Euro doomed without reform, Treasury warns
The Guardian Staff and agencies Monday February 17, 2003
The European Union must step up the pace of economic reform and market liberalisation if the euro is to be a success, the Treasury warned today.
In a technical paper published ahead of next month's Brussels council, the Treasury said economic and monetary union (EMU) meant it was more important than ever that the EU had the "flexibility" to adjust to sudden economic changes.
It said that the programme of market reforms and liberalisation agreed at the 2000 Lisbon summit was not progressing rapidly enough, and that the delays risked creating a "cycle of cynicism and underperformance".
"To be successful in EMU, countries need even more flexibility to adjust to change and to unexpected economic events, since the ability to vary interest rates and exchange rates within the euro area no longer exists," the report said.
"EMU membership puts a premium on ongoing reform of EU labour, product and capital markets, delivered through the Lisbon agenda.
"The government will continue to argue that employability, flexibility and stronger competition policies must be a top priority, so that EMU can be a sustained success."
The comments are likely to be eagerly seized upon by opponents of the single currency as further evidence that the Treasury is moving to the conclusion that the conditions are not right for Britain to join.
In a personal introduction to the paper, Tony Blair said that member states were "still not doing enough" to tackle the fundamental barriers to job creation that exist within the EU.
"We know what has to be done - to restructure tax and benefit systems to make work pay, to remove the self-defeating incentives to retire early, and to pursue active labour market policies that match new opportunity for the unemployed with responsibility on their part to take jobs," he said.
Mr Blair added: "There remains a daunting amount to be done. But we Europeans need to do it if we are to compete in a globalised economy.
"Reform on this scale is never easy. But we cannot duck it."
In a statement published with the report, the chancellor, Gordon Brown, also stressed the need for further reform of product, labour and capital markets in the EU.
"While some progress has been made, the collective challenge we face is immense. Levels of productivity, employment and growth have consistently underperformed those of the US in the past decade," he said.
"If Europe is to fulfil its ambition to be a world economic leader, and not remain vulnerable to the ups and downs of the world economic cycle, then it is vital that we demonstrate our commitment at next month's Brussels council to implement the ambitious goals we have set for ourselves."
With less than four months to go before the deadline for the Treasury to complete its assessment of the five economic tests for British membership of the euro, opponents said that it was now clear that they could not be met.
George Eustice, director of the No campaign, said: "This report makes it impossible for the Treasury to claim that its 'flexibility' test has been met.
"The eurozone has failed to reform its economy, and without this reform, Britain should not consider locking into the euro."
However Philippe Legrain, chief economist of the pro-euro Britain in Europe campaign, insisted that the document should not be seen as evidence that the UK should not join.
"Anti-Europeans cannot comfort themselves with the myth that Britain is a beacon and the rest of Europe a basket case.
"Nor should they be allowed to use this report as yet another pretext for their narrow-minded opposition to the euro," he said.
"Although progress on the Lisbon agenda would boost the euro's positive impact, Europe's single currency is already providing a significant stimulus to competition, innovation and economic growth."
The report noted that the EU was already a third of the way through the decade of reform envisaged in the Lisbon agenda and that while there had been some successes, there had been "setbacks" as well.
It said the priorities must be cutting red tape and reducing business regulation, developing flexible labour markets, promoting research and development, improving competition policy and modernising the system of state aid to business.
The shadow chancellor, Michael Howard, said the government was in no position to lecture the EU on economic reform given its own record.
"The need for economic reform in Europe is clear. But despite all its rhetoric in the last six years, the government has failed to show any leadership on the issue," he said.
"And its own record in imposing burdens on business means that it lacks any credibility when lecturing others. The government is taking Britain along the very road that it criticises Europe for adopting."