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The government must soon decide. It has pledged to deliver its verdict within six months. As judgment day nears, a consensus is forming. Not yet, the Treasury will opine. Naysayers marshal a battery of arguments. The euro economy is floundering. It can only aspire to Britain’s superior monetary and fiscal arrangements. Why jeopardise the UK’s hard-won economic success by hitching ourselves to such a dodgy venture?

Not so fast. The euro economy is not a basket case. The denizens of Westminster and Fleet Street who are so quick to write it off should venture out and see. German trains run on time. The French can pop in to casualty to see a doctor after work – and still be home in time for dinner. New penthouses overlook the BMWs that fill Dublin’s streets. Most Britons would love to live in such a disaster zone. Statistics confirm this favourable impression. Eight of the 12 eurozone countries are richer than Britain. Five have faster economic growth. Living standards have risen faster in the eurozone (2.2 per cent a year) than in Britain (2.1 per cent) and the US (0.9 per cent) since the euro was launched.

Anti-Europeans are particularly dismissive about Germany. They date its decline to its decision to swap the D-Mark for the euro. Undeniably, Germany faces serious difficulties. Its labour and product markets require radical reform. The costs of unification still weigh heavily. But the pessimism is overdone.

Even after averaging the much richer west of the country with the ex-communist east, Germany’s gross domestic product per person is 6 per cent higher than Britain’s. German workers are 29 per cent more productive than their British counterparts. And the gap is widening. Whereas labour productivity in Britain has risen by 19.8 per cent since 1992, it has soared by 29.2 per cent in Germany.

Anti-Europeans claim that if Britain joined the euro it would import Germany’s weaknesses – though, oddly, not its strengths. But places that share a currency do not become identical. The North East and South East of England share a currency but not a growth or unemployment rate.

For sure, German economic growth has disappointed over the past year. But although domestic demand is weak, exports are faring well. Against the backdrop of a sputtering global economy and falling world trade, German exports rose by 10.9 per cent in the year to September. Clearly, foreigners still prize German products – and the undervalued euro has helped price them into new markets.

Arguably, Germany might have lower interest rates if it still had the D-Mark. But it would almost certainly have a stronger currency too. Nor is it clear that its government would be reflating with gay abandon were it not for the stability pact. It has traditionally been fiscally conservative and the Bundesbank was always quick to curtail any temptation to splurge.

The Bank of England’s record is not as sterling as it seems. The housing market looks like a bubble, threatening a return to dreaded boom and bust. The economy looks seriously unbalanced, with the persistently overvalued pound punishing exporters while permitting consumers to spend beyond their means. National monetary autonomy is not all it is cracked up to be.

There is no denying that the stability pact is less sophisticated than the chancellor’s fiscal rules. Our partners recognise this. That is why the pact is under review. But even in its current guise, the pact scarcely constrains Britain’s fiscal flexibility. The spending plans in Gordon Brown’s recent pre-Budget report do not fall foul of it.

The bigger picture is that monetary union is helping to drive a restructuring of the eurozone economy, making it more competitive. Germany’s trade with other European Union countries has shot up from 27.2 per cent of GDP in 1998 to 32 per cent last year – boosting economic growth. France’s has risen from 28 to 31.4 per cent. But Britain’s has fallen. By remaining isolated from the euro, we are also losing out on the inward investment that has done so much to create jobs and spread productivity-enhancing technology in the past 20 years. In 2002, our share of foreign direct investment in the EU is set to slump to a mere 5 per cent, according to the UN, compared with Germany’s 18 per cent.

The conclusion is inescapable. Britain is paying a rising price for excluding itself from the euro. The government has pledged to recommend that Britain join the euro if it is in our national economic interest. It can hardly fail to say Yes.

Posted 10 Dec 2002 in Europe, Financial Times, Published articles

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