The Cart Before the Horse

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The current debate in the United Kingdom on joining the euro illustrates the false premise on which monetary union is based. The British government is divided both on the timing of and the basis for a decision to abandon the pound. The "soft" position represented by the Chancellor of the Exchequer, Gordon Brown, continues to stress the importance of meeting five economic tests, mostly to do with convergence in economic performance and inflation control within the euro zone. The "hard" view is that early entry is necessary to secure greater political influence within the E.U. for Britain. But because monetary union is a political initiative masquerading as an economic one it is impossible to conduct a sensible debate on either front. If monetary union is an economic initiative, then economic convergence within the euro zone is a necessity, but without an accompanying centralization of fiscal policy this convergence can't happen. If the whole point of monetary union is greater political integration, then British or any other national influence must only diminish after joining.

History shows us that monetary union has always been the result, not the precursor, of political union. Monetary and fiscal policy cannot be conducted at two levels--one centralized and the other devolved. If money is managed centrally then taxes must be raised centrally and that means disenfranchising the voters, who expect their elected governments to determine their tax bills. The democratic deficit in the current construction of Europe's institutions makes it impossible to combine representation and taxation centrally, and there are no plans to fix this.

Europe's economies do not move in sync. Cultural, climatic and other differences determine different cycles and patterns of economic activity. A single interest rate policy for the entire area cannot function without compensating tools of economic management. This means a large federal budget, as in the U.S., which can make transfers regionally to accommodate different rates of growth, and it means taxes raised centrally. Even these methods don't produce economic convergence without a degree of labor and capital mobility impossible to achieve in Europe. You can move a business from California to Texas with a minimum of social and commercial disruption. You cannot do the same from Belgium to Spain. Relying on transfers and subsidies to smooth out differences in economic performance tends to entrench these differences rather than eliminate them. Italy has had a single currency for decades yet it remains two economies. The north subsidizes the south, creates dependency and weakens incentives for improved performance. EMU could produce the same situation on a larger scale.

The solution is, of course, full political union and the effective removal of national fiscal jurisdictions. But the political establishment does not have the courage to put this proposal to the European public. They fear rejection because of the democratic deficit in Europe.

On economic grounds, the case for British entry is not convincing. The world's fifth-largest economy is certainly capable of maintaining a national currency, but if Britain were determined to abandon the pound, joining the dollar zone would make more sense. Britain's foreign trade in goods and services is greater with the Americas and the parts of Asia pegged to the dollar than with its E.U. partners. Britain has 25% of the inward investment in the E.U. without being in the euro zone. The City of London is the largest center for euro-based transactions (and the largest center for dollar-based transactions outside the U.S.)

Americans like to think British influence in Europe is generally beneficial to U.S. foreign policy. But if monetary union means political union, the euro zone will lead the way to greater integration and Britain's voice will not be heard. Outside the euro, British influence is actually growing in key defense issues, and it is a counterweight to an increasingly Eurocentric and protectionist Continent in trade matters.

Finally, we live today in a multicurrency global market. Lack of British accession to the euro does not threaten Europe's single market. The world's largest single market is that which exists between the U.S. and Canada, each with its own fluctuating currency. Financial markets and engineering have almost eliminated exchange risk exposure for ordinary trade and investment and if highly leveraged speculators occasionally get burned, risk awareness is increased.

The reality of the euro is that politicians in Europe see monetary union as a way of protecting and enhancing political power while limiting accountability. But money is a protector of political freedoms. Those within the euro zone may become restless when they see the consequences of pooling sovereignty in the area of monetary policy. There is no reason for Britain to join in a dangerous experiment that brings neither commercial nor diplomatic advantage.

Stanislas Yassukovich is an international banker and chair of the City of London council of Business for Sterling