Central Fife Conservatives Business Breakfast, Laurelbank Hotel, Markinch

October 19th, 2001

Introduction

It is a great pleasure to be with you this morning in Central Fife, although debating the Euro over breakfast is likely to lead to dyspepsia! Nevertheless, the Conservative Party has a new leader and a new, hard-line policy which, effectively, rules out UK membership of the Eurozone permanently.

That is not to say that Iain Duncan-Smith is in any way unbending or intolerant on this issue. Indeed, I asked him last week in Blackpool what his views were on the Single Currency and he once again acknowledged that there are diverse views within the Conservative Party and that he is happy to allow everyone to vote and even campaign on either side of the spectrum during any referendum. He even went so far as to say that he would allow members of his Shadow Cabinet to stand down temporarily to support the YES campaign in such a referendum, re-joining after the campaign was over. Given the makeup of the Shadow Cabinet, I cannot envisage a stampede to take up this offer.

It is worth remembering that in the UK, the Conservatives are the only party to be against entry into EMU. For those who advocate clear blue water between us and the other parties, here is the clearest blue water you could wish for. Labour, the Lib/Dems and the SNP believe that the single currency will provide a cure-all for our economic ills.

From the SNP perspective this is particularly grotesque. They dislike intensely having Eddie George set Scottish interest rates in London, so they would rather hand over control to a bunch of unelected and unaccountable bankers in Frankfurt! Their policy gives a new meaning to the term 'REMOTE CONTROL.' I note with interest that there are now some signs of divisions in their ranks on this issue. Alex Neil is now advocating a NO vote in any referendum. Maybe he should come and join the Tories!

And as for the Lib/Dems, well they will roll over with their paws in the air to any policy that smacks of federalism. To paraphrase Winston Churchill's famous quip about Clement Attlee: "An empty taxi drew up outside The House of Commons yesterday and Charles Kennedy got out."

When the German Chancellor, Gerhard Schroeder, said that a single currency was an essential prerequisite to political union, he let the cat out of the bag. Even more so than his predecessor Helmut Kohl, Schroeder is determined to create a federalist Europe. He has found a willing ally in Romano Prodi, the President of the European Commission. Well I for one will campaign vigorously against the federalist vision. I want to be in Europe, but not run by Europe. I want to be a member of a common market, not a citizen of a United States of Europe.

Prodi would like to see not only taxes, but judicial and legal systems harmonised across the EU. His vision is of a Single Market, with a Single Currency and a Single European Central Bank setting a Single set of interest rates, over an enlarged EU with its own Army, judicial system and constitution. My view is that once you have surrendered the right to set your own interest rates, formulate your own fiscal policy, devise your own laws in an independent judiciary, and control your own defence forces, you have surrendered the right to call yourself an independent, sovereign nation state. You have become simply a region in a Federal United States of Europe.

That is why I regard the single currency as the thin end of the wedge; as a concession too far. Let us look at the myths which surround the single currency:

There will be a big saving in transaction costs

One of the main arguments you always hear is the one about saving transaction costs. Many business people argue that by eliminating the costs of exchanging currencies we can offer major savings for business and travel. Well let me tell you what the European Commission's own findings on this issue are. They have published a report which indicated that the actual savings will amount to only 0.04% of EU national income. In other words a gain of 40p in £100 through the elimination of transaction costs.

In addition, they say that such benefits will largely be concentrated in the smaller, poorer countries of the EU like Belgium, Ireland and Portugal, so the benefits to the UK will be much smaller. Indeed the estimated savings for the UK is put at 0.15% of GDP which wouldn't even be enough to pay the interest on the huge cost of the changeover to the Euro, estimated by IBM as $150 Billion for the whole of Europe.

But even the figure of estimated savings needs to be treated with great care. Where are these savings coming from? They are coming from the fact that transactions no longer need to be conducted by banks and bureaux de changes and other organisations engaged in the processing of money exchange. In other words, the savings only accrue through rendering such people unemployed. So the cost of transaction savings will be job losses.

In any case, in this electronic age of e-commerce, transaction costs are low and falling, so there is no substance in this argument whatsoever.

It will be easier to compare prices across Europe

Another benefit claimed is the so-called transparency of pricing which the Euro will bring. This seems to me highly dubious. The argument goes that if we all have prices in a single currency it will make it easier for consumers to compare the price of goods across the entire EU, allowing them to shop around for the best buy and forcing prices down through more open competitive markets. The example usually given is the price of cars, which, we are assured, can be purchased far more cheaply on the continent than in the UK.

To take this argument seriously, we are asked to believe that it is specifically the existence of different currencies which allows retailers in Britain to rip us off mercilessly. I just don't accept that.

It is far more likely that car dealers are involved in restrictive practices, or that British car buyers are unaware of the widespread availability of right-hand-drive models on the continent. In any case, you can find examples of hefty price differentials for new cars even within Britain. All of this indicates that whatever the cause of price differences between Britain and the rest of Europe, it is nothing to do with having a separate currency.

The Euro will challenge the might of the dollar

We often hear that joining EMU will help Europe challenge the might of the dollar, although I've never been too clear what this really means. Are we talking about international prestige and if so, is there any real benefit to be had from this? Or are we hoping that the Euro will replace the dollar as the currency for pricing internationally traded goods such as oil? I cannot really see what national advantage the US gains from this practice, as everyone has to pay the same amount of money whatever currency the prices are quoted in. In any case, the accumulation of dollars abroad could be regarded by the American authorities as economically disadvantageous, as there is a danger they could lose control of their own money supply.

A one-size-fits-all interest rate

It has often been argued that by joining the single currency, Britain would instantly enjoy lower interest rates. It is a very tempting proposition and some people always believe that the best way to get rid of a temptation is to yield to it. But it would be a serious mistake to count on this as a benefit of the Euro.

As we know, the Bank of England's Monetary Policy Committee currently has the job of setting interest rates, having taken a range of key economic factors into account. One must assume, whether or not you agree with them, that the current level of interest rates, are where they think they should be, for the ultimate benefit of the UK economy. So, if we were to join Euroland tomorrow and watch our interest rates plunge to 3.75%, one must equally assume that this would be bad for the UK economy. If this wasn't the case, Eddie George would have lowered interest rates to 3.75% already.

So while I have every sympathy with those who look covetously at lower mortgages and a reduction in the cost of borrowing and those business people who claim to be trading at a competitive disadvantage with their business rivals on the continent, are they really suggesting that we should sanction something that would be damaging to the UK economy to provide them with some short-term advantage? Such mis-management of the economy would have long-term costs for everyone.

The truth is that once we hand over control of interest rates to the European Central Bank in Frankfurt, we effectively surrender control over our own core economic policy. Do you remember when Eddie George famously said that job losses in the North of Britain are a price worth paying to keep inflation under control in the South? The SNP made a great song and dance about that at the time.

Imagine how much worse we would fare if instead of Eddie George and his Bank of England colleagues, our interest rates were to be set by Wim Duisenberg and his ECB chums in Frankfurt? Would widespread unemployment in the UK be seen as a price worth paying for economic growth in Spain or for industrial regeneration in Poland?

When rates are too high, some countries may suffer from recession, bankruptcy, unemployment. When they are too low, there can be runaway inflation followed by a crash. Countries in EMU, unable to manage their own interest rates, will face massive demand-cycle volatility - boom and bust. We already can see a situation where Germany, facing recession, needs lower rates, while Ireland has rates that are far too low and is risking severe inflation. But if it comes to a choice between lowering interest rates to help big Germany or raising rates to help little Ireland, how do you think Wim Duisenberg will react? It doesn't take much imagination to work it out!

I think everyone agrees that there are both costs and benefits to a single currency and I don't think that anyone would deny that a case could be made for a small group of countries sharing a currency where the benefits would outweigh the costs. This could, for example, be the case if Germany and the Netherlands joined together in monetary union.

However, it is most unlikely that those benefits could extend to all 15 member states, far less the ten new states from Central and Eastern Europe who are hoping to join the EU. How could a single interest rate set in Frankfurt, embrace the economic diversity of Scotland and Slovenia or England and Estonia. It just wont work.

UK and EU have separate economic cycles

There are further key economic objections which convince me that signing up to the single currency would be wrong at the present time. The first is the "separate cycles" argument which points out that the UK economy is almost always out of sync with the French, German and other EU economies. After all, our pattern of trade is far more externalised than for most Euroland countries. We produce oil. They don't.

We are the world's second largest global investor after the US. We are much less dependent on manufacturing and we have a much greater dependence on short-term interest rates for mortgages and corporate debt. So, when an interest rate cut would be good for the UK, it is often the case that an interest rate rise would be good for Germany and France and some other members of Euroland, or vice versa.

There is also the more worrying contention that an 'asymmetric shock' may have a disproportionate impact on one of the individual countries participating in EMU, leaving the affected country powerless to take corrective economic action. Once again it can be assumed that the European Central Bank will be reluctant to take action which will impact on all EMU members simply to solve the problems of one. A Member State could find itself twisting in the wind, powerless to help itself.

The Euro will give us stability

To those who argue that the single currency will bring stability I say "nonsense." It has lost over 30% of its value against the US $ since it was launched - some stability. It is a weak and unstable currency. More than half our exports and three-quarters of our international investments are outside Euroland, so the $ rate matters. Supporters of the Euro argue that what goes down must go up again, which sort of defies Newton's Law of Gravity, but I doubt it. The only possibility of any temporary rise in the Euro will come next year, just after the coins and notes are released on 1st. January. It is ironic that this temporary rise is being predicted by economists because of criminal activity.

At any given time there is around $100 billion washing around Europe in black market cash. This is money stashed under mattresses or in cupboards to hide It away from the taxman. But the looming introduction of Euro notes and coins has posed a problem for the EU's tax dodgers. They can't simply roll up at a bank on 2nd. January with a stash of Francs or Pesetas and change it into Euros without alerting the authorities. So, most of them have been busy changing their hidden hordes into US dollars. Thus, the argument goes, in early January, the Euro will suddenly experience an unexpected boost against the dollar when over $100 billion is converted back into Euros.

Of much greater import will be the even larger amount of cash held by money launderers and other elements of dubious provenance throughout the EU. Economists reckon that around $600 billion is swishing around in the pockets of gangsters, drug dealers and money launderers at any given time, again all in hard cash and usually in the biggest denomination note in common circulation, the $100 bill. But the Euro is determined to be the currency of choice for all modern gangsters, so they intend to circulate a new 500 Euro bill, worth around £300 at today's exchange rates. You can stuff a lot more value into a briefcase using 500 Euro notes than $100 bills. Once again, from January, this will have a major effect on the Euro's fortunes.

We are too small to prosper outside Euroland

When people say that we are too small to prosper outside Euroland I say "try telling that to Canada, Switzerland or Singapore" - all much smaller economies than the UK. We are a very large economy indeed - there are only three significantly larger national economies in the world - US, Germany and Japan. We're the world's second largest global investor. We have the world's largest foreign exchange market. Indeed, the gloom merchants who predicted the City would suffer following the launch of Euroland have been confounded. London is now the world's leading centre for trading in Euros!

We are members of the G8, the OECD, the World Bank and the IMF. The idea that we are too small to have an independent currency is absurd.

We will lose inward investment if we stay out

The argument that we will lose inward investment to the UK if we remain outside the single currency is perhaps the biggest lie of all. Research amongst inward investors shows they come here for our low costs, low taxes, flexible labour markets and light regulation - all of which would be put at risk by further EU integration and by membership of EMU. Investors also come for the English language. Even with our decision to opt-out of the single currency well known for some years past, still our level of inward investment has increased. If the Euro had been a key factor, these investors would have gone to Germany or France.

Bad economics equals bad politics

So, I firmly believe that the mad headlong rush into European Monetary Union is a bridge too far. It could be laying the foundations of an enormous economic disaster.

Bad economics equals bad politics and bad politics lays down the foundation for future conflict. In due course, when future generations find themselves trapped in a European Federal Superstate which discriminates economically against their country, secessionist movements and breakaway groups will be formed, demanding independence from Europe. The legacy we may leave to future generations may be a legacy of conflict, rather than of peace and stability. That's why I believe we are right to reject membership.

I think the eleven rather ill-assorted countries who make up Euroland, have embarked on one of the riskiest and most appallingly complex political experiments of all time.

There has never been a successful single currency in the entire history of the world that was not managed by a single state. European leaders, from ex-Chancellor Kohl on, are quite clear on this issue. Monetary union and political union go hand in hand. When we last used a foreign currency in these islands, it was the Roman currency and Britain was a Roman Province. If we join the Euro we will become a mere Province in the European Empire.

The ability to raise and spend taxes and to control monetary policy, is practically the defining feature of the nation state. A state which has given up these competencies and is negotiating, as Tony Blair is at present, to give up control of foreign affairs and defence, of home affairs and justice, is clearly no longer independent.

Europe as a trading community

But just because I oppose the single currency does not in any way imply that I am anti-European. Indeed I am a great believer in the Common Market as a vast trading area in which Britain can buy and sell goods free from bureaucratic regulations and controls. The great principles of European unity, which have provided the nations of Europe with a bulwark against war and made the EU into one of the world's most formidable trading blocs, are the cornerstones of our modern peace and prosperity.

Global issues such as world trade, agriculture, environmental protection, transport and energy networks, are properly dealt with on an EU-wide basis. The movement of people and goods, the international fight against crime and terrorism, these are matters which are most appropriately handled at the top of the EU pyramid in Brussels.

The challenge of EU Enlargement

The big debate in Brussels just now is about enlargement - the process by which another ten countries will join the existing fifteen Member States within the next decade, some of even becoming full members in time for the next European elections in 2004. The countries lining up to join are Poland, Czech Republic, Slovakia, Estonia, Latvia, Lithuania, Hungary, Slovenia, Romania and Bulgaria. Already, half a billion Euros of our tax is being paid each year to these countries, to help them make the necessary adjustments to prepare for full EU membership.

Many people in the UK complain that these Central and East European countries will absorb all of the grants and subsidies which we currently enjoy and in return, will flood us with cheaply produced goods, undercutting our markets and destroying jobs. They are well off the mark! Although it is inevitable that much of the structural funding and farm subsidies which we have benefited from in the past will drift from the west to the east, it remains the case that out of the ten countries waiting to join the EU, only Hungary and Romania are net exporters of food. All the rest are net importers. So, as their standard of living rises to match the rest of us, so will demand for more and more consumer products from the west. This is a huge opportunity for us to identify and sell Scottish products to a vast new marketplace. As well as a wide range of foodstuffs, there will be a growing demand for agricultural equipment, intellectual property, consultancy services and a host of other commercial opportunities.

I hope the NFU, CBI, Chambers of Commerce and others are on top of this. They must get over to these countries now and make the contacts which will open up this huge trading opportunity for Scotland. The Germans are already beavering away, signing up ten year contracts to supply Poland with a variety of agricultural produce. So let's stop moaning about enlargement and ensure we make it work to Scotland's advantage.

The Real Centre of Europe

It is now ten years since the fall of the Berlin Wall and high time that enlargement is allowed to take place. While Brussels continues to bulldoze all of its remaining buildings of architectural merit, making way for concrete tower blocks to house it's ever-expanding army of bureaucrats, Berlin is fast becoming the real centre of power in the new Europe. Centralised socialist planning and a determination to interfere in every aspect of its citizens' lives, has been the hallmark of modern Brussels. The vast £750 million European Parliament building dominates a landscape dotted with monstrous new offices to house the European Commission, the Council of Ministers and a host of less well-known departments.

Meanwhile, Berlin is moving serenely back towards the centre stage of world affairs. The German parliament has once again taken up residence in the Reichstag - or Bundestag, as it is now known. The building has been entirely re-built by British architect Sir Norman Foster, although the familiar exterior facade, complete with the massive stone-carved legend above the front portals 'DEM DEUTSCHEN VOLKE' still remains. From the top of the new Reichstag it is possible to see the burgeoning development of Berlin. Where once there was no-man's land and the Berlin Wall now there are gleaming new business centres, banks and commercial headquarters. The skyline is dotted with cranes, bearing witness to the pace of re-development of this dynamic city.

In East Berlin, the wonderful seventeenth and eighteenth century buildings, which miraculously survived two world wars and fifty years of communism, have been restored to their former glory. Art galleries, museums, theatres and opera houses abound. The city breathes wealth and is living proof of Germany's economic dominance of Europe. Even the staggering cost of German reunification could not put the brakes on German growth. But now, economic dominance is beginning to be mirrored by political dominance. With units of the German army operating in The Middle East and Kosovo, outside the boundaries of Germany for the first time since 1945, The Fatherland is well poised to flex its muscles on the international stage. When the EU enlarges to embrace up to ten new countries from east and central Europe, it is not Brussels, which will lie at the geographical heart of this new landmass, but Berlin.

Staring from the roof of the Reichstag at the pace of re-development and the welter of new government buildings springing up in Potsdamer Platz, it is easy to imagine that Germany is setting out its stall as the nominal leader of the EU's expanded 500 million population. The humiliation of Chirac at the Nice Summit, when French arrogance and bullying tactics backfired, paved the way for Schroeder to stake Germany's claim to the mantle of EU leadership. Those who thought that France had duped Germany into giving up the all-powerful Deutschmark in exchange for French-dominated EU integration may now begin to see method in the German madness.

A clear alternative

So I am deeply unhappy with Commission President Romano Prodi's vision of the new enlarged EU. He is obsessed with integration and harmonisation which, if we are not careful, would create a new Iron Curtain of protectionism around the whole of Europe, isolating the EU from the global market and all the potential benefits that brings. Someone recently wisecracked in the Parliament "if you came across Romano Prodi struggling in a raging river and you had a choice between rescuing him or getting a Pulitzer prize-winning photograph, what shutter speed would you use?"

Costly harmonisation and regulation of taxes, legal systems, working practices and even European defence, would lead to an increasingly inward-looking and uncompetitive Europe. We have a moral obligation to our colleagues from Eastern Europe who suffered under almost half a century of Communist repression. We must welcome them into the EU, but we must not ask them to exchange one system of centralised, bureaucratic control for another. We don't want a United States of Europe. We want to be members of a 'Common Market', a vast trading community which brings jobs and prosperity to each Member State.

We must demand that the new, enlarged EU embraces the concept of flexibility. While I recognise that every Member State must accept the rights and responsibilities of the single market and core elements of an open, free trading and competitive Europe, nevertheless, outside that core there should be a new treaty provision to allow countries not to participate in new legislative actions at EU level, where they prefer to handle these at national level. This would mean that countries could avoid having legislation imposed upon them by other countries against their will.

This is surely the only way in which a new, enlarged EU with twenty five Member States will be able to work effectively and the only way in which we will feel safe enough to give up our right of Veto in exchange for majority voting.

So Britain and Scotland face a clear choice. We can opt for ever-closer integration in a Europe which is over-governed, over-regulated, over-taxed and over-borrowed - a Europe which is protectionist, inward looking, corporatist, statist, dirigiste and, let's face it, federalist and socialist. A Europe which is a continental social model that destroys jobs and the capacity for wealth-creation and that drives businesses out of the EU altogether. Or, we can play to our strengths as a global trading nation.

Of course we want to develop trade and prosperity in Europe. Of course we want to co-operate with our European partners. But we also want to nurture our traditional links with the USA, Asia and the Commonwealth. We want to preserve our distinctive Anglo-Saxon model with its key competitive advantages. We want to be a focus for enterprise and investment. We want productivity, growth, wealth-creation, high employment. We may never convince our continental partners by debate, but we may convince them by example. Let us show them that we are an off-shore power-house, a beacon for free trade, democracy and progressive economics.

The world is a more dangerous place now than it was before September 11th. George W. Bush has formed a global coalition to fight terrorism. The UK has been at the forefront of efforts to build that coalition. In this respect it is interesting to note that America once again looked to its traditional ally across the Atlantic for its greatest support, not to France or Germany and certainly not to the EU.

Why is this? It is because Britain has a reputation as a strong sovereign nation with a strong democratic tradition and a strong and stable economy. Let us play to these strengths and not seek to undermine them in a way that would sap our sovereignty and squander our independence. Protecting and preserving the freedom and independence of our country is our foremost duty as citizens and the most important legacy we can bequeath to our children and grandchildren.