Euro Focus – The euro: spiral of doom or bag of gold?

Electronic Arts is just the kind of business that the government wants to encourage.

It is American, it invests millions of pounds in Britain and as designer of computer games it is at the cutting edge of the new economy.

Electronic Arts’ managing director is David Gardner. Like many American bosses he was attracted to the UK by cultural factors. ‘You can trust the local people, they know what language to speak for us,’ he says.

But David Gardner has a problem – Britain is not in the euro. The high value of the pound is forcing up his costs per employee by 25% compared to the eurozone. Hedging against foreign exchange risks is also expensive.

Electronic Arts spent £250,000 doing just that last year.

The company has 500 staff in the UK but now Gardner is recruiting across Europe because it is less expensive: ‘I think US companies come to Britain mainly because they are comfortable here,’ he explains. ‘However at the end of the day, cost is one of the major reasons. American companies are very cost aware; if it is a high cost environment they won’t go there.’

Inward investment

But recent figures on inward investment show 1999 was a record year for attracting foreign firms to set up in the UK. Such investment created over 50,000 new jobs and has other benefits. Foreign firms tend to be more efficient than home grown ones and some of that efficiency rubs off when they do business here.

Business for Sterling, a pressure group, immediately reacted to the good news on inward investment by claiming: ‘The most serious threat to Britain’s inward investment success would be to forfeit our stable business environment and economic advantages, such as lower taxes, by joining the eurozone.’

Joining the euro wouldn’t automatically mean higher taxes, but for businessmen like Rod Turner of Whale Tankers it would be a leap in the dark. Turner used to be Landrover’s finance director. Now he employs 150 people making truck bodies in the Midlands. Adopting the single currency would, he admits, ‘reduce transaction costs, but that’s about it’.

And he is dismissive of the calls by the international car giants for the UK to enter the euro. He admits it would ‘make life easier in Detroit’ but thinks that overcapacity in the industry and the high pound are also major factors.

Turner believes joining the single currency would endanger our current economic successes. With low inflation, low unemployment and an independent central bank now is not the time, he says, to gamble on the euro ‘to abandon a real success story and take a leap into the dark and hope Franco/German interest rates will suit us, is a real risk’.

Whale Tankers and Electronic Arts illustrate how simple the economic arguments for and against a joining a single currency really are.

Do the benefits of joining a massive trading block with no exchange costs outweigh the risks of joining – key among them being the fact that we will no longer be able to set our own interest rates?


The eurozone is a massive area, it already has a population larger than the USA and a bigger economy, as well. It is, to its supporters, the natural extension of the single market. It will enable the free flow of goods and services across Europe, removing exchange costs and risks and making possible massive economies of scale. Europe is well aware that it is American multinationals which dominate world trade even though their home market, the USA, is smaller than Europe.

The theory is the single currency will redress that balance by turning ‘national players’ into regional giants. Even consumers will benefit, it is claimed, as competition forces down prices and ends local monopolies.

It is too early to say whether this utopia will ever arrive. Certainly there is still a long way to go to creating a truly ‘single market’ even though it was supposed to be in place by 1992. There isn’t even a single electrical plug that works across the EU, let alone a single market. But things are changing.

Already this year I have been to Toulouse to report on the aerospace industry where Airbus has been turned into a company rather than a government-backed joint venture, and to Duesseldorf where the takeover of Mannesmann by Vodafone was allowed to go through.

Stock markets are combining to create just a few pan European bourses and bank mergers are in the news regularly. The single currency may not be the prime mover in these factors but it has concentrated minds wonderfully.

However, there is a price to be paid. Instead of setting interest rates to suit their economy, the decision on interest rates has been taken out of the hands of governments or central banks. In some countries this hardly matters at all.

The Benelux countries were so closely tied to Germany’s economy they had virtually no freedom to set their interest rates anyway.

But other countries have more of a problem, Ireland is one. Its economy is booming and has been growing at twice our rate for years. It is doing so well that instead of exporting workers it is now importing them.

Irish experience

I visited the Xerox call centre in Dublin earlier this year. It employs staff from almost every European country all dealing with customers’ calls from around the EU and beyond. Even Dublin’s building sites have run out of home grown chippies and bricklayers and are importing them from as far afield as Spain.

But the trouble is the economy is overheating and many economists warn it is riding for a fall. The traditional solution would be to increase interest rates to slow things down, but those rates are set in Frankfurt by the European Central Bank. Since the ECB sets its rates after looking at the whole European economy Ireland’s problems don’t have a great deal of influence. This is a very strong argument against putting the pound into the single currency; the loss of economic freedom and the power to set your own economic policies to suit your own circumstances.

One of the biggest problems of joining the euro may well be the British housing market. Long used to high interest rates and high house price inflation, joining the single currency could lead to an unmanageable boom and as a result something may have to be done to cool it down.

Not only that but in a single currency area you find yourself tied, for ever, to numerous other countries whose economic interests can at any given time be at odds with your own.

Things are bad enough for countries like Ireland with the European economy growing steadily. But what will happen when the first recession comes along? The internal pressures created when different countries react in different ways to an economic slowdown are going to be enormous.

If, for example, the French luxury goods market collapses as a recession hits champagne sales but German engineering exports are unaffected, how will the ECB decide what level interest rates should be set at?

This brings us to one of the most important points – the closer the economies of Britain and the eurozone are together the lower the internal pressures will be. Equally the further apart they are the weaker the arguments are for the joining.

The Big Five’s opinions

The Big Five have been looking at this issue of convergence, which is also one of the government’s five criteria that need to be filled before it will hold a referendum on membership.

PricewaterhouseCoopers predicted just last month: ‘Gordon Brown’s key economic test of requiring convergence before joining the EMU could be met in two or three years time.’ Probably just in time for the referendum campaign.

The ITEM Club at Ernst & Young, which uses the Treasury’s own economic model to analyse the economy, has also been examining this issue. Peter Spencer, of the ITEM Club, says he is ‘very firmly of the view that although there are some differences in interest rates, the economic cycles (of the UK and Europe) are combining nicely’.

Several others agree with ITEM’s calculations. The OECD in Paris is the most respected and influential economic think tank to have produced evidence that the UK’s economy is converging with the rest of the EU’s. And just last week the National Institute of Economic and Social Research concluded that growth would be higher in the UK if we entered the euro.

And growth is, I think, the key. With higher growth comes more wealth, more tax revenue and higher standards of living. In the coming months and years there will be many arguments (some good and some very bad) both for and against the euro. But the key ones will be about growth.

Recently the USA has managed to grow at well over five per cent a year with no problems. France has been growing at around three per cent recently and several other EU members have been outperforming the UK as well.

E&Y’s Spencer forecasts ‘very strong growth in Europe this year and for at least three or four years to come’. Britain is still the fifth largest economy in the world.

Much smaller countries than our own have survived and prospered for centuries with their own currencies. There is no reason why we can’t do the same.

The question is whether we would be more prosperous in the single currency or outside it?

Unfortunately economics is unlikely to provide a definitive answer. Nor will economics make clear whether the chances of any higher growth outweigh the risks and costs of joining.

That’s one reason why it is politics, not economics, that will decide the issue.


  • Economic convergence must be sustainable
  • Flexibility to cope with change
  • Improve investment
  • Not harm financial services industry
  • Good for employment.

Euro focus

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