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THE SUSTAINABLE ECONOMY AND THE U.K.’s ENTRY INTO E.M.U.; AN INEVITABLE CONTRADICTION?Dr Brian Burkitt
INTRODUCTION
I
n recent years Green political economy has flourished. Numerous publications have set out a series of mutually reinforcing policies, to achieve the objective of securing stronger, more diverse local economies, with stringent democratic, environmental standards; e.g. Lucas and Woodwin [2000]. The question arises whether such proposals are compatible with membership of the European single currency. Entry into economic and monetary union (E.M.U.) was a central target for the New Labour government, until continuous adverse opinion polls appear to have dampened its ardour. This article analyses the relationship between ecologically viable policies and embrace of the Euro.THE EURO: IT’S ECONOMICS
Economic analysis, dating back to Viner [1950], clarifies the advantages and disadvantages of adopting monetary union. The theory states that a single currency across individual member states will increase average incomes per head, when the countries involved are cyclically and structurally convergent; if they are divergent, living standards will fall. There is little doubt that convergence does not exist between the U.K. and the rest of the eurozone.
Cyclically, the U.K.’s trade cycle follows that of the U.S.A. rather than the eurozone’s pattern. The value of the pound sterling compared to the U.S. dollar fluctuated by 13% since September 1992, whilst a 38% oscillation occurred against the deutschmark (and subsequently the euro) over the same period. Moreover, Britain’s output fell or grew with the E.U. average in only six of the last ten years (barely a half). Therefore a uniform E.U.-wide monetary policy (‘one-size-fits-all’) is bound to be economically inefficient for the U.K., since its flow of economic activity differs so markedly from that of Continental Europe.
Structurally, the British economy differs from the rest of the E.U.; its overseas trade is largely financed through the use of the U.S. dollar, it remains the E.U.’s only net natural gas and oil supplier, it, relies more upon variable interest rates for its mortgage and business finance, whilst its profits from overseas investment (approximately 80% of which comes from outside the E.U.) exceed its earnings from manufacturing exports. None of these characteristics remotely resemble any of the other eurozone economies.
Therefore, the U.K. is cyclically and structurally separate from the remainder of the E.U. Accordingly, it requires different economic and ecological policies, designed to meets its specific needs. As one illustration, the Centre for Economic and Policy Research [1997] estimated that a 1% change in the rate of interest exerted a four times greater impact over two years on economic activity in Britain than in France or Germany; therefore, even if eurozone countries become temporarily ‘converged’, any change in the eurozone’s uniform rate of interest would create immediate divergence.
THE EURO: IT’S POLITICS
Within the E.U. institutional structure, four crucial bodies exist; the E.U. Commission, the European Central Bank, the European Court of Justice and the European Council of Ministers. The first three are composed of unelected bureaucrats, totally lacking democratic accountability or transparency. As such, each should be rejected by anyone who accepts that those in power ‘should account for themselves’ to the people. The fourth forum, the Council of Ministers, consists of government elected representatives, but they meet in secret and communicate their deliberations, not through independently written minutes, but via public relations, media-orientated, press conferences. A less democratic process would be difficult to construct.
THE NATURE OF THE EUROZONE’S ECONOMIC DOCTRINES
The fundamental character of the European single currency rests upon centralisation, with the independent European Central Bank (E.C.B.) in sole control of monetary policy, whilst the provisions of the Stability and Growth Pact (S.G.P.), overseen by the democratically unaccountable European Commission, determine budgeting policy. Neither bears any relation to an ecologically sustainable alternative based upon local decision-taking. Such an incompatibility is accentuated by the character of the economic policy pursued through the bureaucratic E.U. institutions.
Control of inflation, defined as achieving an annual price increase of 2% or less, is the sole legal policy objective imposed upon the E.C.B. by the 1991 Maastricht Treaty. The level of employment, a sustainable environment and rising living standards, by contrast, are not legally binding. Consequently it is no surprise that on July 31st 2005 the unemployment rate was 4.8% in Britain compared to 8.9% in the twelve countries comprising the eurozone, where a uniform monetary policy is set by the E.C.B. It aims to lower inflation by restricting the money supply, with little or no concern being given to the wider impact upon employment or the environment.
The S.G.P. worsens these problems by placing severe restrictions on the scope for national member governments’ budgetary manoeuvre. Thus it limits the possibility of using public expenditure to implement environmental protection measures. These restrictions, enacted through an administrative, bureaucratic rather than a democratic, popular procedure, operate through two mechanisms. Firstly, they impose on all member states a balanced budget target by 2006, which involves a return to the discredited inter-war years’ orthodoxy. Therefore many eurozone countries are cutting their infrastructure spending and their welfare benefits, whilst adopting privatisation programmes to balance budgets. Secondly, the provisions of the S.G.P. fine nations with a budget deficit greater than 3% of its gross national product, without taking account of the views either of the electorate or of the stage of the economic cycle.
The need to reduce the short-term deficit explains Gordon Brown’s focus upon public-private partnerships (P.P.P.s) despite their long-term cost. The average P.P.P. reduces immediate borrowing, but incurs an ultimate burden; it involves a rate of interest 1.5% higher than if the Treasury borrowed an equivalent sum, so that for every £1 billion spent on P.P.P.s, the extra cost to the Treasury is £50 million per annum (spread over 30 years) that could be devoted to education, the environment, health and/or transport.
In short, embracing the euro would entail adopting an outdated, revolutionary
monetarism, which would set back the hopes of ecological improvement and of
attaining full employment by many years. Clearly the adoption of this policy
alternative is contra-
indicated.
THE EURO AND ENVIRON-MENTALLY SUSTAINABLE POLICIES
In the longer-term, maintaining the U.K.’s self-governance will enable it to play a leading role in democratic monetary reform. Replacing the pound with the euro, thus acquiring a fifteenth (or twenty-fifth) share of virtually no control over the E.C.B. and the S.G.P. would make that objective more difficult to achieve. This objection is crucial, should Britain wish to assist in creating an equitable, sustainable and democratically regulated global economy in response to growing worldwide pressures for it.
Although political democracy spread around much of the world in the twentieth century, financial democracy has not accompanied it. Unless contemporary financial institutions are completely restructured, political democracy will come to be seen as increasingly irrelevant (as the turnout statistics of the 1997, 2001 and 2005 British elections demonstrate). The impact of the global economy is detrimental, in terms of economic efficiency (divorced from profit maximisation), social justice and environmental sustainability. Inevitably, pressures for further budgeting and monetary reform will grow over the next two decades and Britain will be better placed to respond to them outside the single currency straight-jacket.
The central aim of Green political economy is to create a sustainable society that meets human needs whilst enabling the natural systems of the planet to continue meeting those needs indefinitely. Such an objective requires an equitable distribution of resources, not only amongst the current human population but also between our own and future generations, which can only be achieved through a radical reform of the mechanics of creating money and the uses to which it is subsequently put. This reform should be based upon Keynes’ [1931] realisation that the supply of money is not an externally given constraint, but is politically determined.
It also depends upon a democratic system of governance where the needs of even the most marginalised are heard and recognised. Only when a full commitment to equity has been established will people be prepared to work together across cultural and political divides to overcome the many challenging obstacles to sustainability. A commitment to sustainability needs to evolve into a coherent structure of socio-economic priorities that differ markedly from the profit-maximisation, eliminate-inflation-at-all-costs assumptions of conventional free market economics. Budgetary and monetary policies should systematically favour environmentally benign forms of production and consumption, whilst also benefiting the economically weak against the strong.
Consequently, the U.K. should only join the single currency if membership would make it easier to meet these priorities. The weight of evidence demonstrates that Britain is better able to establish a sustainable economy outside the Euro. This conclusion is based upon three problems inherent in the essence of economic and monetary union – the first is the diversity of the Euro zone, so that uniform E.U.-wide polices can not be optimal; the second is the deflationary economic policies of the E.C.B. and the S.G.P; the third is the undemocratic character of the whole E.U. project. Therefore, in its emphasis on localisation, environmental sustainability runs counter to the centralisation that is the driving motor of the E.U. integration.
However, the localisation process does not imply cutting off from the outside world. It means nurturing businesses which use local workers at decent wages, whilst serving primarily local consumers. It involves becoming more self-sufficient and less dependent on imports. Control moves back from the boardrooms of distant corporations, returning to the community where it belongs. National governments provide the policy framework (e.g. tighter environmental and social regulation of multinational companies and global financial movements), which enables the rediversification of local economies. Over time, countries’ economies would cease to compete with each other in a global economy; rather, goods and services will be provided locally wherever feasible and appropriate. Re-regulation of finance capital, perhaps through the ‘Tobin Tax’ [1978], needs to be complemented by support for smaller, locally based banks, credit unions and trading schemes. These help to retain wealth within a community, promote its social structure, and create local employment and trading opportunities. Refusing to join a single currency will not ensure the success of localisation strategies, but it will make their ultimate achievement more probable.
CONCLUSION
How is localisation to be achieved within the current E.U. framework? The widely-held belief that ‘there is no alternative’ to the current U.K.-E.U. relationship is the conventional wisdom of a previous generation’s economic and political establishment. Today many options are available – Baimbridge, Burkitt and Whyman [2005]. One of the most feasible is to change the contemporary bureaucratic, unaccountable E.U. into a Europe of Democracies (E.D.), which would be a treaty association of free, self-governing European nations. It would not possess a constitution and would be organised on an interparliamentary basis by means of a new Treaty of European Cooperation. Under this treaty, no laws should be valid until they have been passed by all national parliaments, whilst no treaty alterations could occur without the support of national referendums in all member countries. Such a framework would enable every nation to support and develop local economic strategies, free from the dead-hand of the E.U. undemocratic regulations and its deflationary economic policies. Subsequently, a thousand flowers could potentially bloom!
Dr Brian Burkitt
Senior Lecturer in Economics
Department of Social Sciences and Humanities
University of Bradford
REFERENCES
M. BAIMBRIDGE, B. BURKITT, and P. WHYMAN [2005], Britain and the European Union: Alternative Futures, Campaign for an Independent Britain.
CENTRE FOR ECONOMIC POLICY RESEARCH [1997], The Ostrich and the E,M.V. – Policy Choices Facing the U.K., Centre for Economic Policy Research.
J.M. KEYNES [1931], Essays in Persuasion, MacMillan (now Palgrave)
C. LUCAS and M. WOODIN [2000], The Euro or a Sustainable Future for Britain, New Europe.
J.TOBIN [1978], A Proposal for International Monetary Reform, The Eastern Economic Journal, Vol 4, pp. 153-159.
J, VINER [1950], The Customs Union Issue, Carnegie Endowment for International Peace