No-win situation if we dont join soon

27 February 1998

No-win situation if we dont join soon

UK AGRICULTURE could be in a "lose, lose" situation if government stays outside the single European currency for too long.

According to consultant Robert Gooch of Brussels-based Eurinco, whether the euro emerges as a strong currency or a weak one, there are inherent dangers for those not taking part.

Speaking at this weeks FW Economic and Monetary Union conference in London, he said a worst case scenario for the euro would be if:

&#8226 The convergence criteria for participants were fudged.

&#8226 There were frequent conflicts between the European Central Bank and EU finance ministers.

&#8226 Market pressures forced a realignment of exchange rates in the run-up to the 1999 start date.

&#8226 There was a lack if budgetary discipline.

In this case, the euro would become a weak currency, leading to a further strengthening of sterling, more green £ revaluations and a continued drop in farm incomes.

The other scenario, leading to a strong euro, would be if:

&#8226 Convergence criteria were respected.

&#8226 There was sufficient labour market flexibility.

&#8226 The European Central Bank was run like the Bundesbank.

This would create low inflation, low unemployment, low debts and low rates of interest.

But for sterling on the outside, yes, there would be a weakening of market exchange rates, but there was a danger the rest of Europe would be more hostile to devaluations in green rates. In particular, the higher green rates for area aid and livestock headage payments – currently worth 11.5% extra – would probably disappear.

The lack of exchange rate stability in recent years was a "dismal" achievement, according to economist Sean Rickard of Cran-field University. The consequence had been higher interest rates, leading to lower investment.

Currently, UK interest rates were 4% higher than elsewhere in Europe, boosting the strength of sterling. "This is what managing our own affairs has done for us."

Mr Rickard believed the euro would emerge as a strong currency. "It will be run by central bankers who have made it their careers to drive inflation down."

By Philip Clarke

Sean Rickard: Euro will be strong.

DANGERS OF EMU

&#8226 Inability to adjust interest rates to meet local requirements.

&#8226 Lack of labour movement between rich and poor areas.

&#8226 Higher labour costs as UK adopts the Social Chapter.

&#8226 Lack of will to transfer money to poor areas.

ADVANTAGES OF EMU

&#8226 Currency stability leading to faster economic growth.

&#8226 Lower transaction costs boosting trade.

&#8226 Lower interest rates and inflation.

&#8226 End to green money system and attendant abuses.