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Last Updated: Thursday, 8 May, 2003, 08:59 GMT 09:59 UK
Six Forum: Should Britain join the euro?
BBC Business Correspondent Jenny Scott answered your questions in a live forum for the Six O'clock News.

  • Click here to read the transcript


    Iain Duncan Smith has broken his self-imposed silence on the euro with a speech restating his opposition to UK entry into the single currency.

    The Tory leader also challenged Tony Blair to "call a referendum now and find out exactly how the British people feel about the euro".

    The move comes ahead of Chancellor Gordon Brown's verdict on the Treasury's five economic tests widely expected within the next few weeks.

    Should Britain adopt the euro? What are the Treasury's five economic tests? Will there be a referendum?



    Transcript


    Manisha Tank:

    Hello and welcome to the Six Forum with me Manisha Tank. Well, the leader of the Conservative Party, Iain Duncan-Smith, has reiterated his anti-euro views and has called on Tony Blair to ask for a referendum on euro entry. But at the end of the day there are those five economic tests that must be met before Britain adopts the single currency. So sticking to the economics of the issue is the point and here's Jenny Scott to answer your questions. Jenny first of all people have been writing in about this referendum idea. Tom, England has written in saying: Why don't we just have a referendum and get it over with now?


    Jenny Scott:

    Well two reasons I think essentially: first of all because Tony Blair knows that he won't win it at the moment - all the latest surveys say that around two-thirds of the population are against it. But secondly, Gordon Brown, the Chancellor, wouldn't want him to because he doesn't think that we have met the economic tests yet. We're going to find out over the next couple of weeks exactly what his assessment of the five tests are. But all the speculation is that he thinks that we haven't met the five economic tests yet and we're not ready. Essentially it boils down to our economy isn't sufficiently similar - it hasn't converged with the euro land economy sufficiently enough for us to be able to go in at the moment.


    Manisha Tank:

    Simon Mallett, has written in from Birmingham and he says: Tony Blair is unlikely to call a referendum until he believes he has any chance of winning. And if he loses, we will have a series of referendums until he gets the answer he wants. Isn't that what they did in Denmark?


    Jenny Scott:

    Well in Denmark they had a referendum on whether to join the euro in 2000 and they voted no. And since then support has been gradually swinging back towards the euro and the Government has said that they're probably going to have another one probably next year some time - probably thinking that they've got much more of chance of winning now. So in a sense yes they've left it long enough to see how the euro has developed, to let people get used to the idea and when they're a bit more confident of a win, they're probably going to have another one.


    Manisha Tank:

    So obviously in a sense Britain has to benefit from the fact that most of the European countries have already adopted the single currency so we can sit back and watch what's happened there. For example, Nick in Moscow has written in saying: Should the poor health of the German economy act as a warning sign for the UK to stay well away?

    We know Germany has its own specific problems doesn't it?


    Jenny Scott:

    Yes I think what it does act as warning for is that we really do have to be converged with the European economies to be able to go in. The big main issue about European Monetary Union is that all the countries in it will have the same single interest rate and that's one of the things that's causing the real problem for Germany at the moment. Because their economy is very weak, teetering on recession again, and because interest rates in the euro zone affect for the 12 countries, not just for Germany, and some of those countries are doing rather well. Interest rates are a little bit higher than the Germany government would ideally want them and that's really not helping at all.

    So I think the main lesson there is that we have to go in when our economy grows, the euro zone economies have to be growing - when ours go down, the euro zone has to go down. We have to be in very much the same pattern as the euro zone economies if we're going to be able to survive with exactly the same interest rate as all those other countries.


    Manisha Tank:

    Just sticking with Germany for a second, Francis Empson, England has written in saying: Supporters of the euro say that staying out of the single currency is costing the UK thousands of jobs. Why, then, have the UK unemployment figures been falling while, the number of Germans out of work increases?

    Of course what we have to remember here is the different methods of calculation as well.


    Jenny Scott:

    Yes, even on the different methods of calculation, if we take the international measure of unemployment - unemployment in Britain is still considerably lower than that in Germany. I think what the pro-euro supporters here are probably talking about is a longer term gain. They would argue that over the long term, if we stay out of the euro then companies will invest less in Britain and trade will fall off and therefore gradually the number of jobs over here will go down. It's very difficult to argue that at the moment because of those very different exchange rates.

    The whole trouble with this is making forecasts. Gordon Brown's forecast for British economic growth that he made in the Budget is already looking out of date and that's was only made last month. It's very, very difficult to predict what's going to happen to growth, what's going to happen to unemployment. So a lot of this is just conjecture.


    Manisha Tank:

    Well I'm sorry to do this to you but we're going to have to do some more forecasting - you'll have to walk us through the possible impact that this can have on individuals because obviously there's been a lot of questions on that aspect. Mark Staines has written in from Cardiff asking: If we change over to the euro, are our bank balances automatically changed then? What happens if it's not a success and its value actually deteriorates? Life savings could be gone in a flash and will cars, CDs, DVDs etc. be cheaper?

    Now just breaking that down, obviously all of these things don't happen overnight of course.


    Jenny Scott:

    Well, yes, in the euro zone countries they fix the exchange rate a couple of years before they actually introduced the notes and coins. So what would happen is that, if we decided to go in, we would decide the exchange rate between the pound and the euro at which we would join. Once that has irrevocably fixed and once euro notes and coins are actually physically introduced in all the shops then yes your bank account wouldn't be expressed in pounds anymore, it would be expressed in euros. And then it just acts like any other currency - it could go up against the dollar, against the yen - it could fall against the dollar, against the yen. So all it does is change the denomination of your savings or whatever you have in the bank and that then fluctuates as one whole euro against the world's other currencies.


    Manisha Tank:

    Now we've had an e-mail that just come in from Mike Cass in Liverpool who asks: If we were to join the euro, how would this affect interest rates, especially regarding mortgages?

    And with that we've had a text message in from Mike who asks: Who will control interest rates if we enter the euro?


    Jenny Scott:

    Well if we enter the euro, the European Central Bank will control our interest rate. The Bank of England governor will have a seat on that board - he'll have a say in what happens to that interest rate but of course he would only be one voice - if we were the only ones to join - one voice of thirteen. So he would only have a minor say in what goes on, which is the fundamental macro problem with the euro - this one size fits all policy.

    In terms of what happens to our interest rates - it all depends on where the euro interest rate is when we join. At the moment our interest rates are slightly higher than euro interest rates so they would come down. Again this goes back to the argument that our economy must be in the same sort of situation as the euro zone economy to be able to take the same interest rates. If we suddenly reduced our interest rates by quite a way now, that would obviously have implications for inflation, which is another reason why some would argue that we're not ready to go in at this rate because our interest rates are too different.


    Manisha Tank:

    Well Jenny I hope Gordon Brown is listening to all of this because it seems to be that the argument is against right now but that's just our opinion isn't it.

    Tom, Tonbridge, UK: I've just been to France where because of the exchange rate, everything is costing around 10% more than it did a year ago. What is this costing our businesses?


    Jenny Scott:

    The pound has had a pretty rocky ride against the euro. Initially the euro fell quite sharply when it was first introduced, so the pound was quite strong which made our imports into this country from Europe quite cheap but it made our exports to Europe quite expensive which made it obviously very hard for British exporters to try and sell their goods there. That's slightly reversed actually in the last six months or so. The euro has been getting quite strong and the pound has actually been falling so the reverse has happened. Our imports from Europe are now getting a little bit more expensive which is causing a few little jitters about inflation - pushing inflation up a bit - but it is making our exports slightly cheaper so we're actually getting slightly more competitive on that front.

    Exchange rates will always fluctuate against each other. You can debate until the cows come home about which is the actual right exchange rate. At this moment with the euro strengthening, that's the last thing the German economy needs because they rely on exports and they're in trouble. So the last thing they need is to make their exports more expensive. So it is kind of swings and roundabouts with exchange rates.


    Manisha Tank:

    But maybe of course the Central Bank may change that ever so slightly this coming week but we will have to wait and see for that. Here's an interesting question from David Wright in Norwich: Sterling is one of the few recognised international currencies. How will the loss of such a position be of benefit?


    Jenny Scott:

    The supporters of the euro would argue that it is their ambition to make the euro one of the three world currencies - what we call reserve currencies - which are the currencies that central banks salt away in their vaults for use should they need it and that's the dollar, the yen and they would hope the euro. If Britain gives up the pound and joins the euro, pro-euro supporters would argue that they're giving up something - yes there's a lot of heritage - but they're also joining this enormous bloc of people and money, this enormous force which if we leave it for a couple of years, if they manage the economy well, if they keep inflation under control, if the euro gets perceived to be a strong currency, pro-euro supporters would say, well you're exchanging it for something that's a lot more powerful.

    Of course anti-euro supporters would say would say you're losing hundreds and hundreds of years of history. Psychologists would say that if you lose one symbol of our identity like the pound then pretty soon we adapt to new symbols and we'll find a symbol of Britishness in a pint ale or whatever it is. They say that the human being is very adaptable like that.


    Manisha Tank:

    Well just talking about symbolism now and I'm afraid this will have to be our last question. Charles Moore has written in from Scotland: Would British euro entry have a detrimental effect on the dollar? If so, would this damage the UK/US relationship?

    There's a lot to be said for symbolism in economics isn't there?


    Jenny Scott:

    There is yes. This question does come up a bit - we're culturally maybe more similar to the Americans, we have this so-called special relationship between our governments. But the fact is that we do an awful lot more trade with Europe than we do with America, so if we're going to hook our currency up with anybody then logic would dictate that it is with the Europeans because that way we get greater price transparency with all the products in the European market, we get more competition with them which should drive prices down, which should drive investment up and we supposedly get all the benefits of trade with that. So I think it is a bit of red herring to talk about joining monetarily to the US. Whether or not it changes that special relationship - I think that probably transcends what currency we're using.


    Manisha Tank:

    Absolutely. Well in economics and politics there's a big overlap there. Jenny Scott for now we have to finish it there. Thank you very much. Whatever currency you're paying with I'm just thankful that you joined us for the Six Forum. Goodbye.




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