission for new members looks as if it will be a protracted, and maybe cantankerous, business.

Essay Types: Essay