MARKET COMMENT
UK Right Not To Spoil Euro Party

By James Carlisle
December 31, 2001

After much hype, blather and general wailing and gnashing of teeth, the euro is just about here. At midnight tonight, 52 billion new coins and 15 billion bank notes will hit 'pochets' around Europe. They'd better be très sturdy pochets, because that amounts to about 170 coins and 50 notes for each person in the eurozone.

If the euro can be made to work, there are obvious benefits to be had. For starters, people can forget about changing money each time they flit across euro borders. In corporate terms, that potentially means removing the costs of 12 separate pricing and invoicing mechanisms. No wonder the large multinationals are keen on the idea.

Benefits like this, however, fade into insignificance compared to the bigger picture. What is happening (in fact, it's already happened) is that 12 nations, that had separate economic policies, have joined together to live under the one economic policy. That potentially brings great reward or great disaster.

In the past, when countries have encountered economic difficulties, the traditional solution has been to chuck money at the problem. So, interest rates are lowered, taxes are cut and, eventually, with all that money around, companies start investing again and the economy picks up. If this involves the effective devaluation of your currency by way of inflation, then 'hey, you can't make an omelette without breaking eggs'.

Within the eurozone, this sort of thing can no longer be achieved on a country by country basis. That imposition of fiscal discipline could be a good thing. Certainly it would eventually lead to a greater confidence in the currency - if it could stay around long enough. And that's just the problem. Imposed discipline is all very well, but it only works if it works and, if it doesn't, there's the potential for things to go very badly wrong indeed.

If high interest rates are needed to restrain a booming Germany, then a struggling Greece will have to live with it. The upshot? Well, you tell me. We're moving into uncharted territory to a large extent. My guess is that money, and people, would simply up sticks and leave Greece for Germany. Good for holidays in Corfu maybe, but not much fun for Greece. Let's hope that the Greek and German economies fit together well enough.

In a sense, it's an exercise in squeezing pegs into holes. If the economies match up nicely and the pegs slip into their holes, then everything could work out beautifully. On the other hand, if the pegs turn out to be a bit too square and the holes too round, then the harder you try to bash the one into the other, the more you'll end up just making a mess.

So how does the UK fit into this? Well, at the moment, the Chancellor has his tests to assess the roundness of our peg. That sounds fine in theory, but in practice there are dangers because it suggests that there's a cat in hell's chance of our being certain that our economy fits any time soon. And certain we have to be. There's no going back. If it turns into an 'err, oops, sorry, actually it only looked like our economy fitted in with everyone else's, in fact our cycles were just passing by' then not only could we do great harm to our own economy, we could bust the euro apart.

There's nothing wrong with being sceptical about the euro. In fact, for such a monumentally important decision, it's very healthy. There's no rush to join. The euro does not need us in it to be successful. In fact, if we don't fit, then we'd be doing very much more harm than good. We absolutely have to be totally sure things are right before we enter. We owe it to our European friends. Otherwise we risk stumbling in like some drunk and spoiling the party for everyone.

So I propose an addition to the economic tests for entry into the euro. Not only should we have to pass them all, but we should have to pass them and keep passing them for a minimum of ten years. If we can achieve that then joining might make good sense. I'm not holding my breath, though.

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