VERBATIM REPORT OF SPEECH BY AUSTIN MITCHELL MP Co-Chairman, Congress for Democracy and Vice-Chairman, Labour Euro-Safeguards Campaign TO THE FOURTH CONGRESS FOR DEMOCRACY, 14 July 2000

THE CASE FOR AN INDEPENDENT POUND

I want to begin by stating a truth which we here all recognise and which is recognised in Europe - indeed, Joschke Fischer has just made it quite explicit - that the euro is about the processes of building a political union.

This is the truth which is recognised in Europe and which we recognise, but which is being kept from the children in this country, which has been explicitly denied by many of the advocates of the euro, who say "no constitutional importance, this is just a technical, economic measure which does not affect our ability to run our own affairs". That is nonsense.

The intention of the euro is to remove our ability to run our own economic affairs. The economic benefits of the euro are minute even for the European countries and certainly adverse for us, but the intention is to accept those disadvantages for us as part of a process of building ever closer union: the lurching, shambolic, intermittent process that goes on in Europe to build a federal union with a strong centre with the nation states reduced to a level of subsidiarity.

That is the process and the euro is an essential part of it. It is a difficult process because it is hard to build a pristine federal structure on a cowshed, which is essentially what they are doing - building it up from the Common Agricultural Policy. But there is this constant striving towards a federal structure, and it is a difficult process for them because they cannot get popular consent. It is not an issue which can be put to the people where the people will vote by acclamation in a referendum for federal union or for a strong central government. Indeed, it would be rejected. Even in France where the elite is now pushing that process, the people came very near to rejecting the Maastricht Treaty.

They cannot put it to the people, they cannot get democratic consent, they cannot even get the agreement of the Council of Ministers, which is still the dominant force in the EU, because those processes of negotiation are essentially like wrestling a blancmange. As they make gains by pushing back in one area it then goes to them in another area and that is the joy of negotiations in Europe.

So they are going to impose union from the top down and build it without consent by the processes of monetary union. It started with the ERM. The last time the process of union stalled in the late seventies the answer was the Exchange Rate Mechanism, it resumed with the Maastricht Treaty when it stalled again in the eighties, and the euro is part of that. If you have a monetary union, you have to have one bank. You then have to have institutions to manage the economy of Euroland, then harmonisation of taxes, then harmonisation of social spending because the burdens have to be common over the whole of Euroland, you have to have harmonisation of public spending so that you will have uniformity in that area and you will have to have institutions to manage all this.

The process is quite clear and quite specific. It is amazing that the enthusiasts for the euro don't see it. It is a process which subverts our independence, our integrity, our constitution, our ability to control our own destinies for our purposes. It effectively destroys democracy and substitutes plutocracy, which is the rule by bankers of the people, with the decisions taken elsewhere. And what do the people do if they don't like what's happening? There has been a lot of protest about live animal exports which we have to allow in the terms of the single market. What can the people do? Protest? The police will stop them and the animal exports will go ahead. When economic policies have adverse effects in terms of unemployment, high interest rates, economic deflation and depression in this country, and those economic policies arose from Frankfurt, there is nothing the people can do. They can protest, they can write to me, they can demonstrate outside my office in Grimsby. I shall just have to say "Sorry, there is nothing I can do. This is a decision which is taken centrally."

That is the process and the intention indeed. The single currency is not necessary for the single market. This is the great myth that was put about. It is not, because the only way a less competitive nation in a single market can defend itself and can compete on equal terms is through adjusting its exchange rate with the other competitors in that single market. That is the lesson of the North American Free Trade Area where Canada has a lower dollar and Mexico has had to devalue the peso to compete effectively with a dominant American economy. So it is not necessary for a single market; indeed, it is damaging in a single market because it makes the industrially powerful even more dominant in that single market.

Nor is a single currency necessary to encourage investment in this country. Investment will come to this country if we provide a competitive base to export to the single market. We have access to the single market. We will continue to have access to the single market not only if we are not part of the euro but if we are not part of the EU itself, if we were an associate member of the EU, we would still have access to the single market.

That is the ludicrous fallacy of all the inflated figures put about by defenders of the euro, that 3.5 million jobs depend on the euro and will be threatened. We all got a circular from the Minister for Europe - it terrified me - which said that 8,893 jobs in Grimsby were under threat, "faced the axe", if we did not join the euro and if our membership of the EU was threatened in any way. Just total nonsense. We would still have access to the single market, even if we were outside the EU, so it really is ridiculous these calculations designed to produce fear.

What investment needs is a competitive base from which to export to Europe. It needs the prospect of profit, it does not need the membership of the euro. Indeed, if we can change the terms of our competitiveness by adjusting the exchange rate then we can give that investment a better prospect of profit by running our economy for our purposes.

But membership, while it offers no benefits, would indeed damage us. Our economic cycle is different. I notice the OECD says there is a process of convergence. It is the same kind of convergence you get with two escalators passing each other, with one escalator going up and the other going down. For a moment they converge when they pass, and that is what has been happening. This is not a true convergence at all. It affects us adversely because the Euroland countries trade more with each other while we trade more with the world outside.

Again, a whole series of lies and distortions have been put out to convince the British people that we depend on trade with Europe. The figure is often quoted as 58% of our trade going to Europe. That is, 58% of our trade in goods (which includes oil) goes to Europe. If you come to the trade in services, then 63% goes outside Euroland. In other words the balance of trade, including services, goods and oil, is 53% to Europe and 47% outside. The effect on our balance of payments is exactly 50/50 for trade inside Europe and outside Europe. So it is just a lie to say that we depend upon trade with Europe.

It is true to say that we have a bigger interest in trade outside, where we need to adjust our exchange rate and let it move with the dollar and with the currencies which we trade in there. What Euroland wants to do is to iron out these oddities, our trade outside, and press us into the European mould because membership of the euro would force us to trade more with Euroland, where we trade at a substantial deficit, than with the world outside, where until the last two years we traded at a surplus. They want to iron out those British anomalies for our own good, to make us true Europeans by forcing us to trade with them through the euro.

A lot of the argument now has got distorted because everything to do with the British economy now becomes an argument about the euro.

We have a problem. The pound is currently over-valued. That is a problem we can deal with and we need to deal with. It is not a problem that is affected either way by membership of the euro. And yet the debate on the real problem has been stifled to become a debate on the hypothetical problem of the euro.

Sometimes we view the exchange rate as a kind of British phallic symbol: we are proud when it is hard and we are filled with post-imperial triste when it is soft. Most of the time we have to recognise the reality which is that the exchange rate is a market clearing mechanism. It clears markets, that is to say it balances out trade, hopefully in conditions of full employment and economic growth. If it is going to fulfil that role it has to change with circumstances, particularly to change with the circumstances of when we are trading at a deficit or a surplus. If we are trading at a deficit, as we now are, the exchange rate clearly needs to come down to deal with that situation. It is presently overvalued. We are currently trading at a deficit, but we can bring it down if we have the will to do so, and let market forces operate.

The whole process of monetary union stifles that adjustment process in our exchange rate. We saw the consequences with the Exchange Rate Mechanism, when we had to keep interest rates high to keep the pound in its band, we had to make deflation a permanent feature of the economy in order to fit into the ERM. We were locked in to recession.

Now the pound is too high again. Why is it too high? Too high partly because our interest rates are higher than those in Europe, higher than those in Japan, too high and high in historic and real terms, allowing for very low inflation. That is largely because we made the mistake of giving the Bank of England - and I still think it was a mistake, even though it was a Labour government which made it - the power to control our interest rates on a remit which dealt only with inflation. Not with the exchange rate, not with the balance of trade, not with the growth of the economy, not with employment, but only with inflation. To put the Bank of England in charge in that kind of situation was the economic equivalent of making Ron Davies custodian of the parks in London and the effects have been wholly adverse, in my view.

Secondly, we have a tight monetary policy in this country, it has been tightened since Labour came in, and it is too tight.

Thirdly, we are attractive to money flows and to speculation and to investment, whereas Euroland is not and the far east is uncertain. The result is that people buy sterling and the pound goes up.

The fourth reason is that we are in fact, like it or not, using an overvalued exchange rate to fight inflation. It fights inflation by bringing down the cost of imports, by squeezing manufacturing and forcing it to lay off people and cut its costs. Manufacturing is in the front line of that deflationary process, damaging our manufacturing ability. So that is what is being done, using the high pound as our weapon against inflation, even though inflation is at record lows.

The result is that sterling is not only too high against the rest of the world (indeed the dollar is also too high against the rest of the world, and we are suffering as they are because America is running a huge deficit), but sterling is particularly high against the euro, which is down. Why is the euro down? Because the flawed concept of the euro itself was built on fiddled figures. It has allowed in states which should never have been allowed in in the first place. It is a concept which is not certain to work and of which markets are naturally suspicious. There is no confidence in it.

Secondly, some Euroland countries, Germany particularly, want the euro low because they have had to deflate for the Maastricht criteria and they want economic growth to weld east Germany in, so they want a competitive exchange rate. The Germans have always, despite the talk of the strong Deutschemark, run their economy on the basis of a competitive exchange rate because it keeps the powerful German manufacturing machine pounding away and exporting. That has been the basis of their economic policy and it is again now. What they have done, effectively, is to undertake a competitive devaluation against us. If we had got sterling down to the kind of low the euro has fallen to, we would be accused by every court in Europe, every council chamber, every government in Europe, "Britain, not playing the game again, competitive devaluation, unfair trading" but they are doing it, so it's okay. There is a strange contrast of morality there.

The effect is high pound, low euro, growing trade deficit, manufacturing problems, particularly in the car industry whose exports are not competitive and which is having to export without profit to keep market share. We have lost a quarter of a million jobs in manufacturing since Labour in. Those are the problems that the high pound is now giving rise to.

Here we have a real problem. High pound, producing difficulties which we can deal with. It is quite possible to deal with it, to get the pound down, but instead of discussing that and what is to be done to expand industry, to get the economy going again, to stop the downturn which lies ahead, we are talking about theology, we are talking about the euro.

We have a flood of civil servants, trade union officials, ministers and other idiots, all saying that the only way out of this situation produced by overvaluation is to join the euro. This portrays the economic understanding of a whelk. We cannot join the euro at this exchange rate or anything like it. What the exchange rates does is convert our costs of production in this country into their prices. Go in at this exchange rate and we are locked in permanently in an uncompetitive situation vis a vis the rest of Europe. We just could not compete, it would not pay, it would not be profitable to produce in this country to go in at this exchange rate because it locks it permanently into concrete.

We say separately "If we announce that we will join the euro then it will bring the pound down." Incredible! If the euro is that good at creating confidence, if we announce we are going to join why should it not put the pound up? What we do if we announce we are going to join is give the speculators a one-way bet because they are assured that they will not get a devaluation and they are assured of high interest rates which we have to pay to keep it at this level in the interim period. So it is just nonsense to say either that we should join early or that we should announce that we are going to join.

On what basis should we look at these issues? We should look at them in terms of the exchange rate.

Gordon Brown's five tests are really no great bulwark against membership. They are subjective, they are all eminently fudgable and government of both parties is very good at fudging these issues. The fudge manufacturing machine over the road is powering at full tilt most of the year.

The crucial issue is the exchange rate and only the exchange rate and we have to recognise that Euroland is not like strawberry fields where you can go in and pick your own - pick your own exchange rate. You go in at the exchange rate you have been able to maintain relative to Euroland for two years to show that that exchange rate is stable. For four years the pound has been grossly overvalued, there is no indication that it is going to come down, there is no indication that it is not going to be overvalued for the next two years ahead in the run-up, if the government decides to join, to its application.

We can get the exchange rate down, we could reduce interest rates, we could relax monetary policy, we could increase the money supply. We can talk the pound down: say that this exchange rate is not tenable and ministers and the Bank want a much lower exchange rate. We can buy European dates which actually pay more interest than ours and in so doing translate sterling into euros, pushing up the euro and bringing down sterling and getting 1% more interest, £200 million if we invested the bonanza from the phones. We can intervene. It is easier to intervene to get an exchange rate down than it is to intervene to keep it up.

All these things can be done but government is doing nothing. Instead it sits there like a rabbit caught in the headlights of an approaching car, staring at a problem which is already damaging British manufacturing, which is going to slow growth next year, which is going to increase unemployment next year and which is going to make us the limping, lame member of the EU because we are growing more slowly and they with a competitive exchange rate will be growing faster than we are.

While ignoring the problem we talk about theology and about the euro. It is an insanity. We are getting now the worst of all worlds. We are getting a divisive debate about the euro - and it is divisive for my party. I do not like to see what is happening, the arguments in Cabinet which are a mixture of ambition and theology. For people like Peter Mandelson it's a matter of religion, for people like Robin Cook it’s a matter of ambition, having gone native in the Foreign Office. All of them are hiding behind the civil service, while the Prime Minister beams above it all and the Chancellor waits and doesn't see in his adamantine way and we ignore the issue in favour of doing nothing.

I must conclude by saying that it is important to do something, it is important to get the pound down, it is important to manage our economy for our purposes, first of all because we now have as a nation a greater opportunity to grow than we have ever had before. With low inflation there is the chance to grow at a more rapid rate than we have ever had before.

Secondly, we need to grow, and I have to point out that the opponents of this government, those who oppose the euro, need the country to be economically successful to prove the case against the euro. For this country to be successful proves that we can do it on our own and proves that we can manage our economy for our purposes. A paradoxical position, isn't it? Labour Ministers who want to join the euro have to knock the performance of their own government and say we would do better under the euro than we would under Gordon Brown, whilst Conservative opponents of the euro have to praise the performance of this government to show that we can do it for ourselves.

It's a very paradoxical situation but it is crucial, because what will decide this issue when the people come to a referendum on it is not information: people are confused and they recognise that they are confused. It is not fear: I don’t think people will be fooled again. It is the prospects. It is how well we are doing outside. Is the economy serving the purposes of the people outside the euro? If it is, there is no vote and there is no case for joining the euro. We can argue about methods. We will do about how we should run the British economy. That is our prerogative. We can run it in our own way is the important point. It is by growing, it is by generating growth, jobs, more public spending and betterment and building a fair society that we disprove the case for the euro and show that what is central to us is the nation state. The nation state alone has made the people rich, alone has given them an accountable control over the process of management because they can throw out the government they don't like, and it is the nation state which can work and the euro which would damage it.

END