Good Europeans can say 'No' to a single currency

Britain's staying out of monetary union could offer a welcome insurance policy for its partners were their risky experiment to fail

One of the really dreadful, depressing things about the present argument about European Monetary Union is that, in Britain at least, you are not allowed to be both pro-Europe and anti-EMU. Listen to the debate at the two party conferences: fringe meetings slagging Europe off, visiting Euro-commissioners warning us of dire consequences of turning our back on Europe. For once I even found myself in sympathy with Kenneth Clarke, who pointed out a week ago that we could not even talk about EMU sensibly, the debate had become so politicised.

What makes it even more depressing is reading through the newspapers at the time of sterling's entry into the exchange rate mechanism. As part of the grand retrospective exercise this newspaper has been conducting to celebrate its 10th birthday, I found myself looking not just at the way we, as a paper, welcomed that event, but at the way it was presented to the Tory conference that immediately followed, as a financial and political triumph.

But of course we now can see (even Europhiles can see) it was a catastrophe, for it led to two enormous errors of economic policy. First, before ERM entry, the pound shadowed the German mark; this meant that interest rates could not be raised to choke off inflation, as to do so would have pushed sterling too high. Then, after entry (probably at too high a rate) interest rates had to be held too high to keep sterling in line. The trouble was, we did not say so. People who were pro-Europe, who wanted Europe to be successful as a cultural and economic entity, felt inhibited from criticising ERM entry for fear of letting down the European side.

Exactly that is happening now. The rational "good European" case against EMU is simply not being made. Sensible politicians of left and right who are pro-European but who privately have grave doubts about EMU are silent for fear of having their words twisted and used against them.

In fact, there is indeed a powerful case against EMU that good Europeans here in Britain should be making. It comes in two parts. The first is why much of Continental Europe is making a mistake to press ahead; the second is that as Europe is making a mistake, it is in Europe's over-riding self-interest (as well as Britain's) that at least one sizeable chunk of the European Union should stay out of it.

Some of the arguments against EMU have been identified ever since the idea was first mooted: that the region encompasses too diverse a set of economies to have a single monetary policy; that if there is a single monetary policy there will have to be very large fiscal transfers, or transfers of labour, between countries; that having a single monetary authority beyond all democratic control is not acceptable politically; that denying a country the right to change its exchange rate was to take away a crucial element of nationhood .

But the past few weeks have shown a new raft of practical objections. The various European countries have scrambled to produce budgets that nominally bring their deficits below 3 per cent in 1997. We do not know what the economic and political consequences of a savage, simultaneous fiscal squeeze will be, but we can see an extraordinary degree of fiscal manipulation - devices that would be unacceptable in the private sector - taking place. For example, to qualify, the French government transferred the pension fund of its telecommunications workers into the state's finances. The Italian and Spanish budgets seem even less credible.

It has always seemed odd to me that the public sector should be much less scrupulous about finance than the private sector; and the UK is not blameless by any means. Still, the degree of dishonesty here is really pretty dreadful, yet - in the name of the greater good of the single currency - it is accepted.

This scramble to meet a 1997 target leads to a further practical objection. Suppose a country does qualify in 1997, what then? The idea of sanctions, fines on countries that run excessive deficits, has now been sort of agreed. But in practical politics this is cloud-cuckoo land. Is it really credible that we (or Italy, or Spain, or France) would actually pay over billions in fines to Brussels because of a shortfall in tax revenues, or some unexpected spending? Virtually all the budgets of both the last Labour government and the present Tory one would be illegal. Fines may be imposed, but they are not going to be paid.

But EMU may happen. It may be almost inconceivable that Britain will join in the single currency in the first round, but it is certainly conceivable that a core of EU nations will go ahead. What should good Europeans do then?

The arguments are all over the place. Some point to presumed economic advantage and argue that if EMU does go ahead we should join as soon as possible, if only to buttress our exports. The fact that over the past 20 years we have increased the proportion of visible exports to the EU from a little over 40 per cent to about 56 per cent is cited as a success of European integration. But turn that argument on its head. We have decreased the proportion of exports to other regions - North and South America, East Asia, India - from 60 per cent to 44 per cent. Is that really wise, given the faster growth performance of those markets? Visible trade only brings in half our export earnings, with investment and service income accounting for the rest: 85 per cent of our investment income is from outside the EU.

But those are "bad European" arguments for staying out of EMU. The good European one goes like this. If Europe does go ahead, it is taking a gigantic, breathtaking risk. It is coming close to betting nearly 50 years of successful economic and political co-operation on one throw of the dice. If a single currency is adopted and large parts of the EU are thrown into deep depression by inappropriate monetary policies, the whole concept of the union is in jeopardy. If the vast majority of EU members are in the single currency, collapse of the currency would probably signal the end of EU. It would be seen historically as a failed experiment, an effort to force the diverse nations of Europe into a form into which they did not fit.

If, on the other hand, several large European nations - in particular, Britain - were not part of the currency union, but still members of the EU, then the collapse of the single currency would not be so catastrophic. The EU might survive, with the "ins" simply re-establishing the franc and the mark alongside the pound.

So Britain staying out is not a petulant, foot-dragging exercise. It is an insurance policy against failure, and one that good Europeans on both sides of the Channel should respect and acknowledge.