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ECONOMIC ANALYSIS – It no longer matters what we think of EMU –

On the Continent, EMU is seen as a political rather than a purely economic move. This is in marked contrast to the UK, where the issue is normally treated in narrow micro-economic policy terms. (EMU, incidentally, stands for Economic and Monetary Union, not European Monetary Union.) What matters now is not whether EMU is considered a good or bad thing. What we ought to be doing is concentrating on making it work and managing the risks that such a huge undertaking involves. This is certainly Kingfisher’s view. Our main concern is to position our business in what will be a very different and much more transparent market, because we must be able to answer consumers’ legitimate questions as to why they are paying particular prices for important items in different parts of Europe. Before we get to the issue in hand I just want to set out a few prejudices so that you know where I am coming from. The first prejudice is that it is politics, not economics, that leads to problems with the economy. It is politics, not economics, that led to this country’s continuing economic decline in the 1960s and 1970s and indeed to our resurgence in the 1980s. My second prejudice is that I am a convinced European. Furthermore, I am a convinced micro-economist. What matters, I believe, to the economy is the performance of individual businesses rather than the overall state of the economy. I have never forgotten the time at National Power when we paid out a special dividend: the quantum of that, paid out by a single company, was greater than the net effect of Kenneth Clarke’s last Budget. The economic case for EMU is under-whelming. Of course, currency fluctuations need to be managed; but British business has the necessary financial instruments at its disposal. Some of our most distinguished economists have cited other concerns: – our economic cycles are very different – different European economies have a different mix of sunrise and sunset industries – because of the nature of the UK housing market and its mortgages, the British economy is far more sensitive to interest rate changes than any other major EU economy. But, seen from the continent, the economic case is close to an irrelevance. When you ask people on the continent “What problem is all this the solution to?” they start talking about no more wars. Helmut Kohl can remember, when he was 14, walking home across a devastated Europe, and he has built his political career on seeing that never happens again. Therefore, we need to think very carefully about the political case for a single currency and an ever-closer union that is designed to make future wars between European States all but impossible. This is the foundation of the Franco/German alliance which is truly at the heart of Europe. We cannot allow this to fail, so the questions for us are “What are the risks?” and “How can they be managed?”, as opposed to “Should we go in or shouldn’t we?” But of course, there are risks and it would be quite wrong to underestimate the political stresses that will need to be managed within the new system. For example: – a single external exchange rate and internal interest rate cannot be appropriate for all parts of the EU, particularly since the Maastricht criteria are widely known to have been fudged (in Italy and France particularly) – voters in Spain are unlikely to be impressed if interest rates and local unemployment have to remain high in order to prevent the Northern European economy over-heating – there will be serious problems securing the convergence of economic and fiscal policy and, particularly, taxation rates. Now the question is ‘How are all of these things going to be managed?’ Clearly, with great difficulty. But my thesis is this: they have to be managed. It is not in anyone’s interest in this room to see our principle trading partners’ economies in a shambles. All of us have to look carefully at ourselves in the mirror and ask what steps can be taken to make sure these risks are managed and managed successfully. The questions for businesses are: “Do we have a role to play as international business people and members of the EU? Are these problems likely to be solved better if the UK is within the system rather than on the outside?” My view is that we in the UK have a major contribution to make and the sooner we are in a situation to “punch our weight” the better for everyone. There are some very serious risks which won’t automatically be solved. As we look back over the past it seems that none of the previous attempts at aligning currency in Europe have proven successful. And the most dangerous comment in the City is: “This time it’s different”. But with respect to EMU, for business this time it will have to be different. The prosperity of the European Union is too important to be left solely in the hands of politicians; business has important responsibilities too. It must demonstrate that the new Europe can deliver real consumer benefits in addition to straight bananas, and the like. We have to be competitive and our suppliers have to be competitive – that is the key to our future security, prosperity and the quality of life we would like our grandchildren to enjoy. That was in a sense the dream of the people who founded EMU and who have been pushing ahead with the project. We can make it work and I believe that only we and business in general can make it work. This is not a time to pass it over to the politicians. This is an adaptation of The Howard Schultz Lecture 1998, which was given by Sir John Banham last November at the Cabinet War Rooms, Whitehall. It was hosted and sponsored by profit recovery and contingency audit group Howard Schultz & Associates. The evening’s theme – EMU: A source of conflict or harmony? – was inspired by an article entitled EMU and International Conflict by US economist Martin Feldstein, which was reprinted in Financial Director in April 1998.

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