Euro-zone optimism sparks single currency row

The euro's recent rally against the dollar plus the positive economic signals coming out of the eurozone have reignited the row over whether or not Britain should join the euro.

Issuing a challenge to anti-euro organisations to acknowledge the strengths of the euro-zone economies, Kenneth Clarke, former chancellor of the exchequer and patron of euro campaigning group, Britain in Europe, on Tuesday said he expects those countries that have adopted the single currency to forge ahead in 2001. Growth will probably slow down a little but I expect the average level of growth in the euro-zone to continue to exceed the growth of the British economy. The euro has begun to strengthen against the dollar and that will probably continue.

However, the most prominent of the UK's anti-euro groups, Business for Sterling, believe the outlook is far from rosy. Responding to Clarke's trite challenge, the organisation's campaign director, Dominic Cummings, accused him and Britain in Europe of ignoring the long term arguments against the euro. Giving up control of our economy would return us to boom and bust, said Cummings. It would tie us to countries with bankrupt pension systems and higher taxes, and it would be bad for jobs and business.

Clarke made his prediction as the euro rose to its highest level against the dollar for five months. Despite the dollar's rise against the euro following Thursday's US interest rate cut, the euro rallied to stand close to $0.95. The currency has now risen by more than 9% since last October. Some analysts have predicted the euro could regain parity with the dollar anytime between the next few weeks and the end of the year.

In addition, analysts expect that consumer confidence in the euro-zone will be boosted by forthcoming tax cuts, further fuelling economic growth in the region.

Although Cummings claimed to welcome growth in the euro economies, he warned that their recovery has partly been driven by the falling euro, and warned that now there is a danger that a rising euro will choke recovery. We hope [Britain in Europe's] predictions of growth are more accurate than their predictions of a strong euro were, or their predictions that inward investment would collapse, or that the City would be decimated - all of which were completely wrong.

Cummings also believes underlying economic problems in Europe - such as bankrupt pension systems and immobile labour markets - will prevent structural convergence between Britain and Euroland in the foreseeable future.

But, argues Kitty Ussher, chief economist at Britain in Europe, Business for Sterling are trying to portray the euro-zone as a moribund, defunct economy, when both the IMF and the OECD forecast the euro-zone economy will grow at roughly the same rate as the US and slightly faster than Britain in 2001. Consensus among the best brains has moved away from confidence in US and the euro-zone is looking considerably rosier, Ussher says. This shows that the a weak euro does not mean a bad euro-zone.

Moreover, Ussher says, the argument that bankrupt pensions are an impediment to structural convergence is irrelevant. European countries are moving from state pension schemes to private funded schemes. Britain is just further ahead in a process that all the European countries are undergoing. Furthermore, it isn't possible for us to pay for the liabilities of other countries under the Treaty of Rome, so Business for Sterling are just scaremongering.

The same applies to the argument that a single currency would result in UK taxes rising to euro-zone levels. All across Europe taxes are coming down, says Ussher. In Germany, for instance, legislation has been passed forcing taxes down by 2% a year to a 15% base rate by 2005. That's in contrast to the UK's current base rate of 22%. Besides, the euro has no implications for domestic taxation. Countries will only lower their taxes in response to competition from other countries. So it's a separate question entirely.

Ussher also stands by her claim that UK inward investment is lower outside the single currency. Figures showing rising investment must be taken in the context of rising levels of global investment, she says. In fact, the UK's share of inward investment into Europe as a whole is falling. I am not afraid to predict that we would lose a great deal more inward investment if we ruled out joining the euro completely, she says.

Many analysts accept the weakness of the euro has helped euro-zone exports and growth, and that a rising euro could make recovery more difficult, particularly if there was a downturn in the US. Ussher argues that a rising euro would have little effect on the euro-zone because most of its trade is internal. But,she adds, in the same way a rising euro would lead to difficulties for those euro-zone firms which export outside the region, so a rising pound has led to far more problems for UK manufacturers. However, the anti-Europeans can't admit that, because it proves our point that we would be better off in the euro than outside it.