Employer and union reaction to UK’s decision to defer euro entry

In June 2003, after a detailed assessment of five economic tests, the government decided that it would not be in the national economic interest of the UK to join the European single currency at present. This article examines the rationale of government policy, and the response of trade unions and employers’ organisations to the decision.

Following the election of the Labour Party government in May 1997, the new Chancellor of the Exchequer, Gordon Brown, signaled a clear shift in UK policy towards the European single currency in a major speech to Parliament in October 1997. Whereas the previous, 'eurosceptic' Conservative Party government had negotiated an 'opt-out' from the final stage of European Economic and Monetary Union (EMU) as part of the Treaty on European Union, Mr Brown indicated that the Labour government was committed to the principle of joining the European single currency, but that there had been insufficient convergence between the economies of the UK and those of prospective members of the euro area (UK9802102F). Thereafter, the main features of the government’s policy towards EMU were that:

  • a successful single currency would in principle be of benefit to Europe and to the UK in terms of trade, cost transparency and currency stability;
  • constitutional issues need not be a barrier to UK entry, as long as membership is in the national interest, the case is unambiguous and there is popular consent;
  • the decision on whether there is a clear and unambiguous economic case for membership would be based on a comprehensive and rigorous assessment of five economic tests conducted by the Treasury; and
  • whenever the decision to enter is taken by the government, it should be subject to approval by a referendum of the British people.

The manifesto of the Labour Party for the June 2001 general election restated this policy, adding that the assessment of the five economic tests would be conducted within two years of re-election.

Assessment of the five economic tests

On 9 June 2003, after what Mr Brown described as 'the most robust, rigorous and comprehensive work the Treasury has ever done', it published its conclusions in a report, UK membership of the single currency: An assessment of the five economic tests, accompanied by 18 technical studies of different aspects of EMU.

The five tests focused on: convergence; flexibility; investment; financial services; and growth, stability and employment. However, the assessment of the first two tests proved to be crucial to the government’s decision:

  • convergence. The report argues that there has been significant progress since 1997, and the UK meets the EU convergence criteria for inflation, interest rates and government deficits and debt. Nevertheless, it argues that structural differences remain between the UK and the euro area, especially in the housing market. Thus, 'we cannot yet be confident that UK business cycles are sufficiently compatible with those of the euro area to allow the UK to live comfortably with euro area interest rates on a permanent basis';
  • flexibility. The report notes that labour market flexibility in the UK has improved markedly since 1997, and considerable progress has been made to reform labour, product and capital markets in the UK and the euro area. Nonetheless, more needs to be done to ensure that the UK economy can deal with the risks inherent in EMU membership (eg inflation volatility is likely to increase inside EMU). Thus, 'we cannot be confident that UK flexibility, while improved, is sufficient';
  • investment. The data show that there has been a decline in the UK’s share of total EU foreign direct investment (FDI) flows coinciding with the start of EMU but, because of the many other influences, 'it is difficult to say with confidence that EMU has boosted FDI within the euro area'. The report accepts that a delay in joining the euro area might postpone the potential gains of increased inward investment;
  • financial services. The report argues that the competitiveness of financial services (especially in the City of London) can be sustained either inside or outside the euro area, but that entry would offer additional potential benefits. Thus, 'the financial services test is met'; and
  • growth, stability and employment. The report argues that EMU membership could significantly increase UK output and jobs in the long term through the growth in intra-euro area trade. The lack of sustainable and durable convergence, however, means that 'macroeconomic stability would be harder to maintain inside EMU than outside' if the UK joined at the present time. This is partly because of the potential constraints on the use of fiscal policy for stabilisation under current interpretations of the EMU Stability and Growth Pact.

The report concludes that 'despite the risks and costs from delaying the benefits of joining, a clear and unambiguous case for membership of EMU has not at the present time been made and a decision to join now would not be in the national economic interest.' This negative conclusion is accompanied by a set of 'policy requirements' designed to achieve better UK economic performance and sustainable convergence. These include: demand and supply policies to improve the functioning of the UK housing market; reforms designed to increase the flexibility of UK labour, product and capital markets; and the evolution of EU monetary and fiscal policy frameworks. The Chancellor indicated that he would report on the progress made in pursuing these reforms in 2004 and decide whether it merited a further Treasury assessment of the five tests.

Reactions to the government’s decision

Trade unions

The general secretary of the Trades Union Congress (TUC), Brendan Barber, responded positively to the Chancellor’s statement on the euro on 9 June. He argued that it 'set out a clear series of steps towards a positive decision and a referendum … a project with a purpose'. However, a statement by the TUC general council, prepared for the annual Congress in September 2003 and published on 25 July, identified a number of concerns that the TUC wished to discuss with the Chancellor. These included: the achievement of a sustainable exchange rate to reduce the decline in UK manufacturing; a consolidation and expansion of the 'European social model'; and fears that planned public expenditure growth could be threatened by the Stability and Growth Pact. The TUC also warned the Chancellor that it would resist any moves to deregulate the labour market 'undertaken under the spurious reasoning that they are necessary for UK membership of the single currency'.

The statement reveals areas of potential conflict between the TUC and the government, and does not conceal differences in the 'uneasy pro-euro alliance among union leaders' (in the words of the Financial Times on 28 July 2003). Two of the four largest UK unions - the GMB general union and Amicus- have a long-standing commitment to membership of the euro (UK0004166N) and have criticised the government over the last few years for its timidity in preparing the ground for entry. John Edmonds, before his retirement as general secretary of the GMB, argued in March 2003 that the government should call an early referendum because 'the exchange rate of the pound is at last moving in the right direction and Gordon Brown’s five tests have been met'. On 9 June, Roger Lyons, one of the joint general secretaries of Amicus, argued that 'entry is absolutely essential to secure the long and short term future of manufacturing and to maintain London and Edinburgh as serious international financial centres.'

In contrast, Bill Morris, the general secretary of the Transport and General Workers’ Union, supported the Chancellor’s conclusion that the five tests had not been met, adding that the government 'should make the politically courageous decision by ruling out a referendum for the lifetime of this Parliament and give a clear priority to the reform of public services'. Dave Prentis, general secretary of Unison, the public service union and the largest UK union, made a similar argument: 'To join the euro now would be a step into the unknown and would seriously jeopardise the ongoing massive investment programme in our public services.' Unison has called on the government to include an addition 'public services' test before deciding on whether to join the euro - namely, one that 'would ensure UK public investment plans were protected from cuts in the future'.

Employers

The main employers’ organisations supported the government’s policy to defer a decision on membership of the single currency, but they differed slightly in their interpretation of its consequences. The director-general of the Confederation of British Industry, Digby Jones, welcomed the rigour of the assessment and agreed that further sustainable convergence is necessary before the government initiates a referendum. He noted that it was good for business that the Chancellor had reassured other countries about the UK’s commitment to the European Union, but added that 'if EU countries want the UK to join a successful euroland, they should be redoubling efforts to make the euro-zone more globally competitive.'

The director-general of the Engineering Employers’ Federation, Martin Temple, restated its policy that, given the right conditions, there could be important benefits from euro membership for manufacturing, and supported the decision that 'the time is not right to propose joining the euro'. However, he criticised the government for failing to remove potentially damaging speculation surrounding euro entry over the next few years, arguing that 'the economics on which a decision to join are based are so fundamental that it is difficult to envisage how they could be readdressed in the current parliament.' The same point was made even more forcefully by Ruth Lea, head of the policy unit of the Institute of Directors.

Commentary

It is clear that UK policy on economic and political integration in Europe generally and, in particular, the terms on which membership of the single currency could be accepted, divides opinion in the UK more sharply than in other EU Member States. The statement made on 9 June 2003 was widely anticipated, but its consequences remain controversial within the trade union movement (UK9905102F), the business community (UK9907118N) and political parties. With hindsight, it is clear that the economic and political context of the June statement was much less favourable to the pro-euro cause than a few years earlier. Many commentators have linked the low growth and high levels of unemployment in major euro area economies with the policies of the European Central Bank and the fiscal constraints of the Stability and Growth Pact. The latter has increased trade union anxieties about the potential impact of euro membership on public expenditure, not least because the period of rapid growth in expenditure that began in the UK a few years ago is forecast to exceed EU borrowing limits by 2005. Recent surveys of manufacturing firms have also shown that comparatively strong economic growth in the UK, and the recent depreciation in the value of the pound against the euro, has reduced the level of support for membership of the single currency (reported in the Financial Times on 5 August 2003). In this context, the inherent difficulty of demonstrating 'clear and unambiguous' evidence that the five economic tests have been passed and, thereafter, in persuading the British electorate to produce a positive referendum result, suggests that the UK is unlikely to join the single currency in the near future. (David Winchester, IRRU)

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