The economies of Great Britain and the rest of Europe will not become sufficiently alike to allow for a successful single currency, because they are based on fundamentally different principles.
Convergence is the magic word in talk of possible British membership in the European Monetary Union (EMU) experiment (establishing a single currency, the euro, for all of Europe). When convergence happens, single-currency advocates avow, Britain's government will be ready to trade the pound for the euro. Hence, antagonists in the dispute over British membership study inflation rates, growth rates, interest rates, and budget deficits to see whether these indicators of Britain's economic performance are "converging" with those of the Euroland nations. It is Gordon Brown, Britain's Chancellor of the Exchequer, who will decide just how fast these indicators must be approaching one another before he and his cabinet colleagues can announce to a waiting public that convergence has occurred. In the end, however, these statistics are not particularly relevant to the question of whether the British and Euroland economies are becoming sufficiently alike to permit them to be grouped together in a single currency zone with a single interest rate, a centrally dictated fiscal policy, and a Britain shorn not only of its own currency but also of its independent central bank and foreign currency reserves.
The statistical data can only tell us whether various superficial indicators are coinciding at some particular moment. They tell us nothing about the fundamental underpinnings of the British and Euroland economies, the basic cultural and institutional foundations that will ultimately determine whether these statistics are likely to stay aligned in the long run, and whether the business and economic lives of Britain and the members of EMU will respond similarly to varying economic conditions.
The plain fact is that there is not the slightest hint that the British and Euroland economic systems are converging in the only meaningful sense of that word, nor is there any prospect that they ever will. There are three major and immutable differences between the fundamental underpinnings of the economies of Great Britain (and, indeed, of the other English-speaking countries) and those of Euroland. Although Britain, America, Australia, Canada, and New Zealand differ widely in their geography, natural resources, climates, industries, and political and cultural histories, their economies are based on some common principles that are alien to, or certainly far less prominent in, the economies of the European countries that have adopted the euro. That these differences exist between all the English-speaking nations, with their broadly similar cultural heritage, and those of Continental Europe is, as they say, no accident. The major differences are freedom, consent, and integrity.
Underlying economic life in Britain and its English-speaking offspring is a basic belief in freedom. Of course, other Europeans also believe in freedom, broadly speaking, and in all of the English-speaking countries this belief has occasionally been surrendered to expediency. Great Britain, for example, went through fifty years of socialism before returning to its historic devotion to free labor and product markets in the late 1970s. Australia has always accepted restrictions on its labor markets and a level of government intervention in economic affairs that would be unacceptable in America. New Zealand has recently retreated from an experiment with deregulation and reduced government intervention, and America has had waves of activist government followed by waves of deregulation and reform of the welfare state. And Canada's devotion to free trade has often been tested when it believed that its culture and economy were about to be overwhelmed by its American neighbor. Moreover, all of these countries have diluted some aspects of economic freedom when under pressure from so-called special interests.
That said, it remains broadly true that a great deal of freedom for individuals to conduct their economic affairs with a minimum of government interference is a hallmark of the economies of the English-speaking peoples. This is, of course, in marked contrast to the economies of Eastern Europe and Russia during the dark days of communist rule, of Cuba and North Korea today, and to the economies of Euroland.
Let me explain. One aspect of freedom is the ability to control the bulk of the fruits of one's labor. If the government appropriates a large portion of the national income to put at the disposal of bureaucrats, it has seriously infringed on the freedom of its citizens. And that is what the governments of Euroland do, claiming approximately twice as large a portion of their nations' incomes as does the American federal government. Euroland governments tax heavily and rely on income redistribution as a means of maintaining social peace—or, in the case of France, social peace punctuated by occasional riots to force marginal changes in the distribution of the national pie.
To be sure, Great Britain is currently moving toward its Euroland allies, with a steadily rising tax burden and a host of schemes to redistribute income from high to low earners, from workers to pensioners, and from traditional families to single moms. Nonetheless, even Britain professes to want to keep the portion of the nation's income that ends up in the Treasury's coffers at a lower level than is characteristic in Euroland countries, and its economy is no longer as vulnerable to the freedom-limiting machinations of the trade unions as are those of Germany and France. Britain's government is not nearly as willing to stop cross-border business mergers as are France, Spain, and other Continental countries. Neither Britain nor the other English-speaking countries has protectionist tendencies as powerful as those of France and its Continental partners, and none favor administrative fixing of exchange rates—which is, after all, what the euro does—over the free fluctuation of exchange rates in currency markets.
In short, the presumption in Britain is in favor of freedom for economic actors to pursue their self-interests. This is less true of the current Labour Party than of the Thatcherite Tories, and less true of both than even of an activist Democrat government in America. But ask any businessman whether he prefers the red tape of Britain or the regulatory climate of America to the binding regulations and high taxes of Europe, and you will receive a resounding yes. In fact, you needn't bother to ask—simply watch the capital flowing out of Germany and into the United States and Great Britain for your answer.
Britain, America, and other English-speaking countries are different from those in Euroland in another important respect: their governments must obtain the consent of their electorates before launching major economic revolutions. Changes that occur in the economic systems of the countries of the English-speaking world tend to be in response to the democratically expressed will of the people. Both New Zealand and Australia, for example, have moved from significant economic reform back to an increased role for the state by electing governments of different philosophies. In America, Franklin Roosevelt could not have developed the New Deal without massive popular support, and Ronald Reagan could not have deregulated huge areas of the economy without a public mandate to get government off the backs of the people. And in the United Kingdom, Lady Thatcher could not have moved some £45 billion of assets from the public to the private sector—reducing the portion of total output accounted for by state-owned enterprises from 10 percent to 3 percent and their share of total gross domestic fixed capital formation from 16 percent to 5 percent—without first persuading the British people to trust her in affecting a radical transformation of both their economy and the balance of power between trade-union members and shareholders.
This accountability is in sharp contrast to the situation in the countries of Euroland, where the administrative tools available to government often allow politicians to engineer sharp swings to the left or right of the positions they took at election time. Also in these nations, administrative bodies shielded from public participation or criticism make decisions that require democratic consent in Britain and America. To cite just one example, contrast France's ability to execute a massive program of nuclear power plant construction without public hearings, with the open process of hearings in Britain and America.
Oxford University's Larry Siedentop has contrasted the development of the American system of constitutional government with that of the European Union, which was built on the European model. Whereas America was blessed with a long and open debate about the form of government that would best suit it, there has been no such debate in Europe as to the political form the European Union will finally take. As a consequence, Siedentop concludes in Democracy in Europe (Penguin Press, 2000), "Democratic legitimacy in Europe is at risk."
The ability of a nondemocratic elite to impose its will on the citizens of otherwise democratic countries is best seen in the debate over the common European currency. In Britain, attempts by the Labour government to stifle or postpone the debate have failed miserably, in part because important segments of the press have taken up the cause of preserving Britain's control over its economic destiny. Contrast this with Europe (Denmark being an honorable exception). Polls suggest that a vast majority of Germans would prefer to keep the deutsche mark, which has been the keystone of their postwar stability and prosperity, but the government has proceeded apace, although there has been no referendum of the sort that must be held in Britain before the pound can be replaced by the euro. The same is true of France.
It is true, of course, that citizens of Continental European countries can unseat their leaders if they choose to do so, but they are not being given a separate and clear choice on the most important issue they face: the future of their nation-states. Nor are they being given the benefit of an open debate on whether to surrender national sovereignty to an emerging European superstate. The German elite think it necessary to subordinate Germany in a broader European government so that the Germans, whose long-term devotion to peaceful coexistence with their neighbors was openly doubted by former chancellor Helmut Kohl, would be rendered incapable of international adventurism. Better a European Germany than a German Europe, Kohl is said to believe.
This, of course, suits the French, whose elites are certain that they can control the centralized decision-making authority of the European Union, despite the greater size of the German economy, and the recent assertiveness of Herr Schroeder. It also suits the Italians, for whom the transfer of power from Rome to Brussels promises an improvement in the quality of government. For the Spanish and less affluent southern European countries, the European Union will be a source of funds and the instrument by which the wealth of Germany is funneled into their struggling economies.
But it is important to note that nowhere in Euroland have these profound changes in the Continent's economic system and governance been debated as openly and vigorously as they were during the founding of the American system in the eighteenth century or as they are now being contested in Great Britain. The English-speaking peoples have a greater voice in the establishment of and changes in the economic rules that govern their lives than do citizens of other countries. Their governments sometimes find this an inconvenience, as did Franklin Roosevelt when he attempted to pack the Supreme Court as to keep it from obstructing his programs, and as does British prime minister Tony Blair as he desperately tries to get around the fact that 70 percent of the British electorate do not share his desire to subordinate their parliament to an unaccountable and unelected bureaucracy in Brussels.
This is not a recent development. Oxford's Siedentop points out that "the English Common Law tradition tends to affirm the priority of social relations and the market to the state, while the Continental tradition of Roman Law affirms the priority of the state to social relations and the marketplace." This fundamental difference between Britain and the rest of Europe places an enormous burden on those who argue that the economic statistics show a convergence of economies based on such different assumptions about the relationship of the state to "social relations and the marketplace." The French have it quite right when they lump Britain and America together, in DeGaulle's contemptuous phrase, as "les Anglo-Saxones," nations with common cultures and institutions that differ markedly from those of France and those that the French and their German partners are constructing to govern the pan-European state they see as the successor to the nation-state.
A third difference between the economies of the English-speaking peoples and those of other countries is in the extent to which economic life is fundamentally free of corruption. This is not to suggest that all business conducted in the United States and Great Britain is free of bribery, kickbacks, price-fixing, and other such practices. But the political and market systems of these countries minimize the roles such practices play in determining how resources are allocated and how incomes are distributed.
It is no accident, for example, that the most efficient stock and commodities markets, and the deepest capital markets, are found in New York and London. These markets can function only if buyers and sellers are reasonably certain that prices are determined more or less by the forces of supply and demand coming together in an open market. Backroom deals, political pressure to favor this or that player, and market rigging to favor government officials all operate to make markets less efficient and drive traders away to markets they can trust. Americans were shocked when it was revealed that the wife of an Arkansas governor had turned a quick six-figure profit by trading commodities under the guidance of a company regulated by her husband—a matter that would probably go unnoticed in most of Euroland, where a cynical public assumes that such deals are all in a day's work for government officials.
This difference in the integrity of the economic process between English-speaking countries and other nations is no accident, nor is it the result of some superior honesty gene unique to "les Anglo-Saxones." It is, rather, a direct result of the fact that market forces are given greater play in America and Britain than they are in Europe. A system of open bidding for water franchises or electromagnetic spectrum is less likely to provide opportunities for government officials to enrich themselves than one that relies on a government "beauty contest" to select the winners. A system of private housing ownership and a free market for housing decisions is far less likely to produce allocation-by-favoritism or outright bribery than the bureaucratically controlled distribution of government-owned houses and apartments now operating in many European countries.
It should be no surprise that economic corruption is greatest where government plays the largest role. Black markets cannot exist unless the state is rationing resources, and bribery cannot exist where markets, rather than bureaucrats, allocate a nation's resources. Nor should it come as any surprise that an extended period of economic growth in America should have coincided with economic stagnation and double-digit unemployment in Euroland—a circumstance that is changing only now because the sinking euro has created an ongoing currency devaluation that is stimulating Euroland exports. This differential economic performance is a direct consequence of the fundamental differences between the two economies.
The lesser role of government in America means that entrepreneurs and workers are left with a larger portion of their earnings than are their Euroland counterparts. This enables Americans to take greater risks in the hope of greater rewards, and they therefore work harder, something that the British government now professes to recognize. The greater belief in freedom and in keeping government off the backs of the people creates an atmosphere in which people look to their own achievements, rather than to government gifts, for their material well-being, and in which entrepreneurs can pursue their visions with a minimum of interference by risk-averse bureaucrats with an intrinsic stake in the status quo. And the notion that even the most professional of governmental agencies must obtain the broad consent of the public accounts for the relative openness of the Monetary Policy Committee of the Bank of England and of America's Federal Reserve Board, as compared with the European Central Bank, whose head lurches from extreme secrecy to outbursts of ill-considered candor, with no institutional arrangement such as congressional oversight hearings to provide a proper platform for policy proposals.
These differences will not disappear if various statistical indicators happen to coincide at some point in time. These differences are rooted in history, culture, and values that trump economics every time, and they are likely to prove enduring no matter how many symbols, flags, anthems, and bureaucratic constructs the advocates of a European superstate can create.