9 June 2003
Prime Minister Tony Blair and Chancellor Gordon Brown gave a press conference on the euro yesterday.
The Downing Streetpress conference followed the Chancellor’s statement to Parliament on the euro.
Gordon Brown told MPs that the case for UK membership of the single European currency has not at the present time been made and a decision to join now would not be in the national economic interest.
Read the transcript in full
Prime Minister
Good morning everyone. Yesterday we spelt out the potential benefits to Britain of the single European currency, benefits in terms of trade, perhaps to the extent of a 50% uplift over the coming decades, a boost to growth, delivering higher living standards and lower prices to consumers, lower transaction costs for business, and above all, should Britain be able to live comfortably within the eurozone, the prospect of locking in low, long-term interest rates and entrenching Britain’s economic stability.
The reason why membership of the euro is an issue is simple. 12 out of the existing 15 European Union members are in the single currency already. 2 out of the remaining 3 are due to decide membership. The European Union is expanding to take in 10 new countries. All of them in time will want to be part of the European single currency. The European Union single market is the world’s biggest economic market. Almost 60% of Britain’s trade is with it, 3 million or more British jobs depend on it. The economic decisions therefore taken by Europe affect us directly and profoundly.
The reason why the issue is controversial is also simple. It’s in part economic. To live comfortably in the eurozone, short-term interest rates in Britain and those in the eurozone need to be able to be one and the same and we need to be able to join at the right exchange rate without economic problems. The truth is that some years ago there was a large divergence between the UK and the main European economies. Today that gap has narrowed, but it remains and there are uncertainties over the future path of European growth and inflation and the impact of the recent rise in the euro and fall in the pound. European and monetary union is exactly what it says. It is an economic monetary union, so the economics matter. That is why to advocate membership unconditionally, irrespective of the economics has always been mistaken. For that reason we have been clear that though in principle there may be benefits, in practice we must be able to show we can live comfortably within a unified monetary policy zone inside the euro.
What has changed since yesterday is that first we can now on the basis of the detailed assessment be precise about the economic benefits to Britain. If we have sufficient convergence, Britain - our families and our businesses - would benefit from being part of a larger and stronger monetary zone. The new stability we have achieved, with interest rates at a 40-year low, would be entrenched. Secondly, we have set out the specific measures both to assist convergence and to give us the flexibility necessary to adjust our economy when differences inside the eurozone occur. These specific measures, that we will introduce over the next year, include the Skills White Paper next month that will deal with labour market issues, our proposals to introduce regional and local dimensions to all public sector pay rounds, the introduction of our Planning Bill, our proposals for the radical reform of Housing Benefit building on the flat-rate system being introduced in the private rented sector, and in the pre-Budget Report in which our definition of inflation will be changed to come into line with the eurozone and the two interim reports on Housing will be published.
We will then report back next year. In addition, over the year, there will be crucial discussion in Europe about economic policy and economic governance, including our ability to control and set our own taxes. That, if you like, is another present uncertainty that will be clarified over the coming months, but I am confident that Britain’s views on these issues will prevail.
The path of British policy, therefore, is clear. The economic conditions must be right, but we are now able to spell out the benefits precisely and have a clear set of measures to remove the obstacles to Britain’s successful membership of the single currency.
However I said there were two reasons why the euro is a difficult or controversial issue. The second is the politics of the European debate in Britain. Here again yesterday’s statement sets out a clear path forward. It is trying to make the argument for Britain in Europe, to take on those who believe if we are pro-British we must be anti-European, to defeat the false case that if Britain is a full-hearted member of the European Union we lose our identity as a nation, and to show in a world that is moving closer together and being transformed by globalisation, it would be a cruel denial of our own proper self-interest to cut ourselves adrift from the major strategic, economic and political alliance right on our doorstep. This is not a debate that will be won in a day or in a month, but it is a debate about our future and it requires careful and considered discussion. That is our collective purpose on this issue as a government, from now on to build a strong, pro-European consensus again in Britain and to do so, not as a rejection of Britain in favour of Europe, but on the contrary as the proper and modern expression of the true British national interest.
Chancellor
Yesterday’s Statement and the letter that Tony Blair and I are sending to all Members of Parliament this morning set out the potential gains to Britain of the single currency - up to 50% increase in trade over 30 years; a billion pounds a year less, as Tony Blair said, in transaction costs; up to one-quarter of a percent increase in annual growth.
We reported yesterday that with the achievement of sustainable convergence and flexibility, all our 5 economic tests could and can be met.We announced major reforms to be implemented immediately and over the next year to achieve sustainable and durable convergence to meet the 5 tests, including the new inflation target, reforms to housing and planning, and reforms to promote flexibility in the economy, and the consultation on a new fiscal regime. We will report, as Tony said, on the progress of these reforms in the Budget next year. And as I said yesterday I believe that on these reforms there is a realistic prospect of making significant progress over the next year. So, as I said in the House yesterday, if the 5 tests are met it is our intention to join the euro. As I also said the 5 tests are our stability guarantee. At all times we will put stability and the national economic interest first.
When we take the case into the country from today we will show the potential benefits of the euro. We will show how Britain’s national interest is advanced by our engagement in the European Union, and we will take on anti-European prejudices and myths about Britain’s engagement in Europe. The inter-governmental conference on Europe, as with the euro debate, raises the wider issues of Britain’s future in Europe.
In our speeches and in our roadshows around the country we will show how Britain can unite around a pro-European consensus. More than 50% of our trade is with Europe, 3 million jobs depend upon it. At no point has Britain ever been prepared to relinquish our responsibility and interest in Europe’s future. What is new, we believe is that we can show that the enlarged Europe is changing, and will change in line with values Britain holds important. Britain pioneered free trade. As Europe looks outward to global competition, new trading relationships, especially with America, will become a priority. Britain led the push for the Single Market in the 1980’s. Now as Europe faces global competition, the next stage is intensifying the Single Market - a British initiative. British initiatives are also promoting tax competition, and rejecting tax harmonisation in Europe. Britain is leading the way in calling for a job-enhancing social dimension, and we are of course, as Tony said, pressing for reforms of the Stability Pact and the European Central Bank. So ideas and initiatives important to Britain are moving Europe from the old trade bloc Europe, obsessed by its internal rules, to a Europe that is forced to look outwards, including outwards to America, on economic matters and facing up to global competition, opening up to economic reform. I believe therefore that those in Britain who have been ambivalent, apathetic or antagonistic towards the way the old trade bloc Europe worked, can be persuaded that an enlarged Europe, being shaped by ideas in line with British values, is in the British national economic interest.
So Tony Blair and I will put the patriotic case for British engagement with Europe. We propose to take on the anti-European prejudices and anti-European myths. It is time to expose these myths and prejudices and show that engagement in Europe does not mean we have to choose economically between Europe and America, or accept that Europe will never reform, or find our national values submerged in Europe. Tomorrow
I’ll be meeting Britain in Europe and discuss with them the changes we need in Britain and in Europe. Later this week the government will issue our proposals for a new job-enhancing social dimension to cut unemployment in Europe. Next Wednesday in the Mansion House speech I will set out in more detail the modern economic case for Britain’s engagement in Europe and why it is time for Britain to unite in a deep-seated and broadly-based consensus about European engagement in the British national economic interest.
Question and Answer Session
Prime Minister
Right. Thanks very much. Let’s have some questions.
Question
This morning’s papers all give the impression that it is highly unlikely we will join the euro before the Election. Indeed Gordon Brown is being heralded as the saviour of the pound in one paper. Is that how you see it, or do you think that the odds are we will join before the Election, that we will be in a position to have a Referendum?
Prime Minister
I don’t think there’s any point in giving odds on it. It’s a possibility for the reasons we give, but we will have to judge it on what happens over the coming year. What is important though is that we make a judgement over the coming year as to the progress we have made.
There’s no point in trying to spell out the odds on it. What is also important however is that we recognise that in the end the economic conditions have got to be in place. And I think that for most people in the country, unless they are in the camp of saying never, they accept that there are certain economic conditions that have got to be put in place. We are going to do our best to put those in place over the next year. We believe there’s a realistic prospect of progress on that, but we can’t make that final judgement until we have analysed the progress that indeed we have made, so it is not a decision that we can give now. That would be to interrupt the essential conditionality of it.
Question
So the papers are wrong in saying the pound has been saved?
Prime Minister
I can’t really comment on the papers one way or another since the papers say, in my experience, rather different things even about the same event. What I can say is that we set out why we think it is the right thing in principle for the country to do. The economic obstacles that have got to be removed. We’ve put in place a set of mechanisms to remove them, and we’ll make a judgement over the year as to how much progress we’ve made. So it is a possibility - yes - but the economics have still got to be right, and we are not going to do this unless it is the right thing for the country, unless it actually entrenches our economic stability, rather than puts it at risk.
Question
Big picture. In the end are you both confident that Britain will be a member of the euro while at least one of you is Prime Minister?
Prime Minister
Look, the whole point about this is, that in the end it is conditional on the economics being in the right place.
Question
So it might not happen?
Prime Minister
Well, the economics have got to be right for it to be the right thing to do. There are three positions on this. I’ve said this all the way through. And you can see from the Opposition reaction yesterday, they have all the absolute simplicity that comes from a complete and unvarnished prejudice. They will not do this in any set of circumstances. It doesn’t matter how good it is for Britain, they won’tdo it. There are others who say, look all this stuff about economic conditions, it is all just flimflam, really it’s a political decision. But it isn’t. Of course there are political considerations, there are constitutional considerations, but in the end the economics has got to be right. It’s an economic union. You can’t say it doesn’t matter.
So what is different from yesterday is that the benefits are now clearly spelt out, the path is clear, this is something we want to do, we’ve got a process in place to remove the obstacles, but in the end you cannot judge this on anything other than the national economic interest and that is the position that I think in the end the country understands, and it is the only basis incidentally in my view that you will ever persuade the country to be part of the euro.
Chancellor
I think what’s important about yesterday is that I think that many people were surprised at the potential benefits that arise from the euro. I think that many people will be surprised by the trade effects that are being shown in the euro area already. The transaction costs I think were known, but transaction costs benefit small businesses in particular, the greater exchange rate stability, and the benefits in output of growth. So what is new is that we are able to set out right across the country, here are the potential benefits of being part of the euro. What is also new is that the 5 tests were essentially tests that come down to whether we can maintain with a permanent euro interest rate our measures for high and stable levels of employment, for the funding of public services and whether we’ve got sufficient flexibility. And we looked at financial serves, we looked at investment, we looked at employment. And essentially it has come down to these two things: can you have that sustainable convergence, and can you have that flexibility and that’s why the programme of reform is also new. We’ve built on things we’ve done before, but we are stepping that up and over the next few months you’ll see quite major changes. So these three things have changed. Potential benefits are there, we are clear that substantial issues in convergence and flexibility have got to be addressed. But if these issues in the tests are realised, then we can meet all 5 tests, and then the reforms that we are bringing into place. So these are very big changes, but of course the conditionality, as Tony has said, remains.
Question
The logic of that is that you are prepared to leave office as Prime Minister, not only not having taken Britain into the euro, but potentially not even having held the Referendum getting the opinion of the British people. Is that the case, and have you, while we are on the subject of you leaving office, have you got a pact with Gordon Brown to hand over power to him?
Prime Minister
If you don’t mind I think we’ll deal not with soap opera but the issues. But in relation to the issues - you talk about the logic of the position. Look, the logic of the position is that it is the right thing for the country to do provided the economics can be put in place for it, provided that Britain can live comfortably within the eurozone. And that’s why - you know in a funny way - someone mentioned the papers earlier - I thought reading parts of the papers this morning there was almost no constituency for what I think is the genuine sensible position, which is not to rule it out as a matter of principle, because
I think most people think, look as Europe expands, as everyone comes into the single currency, it would be foolish for Britain to say we are never going to be part of the single currency. But on the other hand you can’t say that you are just going to take a political decision to do it, irrespective of the economics. We have spent 6 years putting our economy in the place where thanks to Gordon’s stewardship of the economy, we have low interest rates, low unemployment, low inflation, and the prospect of real economic stability. We’ve got probably the best employment and unemployment record of any major industrialised nation. Now the fact is if we can join the eurozone, if the economic conditions are met, all those things will be entrenched. They will actually be locked in and there will be enormous benefits for us, and that’s why we want to remove the obstacles to us joining it. But we’ve got to make sure in the end that that judgement is based on the proper economic interests of the country. And so the logic is the logic that says of course this is something we want to do. We think it is the right thing for the country to do, but only if we can make sure that the economic changes are in place that allow us to live comfortably within the eurozone, otherwise that would put at risk the very thing we fought so hard to achieve.
Chancellor
I would just add one other thing. We’ve made progress over the last 6 years. People ask what has happened over the last 6 years. Well we have made progress. There is greater convergence. There is certainly greater flexibility in the economy. The financial services industry would do well one way or the other, but would be enhanced by membership of the single currency area, and we can meet the investment and employment tests if we meet the convergence and flexibility tests. So there has been progress, but we are putting a lot of work into looking at these two other tests and looking at them in a very direct way with reforms that are coming into place.
Question
You two have had 6 years in government together, a huge parliamentary majority, we’re still no closer to joining the euro it seems to many, isn’t the biggest obstacle to us joining the single currency simply that you two have never agreed on it, and you have still not found a formula for agreement except to do nothing.
Chancellor
If I may say so, Nick, I’ve just said we’ve made substantial progress over the last 6 years. There is greater convergence. Interest rates - the divergence is a lot less. In terms of convergence generally in business structures, there’s not a problem for business finance, small business finance or large company finance now. On flexibility we are I think most people agree, one of the most flexible economies in the European area, if not the most flexible economy, and we will continue to make progress on that, so on all these issues we have made considerable progress. The question however, as Tony has put to you, is that we must be absolutely sure that there is sustainable convergence. In other words, what that means is we have got to be able to live permanently with the euro area interest rate while being able to achieve full and high and stable levels of employment and funding of our public services. So that is the issue, and we have got to have the flexibility to deal with stresses and shocks. So I think it is wrong to say we haven’t made progress. We have made progress.
Prime Minister
The progress that we’ve made is obvious. You can see it in the way that we spell out the precise benefits. You can see it in the way that we now say look these are the obstacles that still lie in the way, and here’s a strategy to remove them. And you can see it by the fact that we are here today and over the coming months we will be talking about the issue, not just to do with single currency but Britain’s position in Europe, and I think you will find a definitive change of gear in the way that the government approaches this issue.
Question
…..share the aim of definitely going in if you can?
Prime Minister
Of course. We want to go in if the economics are in the right place.
But I think the problem arises here, and this is why I said what I said in my opening statement, is that there are actually two separate issues to do with monetary union. One is a political issue, and there are large parts of the media and the majority of the Opposition now, that are against this on political grounds. People are entitled to take that position, but they basically are against the European Union as it has developed, and don’t really want anything to do with it. Now that’s the fact of the matter. OK. What I think that sometimes however has masked is that there is also, even if you clear that out of the way, there is a genuine economic question here, which is why when you say what has happened in the last six years, had we joined as some people said we should four years ago, and we had to cut our interest rate suddenly by 4% at the time of significant high growth, we would have had an economic problem. We can’t play around with the economics of this.
The economics are important. What I’m saying to you however is that we have a clear path ahead to remove the economic obstacles and to make the case for the engagement of Britain in Europe and that in a curious way puts us in a position that is not the same as those people who say the economics don’t matter, and I think they’re wrong about that, or obviously in the position of those who’ve got a political objection to the whole project. I think this is a good thing for Britain, but only if we make sure that those economic difficulties we’ve identified are removed.
Question
At the core of this is trust, trust by the people that you can make the right decisions about the euro, and trust I think you will accept in you and in the government over the Iraq war is badly fractured, fractured by the embrace of a forged document over …, fractured by the cut and paste dossier. Some are charging that this is dishonesty, some manipulation of the Security Services, and it is all to be investigated by a committee which you appointed which reports to you. Do you accept that you will have to do more on this front if you are going to rebuild the fractured trust that you now require to do rather better than that for the defence of the euro?
Prime Minister
Well I am afraid I don’t accept obviously any of the points that you are putting in your question, and I think what is happening here is that people who frankly lost the debate over the wisdom of the action in removing Saddam are now trying to have the debate back in a different form. The fact is there is not a shred of evidence, absolutely no evidence at all, that we have doctored or manipulated intelligence. That would be absolutely gross if we did so. We have not done so. And I have already said in relation to the Security Committee that they will have access to all the intelligence that they require, and what is more I will make the report public. And it is a very simple allegation this, it should be pretty simply checked, the allegation is in relation to this 45 minutes, that this was a piece of intelligence that we insisted was put in this dossier that the intelligence service disputed. I can tell you that is completely untrue, but it is a pretty simple thing to check.
Question
Getting into the economics of this, one specific difficulty identified yesterday was fixed interest rate mortgages. And I know Chancellor you have said you will bring forward proposals in the budget next year, but just how long do you think it will take on the most optimistic assumptions, and in the broadest way can you say what kind of time it will take to swing the current total of fixed interest rate mortgages, which I think is only 7%, to the kind of level you need to make entry into the euro viable. A wider point, in answer to Adam Boulton’s question you did dismiss talk about a pact as soap opera. I do suggest that to quite a lot of the voters, the issue of the future leadership and Premiership is deadly serious. So can you say nothing about that, whether a pact exists, or whether it doesn’t exist.
Prime Minister
I have said what we will deal with, Charles, are the issues that we are here to talk about. Thanks anyway.
Chancellor
Can I just deal with the important issue, the housing issue. I think behind your question is the wrong assumption that we have made a decision about fixed rate mortgages. That is not the case. What we are not trying to do is replicate the British housing on the German, or Netherlands or American or other housing markets in Britain. It will always be a distinct and unique housing market. The question is not that, the question is how you can deal with inflationary pressures that have arisen over a long period of time, over 30 - 40 years in the housing market, that have often been responsible for the stop-go in the economy as a whole, and how can you deal with these pressures, and indeed the volatility that has arisen that has caused so much damage over a long period of time. House price inflation clearly is much higher in Britain, there has been a wealth effect, in other words people have been withdrawing their equity, and the problem is not that, the problem is the inflationary pressures that arise from it and how you can deal with that.
We are looking at a number of things, and have done a number of things already. We changed the system of stamp duty, of course, we removed mortgage tax relief, we have doubled the housing budget, we have introduced planning reforms, we are trying to raise the number of houses built in the country because there is a demand and supply problem, and we are looking at other means at which housing finance can be done. We are looking at the American system where they securitise long term mortgages, we are looking at other possible incentives as well. So we should not assume that we have decided on one particular course of action, but there are a number of measures and I suspect that to reduce inflationary pressures in the housing market, there will not be one measure, there is a series of measures in addition to those that we are doing. One key issue is of course the planning system itself, and I think everybody knows in Britain the planning system has been far too slow, it is too cumbersome, people have to wait too long, the planning decision system does not work very well and that is what we are trying to change with the new Planning Bill.
Prime Minister
The important thing to emphasise is that all these things are actually the right things for the country in any event.
Question
In this press conference today you have tried, it seems, to put two messages: one is the question of the euro, then there is the question of the wider case of Britain’s membership in Europe. Can you give an assurance that if and when the British public come to vote on the euro it will be on the specific question of membership of the euro, you will not try to muddle it up into whether or not we pull out of Europe, which is not the question?
Prime Minister
Absolutely, of course. We have said there will be a referendum on the specific issue of the single currency should we recommend it to people.
Chancellor
And there will be a draft referendum bill published in the autumn and you will be able to see for yourself that that is the case.
Question
Prime Minister, won’t it be more difficult to persuade British public opinion, isn’t that going to be the biggest problem rather than getting the economics right, and how difficult will that task be?
Prime Minister
I think that is a good point, that is why I said there are two separate questions on this. One is the economic issue, because I think people rightly will not vote for this unless they think it is better for their living standards, their jobs and mortgages and so on. But the second thing is the political issue to do with Britain and its relationship with Europe, and I think this is the right time to have this debate. We have got a lot of discussion going on in Europe at the moment, Europe itself is changing. Here we are, part of this European Union in Britain, we have got 10 new countries coming in, other countries to follow. The European Union is now the biggest political economic alliance anywhere in the world. My point to people is very simple. If Britain is a member of this club, for goodness sake let’s get in there, make our voice heard, win the battles and do so with confidence, let’s not hang about always being half hearted about it. As I say, when you are joining a specific part of that European project that is to do with the economy, you have got to make sure the economics are in the right place, but if they are in the right place I have no doubt at all that it is right for us to join. And yes it will be a big debate this, let’s be clear about this, and I hope one of the reasons why people accept the sincerity of the position we are putting forward, is that it would be a perfectly easy thing for us to duck out of this debate, but we are not, we are engaging in it.
Question
Prime Minister, the fact that you got on the phone to so many EU leaders yesterday to explain this decision argues that you feel somewhat nervous about the response to it. What kind of response did you get when you were saying, trust me guys, to the other EU leaders, and how worried are you that Britain will now lose clout in Europe, being seen as yet again a reluctant partner refusing to engage in Europe’s biggest project yet. Will you be listened to on issues like reform of the Common Agricultural Policy or the Stability Pact or anything like that?
Prime Minister
We have shown actually over the last year in particular, I think Gordon has demonstrated this in relation to Ecofin and the arguments to do with tax harmonisation, that of course you can win these arguments. But the reason I spoke to European leaders, and not just European leaders incidentally, I spoke to the Japanese Prime Minister as well, is in order to explain to other government leaders exactly what our decision was so that, if you like, they got it unvarnished from me. And I think for all of them they are in no doubt at all about the government’s commitment to Europe. We have been the most pro-European government this country has had for a very, very long time. But they also know that when you are talking about your own economy it is important the economics are in the right place, and that is what we explained to them. And I think most of them do realise that yesterday’s statement marked a definitive change, which it does.
Question
The benefits that you spelt out yesterday were spelt out some 8 years ago when the Germans were deciding for example to take just as large risks with their economy in order to gain those benefits as Britain would take now. How do you explain, if it is just about economics, that these other countries took those same risks and led their countries into this union, where the UK has not done so?
Chancellor
If I may say so, I don’t think we had these lists of benefits a few years ago. One of the parts of the trade section is to show what has actually happened since the euro came into being, that there has been an increase in trade within the euro area as a result of the euro being in existence, and I think the tables show something in the order of 3 - 20% growth in trade within the euro area. As far as the issues about what has happened in the last few years, we were clearly not in a position to say we could meet the tests a few years ago, there has been greater convergence, we still have a long way to go but we are in a far better position.
Question
Prime Minister, you just said that the debate in favour of Europe couldn’t be won in a day or a month. Well you have had six years and you have got according to your opinion polls absolutely nowhere, while you have always said you were in the heart of Europe. How long do you think the debate will take before you can convince the British people?
Prime Minister
I think it is very clear that people don’t want to leave Europe in Britain, but I think it is also clear that there is a debate that needs to be engaged with in a far more considered way, and this is the right time to do it. You have got big debates going on in Europe about the future of Europe now, and you have got the issue of the European single currency, but I think if you look back at the very first European summit
I participated in was in Amsterdam and I think Britain’s position on issues to do with economic reform, on issues to do with the governance structure of Europe, on issues to do with European defence, has moved on immeasurably. We are in a far, far stronger position, I think your Dutch government would accept this, a far stronger position today than we were 6 years ago, when frankly we were completely in the margins.
Question
Chancellor, you have twice referred this morning to there actually having been trade benefits to countries already in the eurozone of a sort that you would expect to enhance growth. And yet certainly in the last couple of years that enhanced growth in those economies hasn’t transpired. What do you think has actually gone wrong for the existing members of the club? And also do you ever feel that you are perhaps guilty of stoking up Eurosceptic sentiment in the country through your habit in budgets and pre-budget reports of contrasting eurozone growth rates with our own, and indeed other aspects of their financial affairs and drawing unfavourable conclusions about them?
Chancellor
I don’t think so. I have compared our economy with America, with Japan, with the rest of Europe, and said that unemployment is actually lower than all these countries in Britain at the moment. As far as the conditions of the European area are concerned, I think a lot of focus is on the German economy, they have had difficulties arising from unification and they have issues of economic reform which they are now addressing in measures that Chancellor Schroeder announced only a few weeks ago. But you know this euro decision has got to be taken on a long term basis, you are not going to take the decision on the euro on the basis of the short term performance of one economy one year, or one indicator of the economy in one period of years, you are going to take it on a long term basis, and that is why we talk about sustainable convergence and that is why we talk about the sufficient flexibility that is needed over the long term to withstand shocks or stresses and strains in the economy.
Question
To follow up on Patrick’s point, you have said that you are going to put in place a reform package over the next year which involves some major structural reforms of the housing market, and also effectively trying to persuade the public sector unions to accept regional pay bargaining, or at least regional pay rates. Now is it really conceivable that either of those things could be in place by this time next year in order to have a referendum in the autumn?
Prime Minister
Well we have got the reforms that we are going to be announcing. As you know in the pre-budget report we will be announcing the results of the two reviews in relation to housing, in respect of the pay issue, then I think yes it is perfectly possible to make significant progress on these issues, but we will have to judge it at the time. The important thing I would say to you about these things is that both of them are necessary in any event for the British economy. Gordon was absolutely right when he said a moment or two ago, if you look back on the history of British inflation, so much of it has been connected with the housing market. So if we want economic stability, irrespective of the issue to do with the euro, it is important we tackle these points.
Question
You know very well that this debate is being seen by some through the prism of your relationship and of the power struggle. Matthew Parris writes today: "It is my hunch they often hate each other, always love each other and both need each other. Their relationship is emotional, as well as politically complicated, violent and strong." How do you feel, and this is a serious question about your relationship that goes to the heart of the matter.
Prime Minister
I don’t know whether it says more about Matthew than it does about us actually. Look, the fact is we set out I think yesterday and today for you a very clear picture of where we want to go. But one of the things
I have been trying to get across today to you is that there are on either side of this argument I think simplicities that are misleading, and sometimes when people see it through the prism of say the two of us, they are seeing it in that way because they are actually wanting to avoid what are genuine questions on either side of this argument, because I am often taken as someone who wants to do this politically but doesn’t really care about the economics. I do care about the economics.
Look, if you ended up dropping your interest rates very sharply in circumstances where your economy couldn’t take it, the public wouldn’t thank me for that. They would be saying well you spent 6 years sorting your economy out, getting it stable, and now you are putting it at risk. On the other hand, when people say in respect of Gordon, well this is something he supports as a principle, that came through everything he said yesterday. So I think part of the reason why, it is not simply the fact that people always like to see these things other than in terms of serious arguments, but one of the things that I think we have got to do in these coming months is to explain better why it is both why we think in principle the economics are right, and also why these problems that we have to overcome are genuine problems. And then in relation to the politics of it, then I think there is a big, big argument which is very easy to see about this country’s whole relationship with Europe, and I believe passionately in that. I think for Britain to turn its back on Europe, and let’s be clear about this, if you are always half in and half out of everything, that is exactly what you are doing. For Britain to turn its back on Europe is just a mistake of historic proportions, and for 50 years we have been finding it difficult to enter wholeheartedly into Europe and then win these arguments in Europe for Britain. Now the reason I say however that we still put that conditionality there in respect of the single currency is because of the nature of what it is, it is an economic and monetary union. You can’t do it therefore unless you are sure it is to the advantage of your country. So we are setting out our stall to get there, saying what the obstacles are and how we remove them, and we are making the argument for Britain in Europe. And honestly that is far more important than trying to see all these things through a prism of personalities.
Question
You say that in theory next year we could have a referendum. Now the economic picture we saw yesterday could be turned on its head so quickly, so how can anyone be sure that when the tests are deemed met, that they stay met?
Prime Minister
First of all in relation to the obstacles and the issues that we are putting forward, we said we will review the progress, and we believe we can make significant progress over the year, but don’t omit on the other side of it that we have actually cleared away a lot of the questions about whether this is to Britain’s benefit or not. In terms of trade and investment and financial services, provided there is sufficient convergence there is no doubt at all that this is in Britain’s interest. But in relation to the specific measures we will take over the next year, well we have to see, but we believe there is a realistic prospect of making progress.
Chancellor
Yes, and we are introducing the inflation target from the pre-budget report, we have the skills White Paper coming in the next few days, the labour market remits for the public sector pay review bodies and others will be over the course of the next few months, the housing and planning reforms, there is an announcement in the pre-budget report. Now what I said yesterday was that I believed that there is a realistic prospect of making significant progress on these reforms over the next year, but I am not going to prejudge, nor is Tony, the results of the review when it comes to the budget next year, and that is the right way to look at it, because we have got to be absolutely sure that our economic tests are met, and that is the criteria we have set for the single currency.
Question
What we have learned in the last 24 hours, after 5 years of exhaustive study by the Treasury’s finest brains, is that there are powerful and legitimate arguments for and against joining the euro, at least in the short term, and it is clear from what you are saying today that you haven’t the slightest clue when that is going to change. So is it not an insult to the growing majority of people in this country to suggest that either they are gullible readers of tabloid myths, or they have got a secret agenda to pull out of Europe?
Prime Minister
Well let’s be very clear about this Trevor. There are those who basically would pull us out of Europe.
Question
There are?
Prime Minister
Yes.
Question
But not too many.
Prime Minister
I think if you actually analyse some of the things that are written, and I won’t specify any tabloid newspaper at all, but I think if you analyse some of the things that are written, for example over the debate on the convention, I would say that some of those propositions are a somewhat extreme analysis of what has actually been proposed. And I think we know there are people who run the line that the more pro- British you are, the more anti-European you are. Now what you said however in the first part of your question, believe it or not, I agree with. What the Treasury assessment is is a very thorough analysis of a difficult economic question. And that is why there is no problem at all about us both being very firm about wanting to do this, but also being honest with people about what the obstacles are. He could have come forward yesterday and said look there aren’t any problems at all about this, it is simply a political decision and we should just make the political decision and get on with it. He didn’t, because it wouldn’t be true.
There are issues to do with the housing market, there are issues to do with flexibility when if you are in a single currency area you require as much flexibility as you can possibly have. What we are however doing is to say to people we are going to remove those obstacles and we are going to set about it by the measures that we have laid out. The fact that we cannot specify exactly when we are going to do that is a strength, not a weakness, because it indicates that we are serious about making sure that we are reaching a considered economic judgment, not simply subordinating the economics to the politics. Now as I say, I have got no doubt at all that in the end it is in this country’s interest to join, but it is only in our interest to join at the point at which we can honestly say to the British people look, this is something that is going to be good for your economic stability, for your interest rates, for your jobs, for British industry, not something that puts any of our hard won gains at risk.
Question
One of the many confusing aspects of the situation we are in is whether the policies which the Chancellor talked about yesterday actually have to bring all the benign results that you hope for them before we go into the single currency, or whether simply having those policies in place may be enough, because that seems to have a very big bearing on when we might go into the euro. And the other question for both of you is that since we are still not ready to go into EMU, isn’t it high time that you did the decent thing and congratulated John Major for negotiating an opt-out at Maastricht 11 years ago?
Prime Minister
Well on the latter point, the answer to that is no, to be absolutely honest. And I think I am right in saying that Sweden didn’t have an opt-out either. And I don’t think anyone was ever going to force us into economic and monetary union. I would just say the problem with the whole negotiation at Maastricht about opt-outs and the social chapter and so on is that we put all our negotiating energy into securing the opt-out, and I am afraid not enough negotiating energy into making sure that the basic construct was one we were happy with. But I will leave that for another time.
Chancellor
I think, Don, you had better look at all these different issues. Some of the reforms have got to be in place, we are putting the inflation target in place almost immediately at the pre-budget report; some have got to be in place, and up and working; and some have got to be in place but they are backstops, they are our protection, they are the guarantee that we have the flexibility necessary that if something went wrong, if there were stresses and strains, we could deal with them. And what we are going to do is of course review progress when it comes to the budget. We shouldn’t prejudge that now, in fact it would be wrong to prejudge that now. At the time of the budget we will look at what progress we have made in these reforms, and I said yesterday I thought there was a realistic prospect of significant progress over the next year, but I don’t think it is right to prejudge it, this is an economic set of tests.
Question
But you have already had 6 years.
Chancellor
We have had 6 years and made a great deal of progress over these 6 years, and we will make additional progress over the next year.
Question
Prime Minister, given that as you acknowledge the polls haven’t moved in this time, do you regret the fact that you haven’t rolled up your sleeves and engaged in an almighty battle with the Eurosceptic press, with newspapers like Trevor’s. For example if you don’t do that, do you accept the fact that you will never move public opinion. And will you now do that or at least allow your Cabinet Ministers who are staunchly pro-European to do that, or will they now hide behind the Treasury’s review of the five economic tests?
Prime Minister
I don’t think, if you don’t mind, I am going to get into the position of singling out individual newspapers, but in terms of the basic argument about Europe, yes I think it is important we make that argument. But on the other hand we have been making it over a considerable period of time, but I think what the issue to do with the single currency shows, as I say, is that even if you get over the economic question, there is a big weight of prejudice against Britain’s position in Europe, and it is important that we dislodge that and that we make the argument for it. Because otherwise we are failing in our duty to say what we believe is the proper British national interest, and I have always taken the view that the reason why we should be in favour of Britain’s full hearted participation in Europe is not because of Europe, but because of Britain, because it actually helps us to do so.
Question
Will your Cabinet Ministers now be able to advocate it much more strongly?
Prime Minister
Well of course they are going to advocate it, they are going to advocate the government’s position, and one of the reasons for having the press conference this morning is to indicate to you this is not something we are either shy of the questions on or afraid to push forward, because that is what we are doing.
Chancellor
We have just announced, we are putting the case round the country, we are running a lot of roadshows around the country explaining what the case is. And if I may say so, the position as regards the British national interest in Europe has changed over the last few years in this way. When we started as a government, you could see Europe as a trade bloc, looking inwards, the talk was of tax harmonisation, the talk was of a federal state. Now when I go to meetings of Finance Ministers, they recognise that we are part of a global economy now. You cannot be an exclusive trade bloc, you have got to face up to global competition, you have got to look outwards. They are talking of trading relationships with the USA and other continents, they are talking of the need for economic reform to be globally competitive. So the old Europe that was a trade bloc Europe, a fortress Europe, is actually being moved and we are moving forward to a global Europe, a Europe that has got to face up to global competition with all the changes that that means. And I think because we are a country that pioneered free trade, we are a country that believed in the single market, it is these ideas and initiatives that are starting to dominate the debate in Europe.
Question
Prime Minister, you said you wanted to put your government at the centre of Europe. Still this year there was a diplomatic battle around the Iraqi crisis, and yesterday you announced that this country is not to join the euro, at least for another year. Do you think it is the right way to show to your European partners that you actually want to be a good member of this club that you mentioned earlier.
Prime Minister
I think in relation to your first point, I think we will have to have a little disagreement on that. I don’t accept, I have to say, that just because certain members of Europe take a particular position, the rest of Europe is obliged to take the same position. And the fact is that on Iraq Europe was divided, and it probably is invidious to get into the numbers game, but if you take into account the new members of Europe to join, I think a majority of European countries actually were in favour of the British position. I think, if I may so however, there is one thing that we can learn very strongly from France, and that is that if France conducts a debate inside Europe, sometimes it wins, sometimes it doesn’t, but the conduct of the debate never dislodges its essential view that it is right to be at the heart of Europe, and I just think we need greater confidence as a country to be able to say look, there will be debates and disputes in Europe, some of them will be about issues raised by Britain, some of them will be about issues raised by other countries. And the idea that we should depart from the European Union every time there is a disagreement I find bizarre. And that is why I think it is important, whatever the disagreement from time to time, and there was a disagreement over Iraq, that we carry on making our case right at the centre of the European Union. As you know, in relation to European defence, Britain and France have been working together and indeed leading the way on that, and I welcome that very much.
Question
If so many domestic economic reforms are necessary to join the euro, and you are saying those reforms are also good for our economy, why didn’t we start to undertake those reforms 6 years ago. And also significant progress by the Budget on some of these reforms is not the same as clear and unambiguous. We have said we have to meet these tests in a clear and unambiguous fashion. So is significant progress enough?
Chancellor
Well we did start these reforms a few years ago on housing. I just mentioned the various changes we have made in the housing market so that we reduce the inflationary pressures which have caused so much problems for the economy. It was unpopular to change the stamp duty system and the mortgage tax relief system. It was unpopular to do these things.
We did do these things. We doubled expenditure on housing. We have made major reforms and changes in the planning system and we are taking this further forward.
On flexibility, I think you will find that Britain became a more flexible economy in the 1980s and throughout the 1990s. Our New Deal got more people back to work, the Skills Agenda has been followed through, not just in schools but in colleges, universities, further education and learning. Now we recognise that there’s got to be more flexibility in the reward system as well, and that has already started as well, and it is something that is going to be continued over the next few months. So on all these areas, we have started. We’ve made quite big reforms, but we recognise there is more to do and one of the lessons we have recognised from the first stage of the euro is that the volatility of inflation rates within the euro area suggests to us that you have got to be more flexible than previously people thought to do well within the euro area, and that’s one of the lessons that we are applying with the reforms that we are doing.
Prime Minister
Don’t ignore the big fact, as we made clear in the Statement yesterday, we actually have made a lot of progress since 1997. We’re not in the same place today on convergence or flexibility as we were then, but we need to make more progress.
Question
Isn’t there also the question of when will the eurozone be ready to welcome Britain?
Chancellor
Actually you are talking really about the reforms that we have been asking from the eurozone to make the eurozone economies work better. I started off with a series of proposals about the reform of the Stability and Growth Pact, and we also made proposals about the reform of the European Central Bank. Now what is again very interesting is that the debate is moving in our direction. On the European Central Bank you may have seen in the last few days an announcement from the Central Bank that the inflation targeting is going to become a far more important part of the way that they deal with monetary policy, that the monetary pillar, the monetarist targets of the past, have reduced in significance and they are going to have a target of 2% or less and some people interpret that as a move towards a symmetrical target. On the Stability and Growth Pact, the ideas that we are putting forward about the sustainability of debt, looking at fiscal policy over the cycle and taking into account investment as being quite special in certain circumstances, again these ideas are reflected in a lot of the discussion and some of the new proposals that are coming from within the eurozone itself. So we are making progress in these debates, but one of the things we are able to do in the Budget next year is to report back on how far and how great that progress has been, and that is something we do. I just repeat on this issue, as Tony has said before, the conditionality is there because we will not do anything as a government to put the stability that we have achieved for the British economy, hard-won and newly-won stability for the British economy, we are not going to put that at risk, and we have moved Britain from the stop-go cycles of the past, we have achieved stability over these last few years, where other countries have moved into recession, and we are determined not only not to put that stability at risk, but by the measures we take to entrench that stability to the benefit of the British people.
Question
If you are both going to spend so much time persuading the British people on the merits of the European Union and membership of the euro, how can you can convince your Labour colleagues and the British public that the fulfilment of your Manifesto pledge to improve public services is still your top priority.
Prime Minister
Because the two are actually linked in the sense that it is the right thing for the British economy, it’s the right thing to do. And also I think you can conduct more than one debate at a time and I think it’s an important debate.
Chancellor
Just to be clear on this. The sustainable convergence test is saying how can you live permanently with euro area interest rates while at the same achieving our goals: high and stable levels of employment and the proper funding of the public services and so the test is to do with both our economic objectives and our social objectives and that is reflected in the executive summary and the summary in the assessment that was produced yesterday.
Question
It seems that the strategy or the aims of the Chancellor is to change the European Central Bank. How is that feasible with the UK not being part of the euro? And the second point is a very small one it is just a question of ……. This morning I was a little bit early, just for a change, so I popped into the shop, the Westminster shop selling official papers, and it seems that in order to acquire the 19 documents you need £125. How many people in this country quite frankly are going to buy and read 2,600 and so on pages?
Chancellor
You can see why the public finances are in such a good state! On the ECB, I think I would just make the point that we are making progress on that and it is ideas that we have shared with the rest of the European Union about a symmetrical inflation target, about proper and regular procedures for making decisions, about moving from monetarist aggregates to the inflation targeting that are actually the ideas that are being pursued by the ECB and the latest proposal for reforms, so far from us not having any influence on that debate, I believe that the British system that we introduced in 1997 with the Bank of England, that has a big influence on the debate as has the sustainable investment rule and the golden rule in the debate about the Stability and Growth Pact. There is a growing together of ideas in both Europe and Britain about both fiscal and monetary policy.
Question
In the run-up to Budget, is it your intention to have the extensive Cabinet consultation you have just had over the assessment as regards the forward agenda. Is that something that you are prepared to do. And also on the Draft Referendum Bill which you have said you will publish, is it your intention to enact that in the next session of Parliament given that there is a technical possibility that you could have a positive outcome to an assessment?
Prime Minister
Well in relation to the latter point that is a decision that doesn’t need to be taken at this point of time. But in relation to the first, I’ve no doubt at all we will involve the Cabinet in any future discussions on the single currency. The exact way we will do that frankly we will have to wait another time.
Question
…. the potential fiscal policy measures he was talking about, independent councils, etc, monitoring and all that, is that something we would do regardless of entering the euro? Could I just ask the Prime Minister as well, does he summarise the 5 test result as 4-1 against, as most of the papers did, or as 3-2 in favour?
Prime Minister
It’s a bit like discussing the English mid-field formation.
Chancellor
On the fiscal policy side, what we are proposing if we join the monetary union, is a back-stop in the same way we’ve got a back-stop in monetary policy. There’s an open letter system in monetary policy. If there’s a divergence between what we expect and what is needed, between what happens and what is expected, there is an open letter sent by the Governor of the Bank of England to the Treasury. If there is a divergence that affects fiscal policy there would be an open letter sent by the Treasury to the House of Commons, so what we are bringing in is a far more open form of fiscal policy, reporting to the House of Commons that could eventually be the vote in Parliament on the measures that might have to be taken, but it is a back-stop system in the same way that we have an open letter system for monetary policy and the interesting thing is that although we have that system, and it is the right thing to do, because of the conduct of monetary policy it has not had to be used.
Prime Minister
Right, in relation to the tests, well the position is this, isn’t it, that the financial services test is met in any event, but the two tests in relation to growth and stability in relation to investment are met if there is sufficient convergence and flexibility. Now, you work that out whichever way you want to tot it up, but that’s the basic position. And I think therefore one of the reasons why I say to people yesterday moved things on a long way is that there was a comprehensive analysis of whether it’s good for British investment and trade and growth and stability and the answer is yes, provided you get the convergence in place.
Question
Inaudible
Prime Minister
Yes, but what you’ve got for the first time - and I say this very respectfully to people - what you have for the first time is not merely an analysis and a statement, you have probably the most comprehensive analysis that has ever been done by the Treasury and what the economic consequences and decision to join are, and that I think stands in very stark contrast to the way that we took these decisions before and it goes back to the point I’ve been trying to make throughout this press conference, which is that economics do in fact matter. You can’t just put them to one side and say that they don’t. Now what was the mistake that Britain made at the time of the Exchange Rate Mechanism, apart from arguably joining at the wrong exchange rate, is that we took a major economic decision without a proper economic analysis. Now that’s not a mistake that we are going to repeat. When we come to say this is the right thing to do for this country, it will be on the basis that we have done the economic analysis and it shows it’s the right thing for Britain, and of course you have then got to make also the case for people to be fully engaged in Europe, but it must be on the basis that the economics are in the right place for Britain.
Question
You spoke at the start of the press conference of having very precise measurements against which the government and the country could make these judgements but the one which stuck out yesterday was that trade may grow within the eurozone of anything between 5% and 50%. That’s candid, but many people would think close to being meaningless, and even at the most beneficial level it would increase national wealth by £3 billion a year. Anatole Kaletsky, who is a very clever bloke, calculates that at £50 each a head, for which he says the Chancellor is going back to bad style Sixties tax tinkering in order to balance the economy and has also helpfully set a target entry rate of 137 euros to the pound for the speculators to take pot-shots at. Is it worth £50?
Chancellor
First of all we haven’t set an exchange rate and we would not do such a thing. We’ve said that all these matters would be prior to the point of transition. Secondly on the trade effects, of course the trade effects in different currency areas have led to different conclusions and they range actually right up to 200%. The Treasury has taken the best estimate of these and I think one of the things were are influenced by is what has been the experience within the euro area since 1999, so I think that the figures we have produced on trade are the best estimate that can be done on the basis of what we have done. As far as the benefits in terms of growth and output are concerned, we believe that there are benefits because of the extension of trade, and therefore the opening up of the single market as the result of this, but all of these depend on stability and that’s why we come back to the central point we made at the beginning that stability will not be put at risk by a decision. Stability has to be entrenched for the future and all decisions we make will be with that in mind.
Prime Minister
The reason that we are in favour of this in principle is because the potential benefits to Britain of being part of the single currency are there and frankly after yesterday are obvious in terms of lower transaction costs, in terms of the benefits to business, of trade and investment, in terms potentially of entrenching the stability that Britain needs in order to improve our living standards and give people security. Now that is the potential benefit, and the reason why we are raising this issue with people and taking it out now is because our fear is that if we accept that at some point we want to be part of the single currency, it would be very dangerous for us to be in the position where we simply put that decision off on political grounds. Now the economics have got to be right, but it is important that we make the argument, not just about the single currency but about Britain’s position in Europe, not because we think this is just something to do with a dream about Europe or Britain’s place in Europe, it is because ultimately for the British national interest, if we are going to be part of the European Union we should be in there, pulling our weight, doing the best to get the right things out of Europe for Britain. Now that’s what it is all about, and that’s the reason why this argument is there and what we did yesterday is we spelled out to people clearly the benefits, the obstacles that remain in the way to our membership. We set out a route map - if you like - in order to get there and we are also then going to take out the case for Britain as a constructive whole-hearted member of the European Union and I think those are important. They are difficult things to do, but they are important things to do them, and the reason we are doing them is because we believe that is the right thing for this country and for our own national interest.
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