What can people at work expect from Tony Blair’s second government? Much
depends on the chosen agendas of the restructured Whitehall departments, plus
the implications of extending public-private partnerships.
But the single European currency looks set to be a recurrent theme. A euro
referendum by the end of 2003 is a strong bet, despite Gordon Brown’s caution.
And once normal politics gives way to alliances of those for and against euro
membership, arguments will abound about the consequences for UK jobs. So how
should one decide whether the euro can pass the jobs test?
Euro membership will change the institutions that regulate overall demand in
the economy. This will not directly influence the number of jobs consistent
with meeting the Government’s inflation target – which is determined by how
well the labour market works.
Ditching the pound could have an indirect impact on this sustainable
employment rate if UK employers were hit by more regulation from Brussels. But
the UK is subject to Social Europe legislation whatever happens to the pound.
And anyway, the common notion that EU directives are inevitably harmful to UK
jobs is simplistic.
The same goes for the constant refrain that "3 million UK jobs depend
on EU trade". This is true, but it is highly unlikely that saying
"no" to the euro would reduce the existing volume of trade with
Europe. Moreover, even if jobs were lost by standing aside from the euro,
keeping the pound would leave the Bank of England free to cut interest rates in
line with slacker conditions in the jobs market, thereby boosting demand for
workers.
The real jobs test, therefore, relates to the effect of euro membership on
fluctuations in employment around the sustainable rate. Locking the pound to
the euro should mean more job stability since the economy would no longer
suffer the harmful consequences of currency gyrations against the eurozone
countries.
But this holds only if the "one-size-fits all" interest rate set
for the eurozone by the European Central Bank is right for UK conditions. If
not, the onus would fall on changes in taxation, public spending and borrowing
to avoid boom or bust whenever the economy is knocked off course. Given that
such fiscal fine-tuning is far from easy, the euro could make employment more unstable.
Most economists agree that joining the euro at the current exchange rate
would cause major stability problems and place UK exporters at a severe
competitive disadvantage. The eventual fall-out would dwarf the 350,000
manufacturing jobs lost in the past three years because of the strength of the
pound relative to the euro.
So whatever the power of the ideological case for or against membership, the
euro will not pass the jobs test until the practicalities of achieving safe
entry at a sensible rate have been properly dealt with.
By John Philpott, Chief economist at the Chartered Institute of Personnel
and Development
