VERBATIM REPORT OF SPEECH BY SIMON WOLFSON Managing Director, Next plc TO THE FIFTH CONGRESS FOR DEMOCRACY, 2 February 2001

It's a great honour to be speaking here today. I am sure what you are all wondering is "What's he doing here? Why isn't he out minding the shops? I have to say I did ask myself the same question.

The reason I am passionate about this is not on political grounds. I am against EMU not just because it is politically unacceptable but because in my view it is economically ill-conceived, ill-conceived to the point of disbelief. I would like to take a little of your time to explain why I think it will not work and cannot work for Britain. I am going to start, and standing here in the Church Synod's main meeting room I think it is appropriate to start, with Joseph and Pharaoh.

3,500 years ago Pharaoh had a dream and Joseph interpreted it and said, "Pharaoh, what you've got to do is in the seven years of plenty you must store the corn and in the seven lean years you must release the corn in order to alleviate the starvation of your people." And here we have, amazingly, the first example of the management of the economic cycle. For the first time government got involved and said, "We are not going to let this cycle come back in a recession and wipe us all out. We are going to manage it." Today things have moved on and today interest rates are the main lever which government - and by government I include, of course, the Central Bank - can use to smooth the cycle and manage our economy.

In the modern economy, as things get going and the economy begins to boom, interest rates have to be raised in order to curb inflation. This is well accepted. Equally, when things look as though they are getting tough, interest rates must be lowered in order to stave off recession. And we are seeing that at the moment in America. There has been a big splash in the newspapers, even over here. Alan Greenspan's half point reduction in American interest rates affects the whole world economy. The United Kingdom is particularly sensitive to interest rates. 11% of our national income is spent paying off mortgages. That compares, for example, with Germany where the figure is about 3%. So interest rates, and changes in interest rates, have a particularly dramatic effect on the UK economy.

And here is the problem. One currency for Europe means by definition one rate of interest for Europe. And as long as the economies of Europe are moving in and out of recession at different times, it is clearly not possible to use interest rates to manage the economy of Europe. This is an obvious, central, fundamental flaw in the system, and yet, amazingly, it is one that the proponents of EMU rarely even address. Interest rates become a blunt instrument, one that cannot be used to control our economy.

In the single currency area they are left with a tricky question. When you have one economy doing well (for example Ireland) and another economy not doing so well (say Germany where unemployment is still at more than 8%) what do you do with interest rates? Do you raise them to contain inflation in the booming economy or do you lower them to alleviate the problems of a slower economy? And the only answer that people have come up with is that you put them somewhere in the middle. What are the consequences of that? The consequences are that you neither curb inflation in the booming economy nor alleviate recession in the slow economy.

This is not just theory. It may have been two years ago, but today it is a practical reality. The company I work for has a large business in southern Ireland. When Ireland joined the EMU inflation in that country was running at 2%. Barely two years later it is now running at 6%. (I don't know how they calculate that figure - in my view it is way too low.) House prices in Dublin for two years consecutively have gone up by more than 30%, which leads to the only joke I have heard about EMU. It was not particularly strong but I will share it with you anyway: When is inflation not inflation? When it's Dublin.

It is astonishing that despite saying it was essential that economies should converge before they joined, those people who asked and encouraged us to join EMU have made no provision for the fact that the very system they are putting in is going to make economies diverge. Economic and Monetary Union is going to push them further apart. The economies that do well will do better, the economies that do badly will do worse. Does it not strike you as strange that, having insisted on convergence beforehand, there is no contingency, no discussion of divergence afterwards?

The proponents of EMU do not address the interest rate issue. They do not address the divergence issue. What they will say to you in answer to all these relatively complex criticisms is, "Yes, but it works in America". Does that ring a bell? "Look, it works in America, 300 million people there, why shouldn't it work for Europe with 300 million people here." And they ignore the fact that America has two of the cornerstones of a stable economic and monetary bloc which Britain in Europe does not have. And those two cornerstones are first of all the mobility of labour and secondly, a strong, central, co-ordinated federal taxation system.

Now on the mobility of labour, in America 7% of the population move across state boundaries every year in order to find work. In this way the problems you have with the single currency, where you have one area in recession and one area doing well, are solved by the fact that people can move from the cold economies to the hot economies. So we have seen huge numbers of people moving from the northeast of America to Silicon Valley, to the boom areas of California. That cannot happen in Europe for a very obvious and simple reason and that is the fact that without a single language it is very hard to have mobility of labour. It is no coincidence that traditionally the stable economic blocs have also been single linguistic blocs. And it is extraordinary once more that those people who say "Look at America" and compare it to Europe overlook the single most obvious, most fundamental, a child of six could spot it, difference. They have a single language and we do not. And it is this ability to overlook the fundamentals, to overlook the facts, which causes us such great concern.

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Nonetheless, if you are going to have a single monetary system you need a single taxation system. This is not denied by people in Europe. It seems only that politicians in Britain ignore the fact that in order to alleviate the problems and to manage an economy you need close co-ordination between the people who are running interest rates, the Central Bank, and the people who are running taxation policy, the politicians. This applies in Britain, where the Central Bank and the Chancellor work hand in hand, and in America, where the Central Bank and their Treasury work hand in hand. When President Bush says that he wants to lower taxes, who does he need to seek approval from? Who is it essential gives him the green light? Alan Greenspan, Chairman of the Central Bank, because the co-ordination of interest rate policy and taxation policy must be done hand in hand.

This is a worry for us because, whilst we do not believe it is possible to manage an economy of Europe, they will have a good go at it and they will have a good go at trying to harmonise taxes. And at this point you have to become political because as this point you have to say, "What is left of importance for a democratically elected government if they have no influence over interest rates, and taxation is controlled by another central body?"

And so we get to the nub of the issue: a single currency means a single interest rate. A single interest rate without mobility of labour is bound to be inefficient. Add to that the fact that a single currency will inevitably lead to the need for a single taxation policy, and what you are left with is a situation where we are being asked to trade our political freedom, our political independence, for economic inefficiency, for something that is going to make us less wealthy. That seems to me like a very bad deal and it is one that we must oppose as much as we can.

The reason I go through these arguments is because I feel it is essential that those who are against EMU not only oppose the political but also are able to counter the propaganda that is put about by government that somehow it is good for business. I have only time to address one issue and that is the issue that is constantly raised that a single currency will lead to a boom in trade. They talk about it all the time: "The single currency will do wonders for trade". They ignore the fact that at the moment trade between Britain and Europe is growing. They ignore the fact that it has grown for the last twenty years without a single currency, and they say that the reason it will grow is that people will not need to worry about exchange rate risk.

This is a lie that needs to be nailed. Those of us who are in business and do substantial business overseas, as the company I work for does, know that actually short term you take no currency risks. There are no currency risks when you trade in the short term overseas because as soon as we have a contract for anything, if it is within two years we will cover forward. We will use the currency markets and cover forward and therefore we do not take currency risks. Equally, in the long term the risks of having a fixed exchange rate are actually more dangerous than the risks of having a floating exchange rate, and this can be seen quite clearly from the example of Ireland. If inflation is running in Ireland at 6%, and in Germany at less than 2%, and their exchange rate is fixed, then clearly something that is the same price today in ten years time in Ireland if the differential continues will be 40% more expensive in Dublin. That is bad for trade. A floating exchange rate which can offset imbalances between countries with different rates of inflation is actually a very important way of maintaining price stability. So let us put aside the argument that somehow a fixed exchange rate is going to eliminate risks of trading overseas and therefore create a boom in trade.

I would like to finish by very briefly summarising and saying that a single rate of interest for Europe will not work economically. The perceived benefits of boosting trade are in my view vastly overstated and the problems of a fixed exchange rate completely ignored. There are those who say, and this is their most powerful argument, that somehow EMU is inevitable. This is their main argument. It is going to happen so just run with it. Other fashions that have swept across Europe, whether it be absolutism, nazism, communism and all of them in their time have been seen as inevitable. Britain has always stood back and taken the sensible line. It is not inevitable in this country because we are going to have a vote. My view is that we should vote against.

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