Delaying the inevitable?
By Alex Callinicos
TONY BLAIR has swanned off to Tuscany, accompanied by the massive entourage that his delusions of presidential grandeur demand. But when he returns he will face the perennial problem of the euro.
Labour is committed to holding a referendum on British membership of the euro some time after the next general election. If the government decides the five economic tests laid down by Gordon Brown in October 1997 are met it will campaign for a yes vote.
That, at any rate, is the official position. In one of the many Downing Street memos leaked in recent weeks Blair wrote, "The truth is the politics is overwhelmingly in favour [of Britain joining the euro], but the economics has to be right and, at present, it is not."
It all depends on what you mean by "politics". Blair presumably meant that his fellow European leaders won't take him seriously till Britain joins the euro. But the cabinet is bitterly divided on how strongly it should come out in favour of the euro prior to the referendum. One group, led by Peter Mandelson and Robin Cook, believes the government should start campaigning now.
But Brown is adamantly opposed to such a move. At his insistence Blair hauled Mandelson and Cook back into line. These divisions seem to be tactical ones about timing, rather than the principle of British membership.
But at least one figure associated with Brown-Eddie George, governor of the Bank of England-rarely misses an opportunity to pour cold water on the whole idea. Transport workers' leader Bill Morris, who is anti-euro, has even suggested that the Bank of England should take the decision about whether or not the five economic tests have been met. This would be a pathetic abdication of responsibility. Brown's five tests are so vague that deciding whether they have been met is essentially a political judgement.
It is bad enough that Eddie George sets interest rates without him also having the decisive say over whether Britain should join the euro. The most obvious way in which economics enters the equation is the euro's chronic weakness against other major currencies, including sterling. After staging a slight recovery in May, it has begun to fall again.
The euro's weakness comes against a background of economic recovery in the euro-zone (which embraces most of continental Europe). Industrial production in May was up 7.2 percent on the previous year, and even the appalling unemployment rate has dropped a bit, to 9.1 percent. A major source of the euro's weakness is the continuing American boom. In the second quarter of 2000 the US economy grew by 5.2 percent, while the euro-zone is projected to grow by 3.5 percent this year. "The unavoidable truth is that, whatever the region's successes, the US seems to do better," says the Financial Times.
The American boom is sucking money out of Europe and thereby pushing the euro down. In 1999 the net outflow of foreign direct investment from the euro-zone amounted to �85 billion. The continued weakness of the euro is creating a real crisis in British manufacturing industry. Because of the very close links between Wall Street and the City of London, the British economy tends to move in line with the US. The strong pound means British exports are expensive in their most important market-Europe.
To stay competitive British-based firms have to cut export prices-on average they have fallen by 14 percent since 1995. The result is an increasingly harsh squeeze on manufacturing profitability. Japanese multinationals which invested in Britain in order to get access to Europe are getting more and more fed up. Last week the boss of Nissan was the latest in a procession to visit Downing Street to demand reassurance from Blair about his commitment to joining the euro.
Some economists argue that the crisis in manufacturing does not matter. They point to the fact that the financial services industry accounts for 7 percent of national income and employs 5.2 million people, compared to 4.3 million in manufacturing.
These commentators have to explain why the biggest economies in the world-the US, Japan, Germany and France-all have much larger and more robust manufacturing sectors than Britain. Relying on financial markets means depending on the rollercoaster of speculation that can shatter economies as easily as it raises them up.
It is because of the long decline of British manufacturing industry that Blair faces such a difficult choice over the euro. He has to balance uneasily between two great powerhouses of the world economy that British capitalism is too weak either to rival or to do without.