The UK, the USA and the freeworld's political and economic interests are being undermined by the EU

Dr Irwin Stelzer

Thank you for the opportunity of presenting an American view of the issues that interest your group. I say "an American" rather than “the American" view partly to avoid any impression that I speak for anyone other than myself and partially because there is no single view that I can report to you - most Americans will hear of the euro for the first time if they decide to visit Europe this summer.

This is unfortunate, since the issue is of vital importance to America. Recent experience has highlighted one fact-of-international-life: Britain is an ally on which America can rely in times of crisis while the rest of Europe is less reliable and. indeed, increasingly positions itself as a rival to America. When your Prime Minister said in Texas that only "the bad guys” try to separate America from Europe, he certainly had it right if he included among those bad guys Chris Patten, Juber Vérdin, and Joschka Fischer, all of whom are competing for the anti-American-of-the-year award!

Great Britain has been America's staunchest ally, both in the current war on terror and, at least since 1812, in other conflicts (a bit of uncertainty as to which side to back during our Civil War can be forgiven, given Britain’s interest in southern cotton). We needed Britain to hold off Hitler after France's surrender while we dithered, and Britain needed us to help with the job of finishing off of the Nazis. We needed Britain to allow us the use of bases to knock Gaddafi out of the terror business, and you needed our military capability to do the job. We needed Britain to stiffen our moral resolve in Kosovo, and you needed us to provide the tools for ending that horrible war.

We both understand that when the values our two nations cherish are threatened, all minor disputes must be put aside - steel tariffs matter less than preserving democratic values. This understanding has stood both our countries, and the world, in good stead.

The understanding that our two countries can disagree on small matters but remain shoulder to shoulder - if I may borrow the prime minister's much-appreciated phrase - does not extend to continental Europe, where it has become fashionable to attack America as a reckless hegemon, presided over by a trigger-happy Texan who is likely to nuke the world if he doesn't first destroy its environment. The fact is that the Brussels bureaucracy sees America more as a rival than an ally, witness its attempts to undermine American policy in Korea, where we have 30,000 troops at risk and Europe has none, or the refusal to honour our request to sell us submarines destined for shipment to Taiwan.

I should note that such criticism doesn't carry much weight in Washington. For one thing we have heard it all before, when Ronald Reagan attacked the ("evil empire" and decided that Margaret Thatcher was the only European leader on which he could rely for support. For another, the Bush administration is not the Clinton administration. This president sees it as his moral obligation to protect his fellow citizens, rather than to charm European multi-lateralists by feeling their intellectual pain at the thought that America can and will conduct a foreign policy aimed at defending American interests rather than appeasing the UN or the Brussels bureaucrats.

So it came as no surprise to those of us who know a bit about this administration that Dick Cheney began his recent -and I might add, unfortunate tour of the Middle East by stopping at Number 10 Downing Street. He did not go to Brussels to see Chris Patten or Javier Solano. And most European leaders have yet to experience the pleasures of the President’s Texas ranch, to which your Prime Minister was recently exposed.

All of this is by way of saying that America has a huge stake in a Britain that preserves its independence in all aspects of policy. Let's start with foreign policy.

Imagine what assistance your country would have been able to render mine after September 11 if Prime Minister Blair had already succeeded in his plan to ensnare you in a European Rapid Reaction Force. That new entity will certainly be European, but any reaction of which it might prove capable would be neither rapid nor much of a force. Were it in existence now, America would not have been able to count on the help of your splendid, if under-funded, military. And Blair must have been aware of this, for when he scheduled that famous dinner at No.10 he excluded representatives of countries that had refused to make active contributions to the fight against terror. Odd, then, that on other occasions, the Prime Minister tells us we can rely for support from the EU in battles such as the current war on terror.

Nor would Britain have been in a position to help if it had already surrendered the pound. For one thing, it would be difficult to defy the wishes of fellow-euroland members if those are the same folks whom Britain would expect to give sympathetic consideration to its particular economic circumstances when formulating monetary policy. Not that the ECB would overtly retaliate were Britain to prove more friendly to America than the Patten-Solana-Jospin-Fischer crowd would wish. But it would certainly have to take into account the hostility towards the UK radiating from its political masters.

Or consider a more pressing matter: the reaction of outside powers to Israel's attempt to eliminate the PLO's terrorist infrastructure, an Israeli move that parallels America's efforts in Afghanistan. The European Union, or at least most of its members (Britain being among the honourable exceptions) wants (a) to continue its financial support of the PLO, while at the same time (b) imposing economic sanctions and an arms embargo on Israel, a policy of supporting suicide bombers while depriving the victims of the wherewithal to respond. If Britain feels bound to adopt such a policy in the interests of solidarity with its partners in a monetary experiment, it will be joining in an effort contrary to America's efforts to broker a peace by sending secretary of state Powell to the region. And if Britain becomes so bound up in Europe that it feels bound to join its European friends in opposing an attack on Iraq to eliminate the current regime, America will proceed anyhow, but shorn of an important friend and ally.

Please understand: I do not doubt for one minute that your Prime Minister will stand with America in ventures such as the war on terror. His Chicago speech sets out his views with great clarity, and whatever one may think about the ability of Britain to meet the lofty and far-reaching objectives, one must admire its sheer idealism -a virtue in short supply these days. But there will come a day when Tony Blair is no longer in No.10, and when his successor might not have the Prime Minister's ability to speak the language of Europe while at the same time behaving as a reliable American ally. Blair's successor will inherit the institutions that this government creates, institutions - and this is especially true of the euro - from which there is no turning back after entry.

Which neat segue brings me to the euro. None of the foreign policy concerns that I have mentioned can be divorced from the question of British membership in the euro experiment. For a decision to join is a decision to become still more fully integrated into all aspects of policy making, to trade an independent voice for only one seat at a table with many others, most of whom who have a very different idea of proper table manners.

So, from a foreign policy perspective, Britain entry into the euro has to be seen as potentially dangerous to American interests. But foreign policy is not the only area in which America has an interest in Britain's decision concerning the euro.

America has a real interest in the economic health of its trading partners. That's why top Washington policy makers, officially neutral on the question of the euro are privately worried about its economic effects. They know what you know - that a one-size-fits-all interest rate in the absence of (1) labour mobility, and (2) automatic revenue transfers between regions that are growing and those that are faltering, simply can't work.

But let me explain what I mean by "work". I have little doubt that the euro is now a permanent feature of the world's economic landscape, or "architecture", to use a more fashionable phrase. The continent's political classes are too invested in it, if I may be permitted a pun, which distinguishes them from the world's investors. It does not matter, to quote The Wall Street Journal (March 11, 2002), that "The ECB's four interest-rate cuts last year weren't enough to help Germany substantially, though the cuts were excessive for some other countries." In that sense, a single monetary policy for divergent economies “doesn't work”.

But that is not the test that the euro's creators had in mind. To them, the euro will be said to “work” if it somehow prevents a new European war. I recently had the pleasure of debating the economics of the euro with a leading German economist. Or at least I thought I was to debate about the economics of the single currency. But he opened his talk with this statement: “I have relatives buried at Verdun.”

In short, monetary union is a political project. Never mind that a single currency did not stop the blood - letting in a disintegrating Yugoslavia, or prevent Americans from slaughtering each other in a Civil War. Or that the tensions created by the lower growth rate and higher average long-term unemployment that is an inevitable consequence of the euro, grafted onto existing European institutions and practices, are likely to prove divisive in the long run. Or that the obvious inadequacies of the European Central Bank, when compared with the monetary policy skills of the Bank of England, contribute to the flight of capital from continental Europe, and the vast sums of inbound investment that so enrich the British economy.

The euro is about none of those things -at least in the eyes of the political classes that have imposed it on a largely unconsulted public. It is about politics} and the dreams of key European policy makers of unseating America as the world's leading economic area. It is, in a sense, as much or more anti-American than it is pro-European, more in line with long- standing French policy to reduce or eliminate America's role in continental Europe than with Britain's objective of retaining a special relationship with America, with each country contributing what it can to the preservation of democratic values around the world.

At least, that is how the euro is seen in euroland: one of the tools to be used to pry America off the pedestal on which it stands.

In Britain, the story is different. The Prime Minister and his colleagues must first be convinced that scuppering the pound is clearly, unambiguously, certainly, unequivocally - or whatever Ed Balls’ mot de jour happens to be - in the nations economic interests. I know that some think that in the end the Chancellor's five tests will be skewed this way or that, depending on his reading of the political situation. I am rather inclined to disagree with that view. Not that I think that applying such tests is easy, or that reasonable men cannot honestly reach conflicting interpretations of identical data.

Rather, I think one need not speculate about the chancellor's moral fibre in order to guess at how he will apply his five tests. All that is necessary is to consider his self-interest, a more reliable predictor of most men's actions than an appeal to their goodness. Gordon Brown will inherit the whirlwind if he decides to sow the wind: if he signs on to the euro when the economics clearly dictate that such a move is not in Britain's interest, he may move into Number 10 just in time to face both high inflation and mounting unemployment. I doubt that his political ambition is to be a failed Prime Minister, to go down in history as the man who sacrificed Prudence to Expediency.

It would be foolish to prejudge the results of the famous five tests. But it would not be foolish to wonder whether Britain should join at the current exchange rate: everyone, even the most ardent europhile, agrees that would be a disaster - of the sort France has visited upon Germany by playing on Helmut Kohl's economic illiteracy and desire to lock Germany into Europe, and getting Germany to join when the Dmark was overvalued relative to the franc.

The best estimate of the experts is that it would take a 25-30% devaluation of the pound against the euro for Britain to enter the euro area with a reasonable chance of being competitive with other members. That sort of devaluation would certainly unleash serious inflationary pressures - pressures that the one-size-fits-all interest rate of the ECB could not possibly contain.

That assumes, of course, that the euroland countries would be willing to allow such a devaluation, a clear violation of their membership rules, and unlikely to be attractive to German and French companies that compete with British rivals for customers.

So I think it fair to say that a British decision to abandon the pound for the euro would not be in America's interests, which is why I hope that you avoid joining merely to accommodate the Prime Minister's imperial vision of Britain as a nation holding the balance of power between France and Germany. And I do hope that Britain's voters, if put to the test, will cut through the propaganda of big business and big government, and decide that it is in the interests of the world's fourth largest economy to retain control of its economic destiny.

This is important to America for still another reason. President Bush has committed America to freer trade. His decision to levy tariffs on steel can either be viewed as an unfortunate deviation from his free trade policy, a necessary tactical retreat to get congress to give the president fast-track negotiating authority, or a warning that America will not be the only nation to keep its markets open while others close theirs. Whatever the steel decision was, it was not a decision to abandon pressure for a new worldwide trade opening round.

It is this belief in the virtues of free trade, shared by Britain, that makes me even more nervous about British involvement with the EU. France is not famous for its desire to open its agriculture to competition from more efficient American farmers, or for its willingness to open its energy markets to non-French players. Germany, despite recent signs of the willingness of the government to allow large firms to fail remains a place where politics dominates economics as a determinant of the sectoral direction of such inward investment as that lumbering economy can attract. Only Britain shares America's faith in free trade, and it is now only one voice among many, and not the most influential voice, at that.

Then there is the question of regulation. As I pointed out at the start of this talk, America has a stake in a growing and healthy Europe, for the economic reason that rich countries make better markets than poorer ones, and the political reason that a stable Europe might spare us renewed involvement in its affairs. Unfortunately, Europe is home to one of the greatest production machines the world has ever known - the regulation factory in Brussels. By making it difficult to fire, regulations make it unattractive to hire. By making idleness pay about as much as work, the welfare state discourages labour market participation. By keeping taxes at levels that discourage entrepreneurship and throttle the small businesses that are the principal job creators, euroland countries doom themselves to slow or no growth.

It is no surprise that these regulations and taxes disadvantage euroland countries in world markets, and make them far less attractive to inward investment than is Britain. But rather than move their economies in the direction of freer trade, less regulation, and lower taxes, the boys from Brussels prefer "harmonisation", by which they mean having Britain become more protectionist, increase the burden of regulation (a process already under way, without much urging from Brussels), and raise taxes (another process that is underway, unfortunately). If the euroland countries have their way, Britain will raise the portion of its GDP that goes to the state from its current level of below 40% to the euroland level of 50%. Those of us in America who prefer a strong, growing British economy would mourn our loss.

I recognise, of course, that the euroland group is eager to have Britain join its club. I would suggest that British policymakers take the advice of that great American sage, Groucho Marx, who famously remarked that he wouldn’t join any club that wanted him as a member.

Dr Irwin Stelzer is a senior fellow at the Hudson Institute, an American Think Tank.

He is also the U.S. economic and political columnist for The Sunday Times and a columnist for The New York Post, and an Honorary Fellow of the Centre for Socio-Legal Studies at Wolfson College, Oxford.

Dr Stelzer has written and lectured widely on economic and policy developments in the United States and Britain. He has written extensively on the factors that affect and imped economic growth and on the consequences of European unity.

Dr Stelzer is the author of, The United States, a United Europe, and the United Kingdom: Three Characters in Search of a Policy.