The Five Economic Tests

Submission to the Treasury Select Committee

by the Green Party of England and Wales

Molly Scott Cato, MA (Oxon.), MSc (Open), Phd Economics (Wales)

The Green Party is opposed to the UK’s adoption of the euro as a single currency. This opposition is based on a range of issues that go to the heart of our political vision. The remit of the Tests makes clear the fundamental failure to address a realisation that lies at the heart of Green thinking: that the economy and the environment are intertwined and cannot be treated separately. Our commitment to holism has made it necessary to challenge the narrow basis on which the decision about whether to enter the Eurozone is being made. Some issues related to our broader vision are addressed in the final section below, although the paper addresses itself primarily to the Five Tests as outlined by the Chancellor.

1. Convergence

The Green Party is not convinced that economies as diverse as those of the European Union as currently constituted, or following Enlargement, can possibly find themselves at the same point on the economic cycle at all times. This is the basic requirement of ‘convergence’ and both the theory and the experience of economics suggest that it is not possible.

Competition lies at the heart of the government’s view of how different national economies interact. We are often told that we must compete with our ‘European partners’, that education is directed towards ensuring our success in this competition, and so on. However, if economies compete some will be more successful than others. This will be reflected in their levels of economic indicators such as levels of employment and rates of economic activity. Unless we see economic competition as a race where all will cross the finishing line at the same time, the economies in competition will inevitably be experiencing different levels of economic success at any given point in time. This in itself makes the ‘convergence’ of these economies impossible.

Capitalist economics is an unreliable process of booms and slumps, and an unpleasant process of competition, where those who win necessarily do so at the expense of those who lose. Within an economy or economies structured along these lines convergence is not possible. The Green vision of a steady-state economy, where goods and services are provided locally and without economic growth in economies that have already reached their sustainable level, suggests that such convergence over the long term might be possible. We suggest that the government consider such an economic vision as a serious alternative to the capitalist, competitive economic culture that now dominates almost all political thinking. This would have the positive side-effect of prioritising the well-being of the planet and all its people over the profit-making of the few who dominate the present economy.

2. Flexibility

The Green Party is unhappy with the use of the word ‘flexibility’ to describe an objective of economic policy. In the past the term has been used to describe a process of removing rights and benefits from employees, while allowing corporations to gain legal and political rights without undertaking corresponding humanitarian duties (the negotiations towards a Multilateral Agreement on Investment, now abandoned, is the best example of this agenda at work).

The concern with flexibility evident in the Five Tests appears to have been influenced by this agenda. Within a single currency area, national governments have lost almost all instruments to control their economies. A government whose people are experiencing high levels of unemployment¾as in Germany at present¾has no other option than to reduce the well-being of its own people, their employment rights and their levels of wages, in order to attract corporations that have chosen to employ workers in economies whose politicians do not offer them the same level of protection. This sort of flexibility is not one that a government which had the interests of its citizens at heart would aspire to.

Few discussions have demonstrated so little flexibility as that surrounding the issue of alternatives to the dominant model of global, capitalist economics. For Bill Clinton, globalisation is ‘not a policy choice; it’s a fact’, while Tony Blair has called it ‘irreversible and irresistible’. Renato Ruggiero, former Director-General of the WTO, stated that trying to stop globalisation is ‘tantamount to trying to stop the rotation of the earth’. We would suggest that the government should take a more flexible attitude towards economics and explore the model of decentralised, self-sustaining local economies outlined in works such as those by Richard Douthwaite and Herman Daly (see list below). In place of ‘flexibility’ the Green Party would suggest substituting the word ‘diversity’. The UK should aim for a system of diverse local economies serving the interests of local people. This would offer a brighter future for British people than the present economic system, which offers neither diversity nor flexibility.

3. Investment

The assumption behind this ‘test’ is that, in spite of the ‘flexibility’ offered to corporations they may still not be prepared to invest in our economy should we become part of the Eurozone. This discussion is also determined by a corporate agenda, and the pressure on the government to enter the Eurozone has in the main emanated from heads of corporate firms. Their views should be balanced by those of British citizens and of the smaller businesses the majority of them work for (52.7 per cent of the workforce are employed by businesses with fewer than 500 employees).

The discussion around investment tends to focus too much on the issue of quantity, ignoring the issue of the quality of that investment. In many cases investment by multinational corporations is short-term and may be withdrawn just as rapidly should the flexibility of another labour-market be found to offer superior advantages. Investment that is by a locally based business, or by a cooperative owned by its own employees, is likely to be both more durable and to better reflect the needs and well-being of local people. Researchers in Canada and in Wales have explored the concept of ‘capital anchoring’ as an expression of this beneficial and reliable investment (Mendell, 2000; Arthur et al., 2003).

4. Financial services

Within a Green economy financial services would represent a far smaller amount of activity and we do not consider that the City should be accorded its own particular ‘test’ as part of a decision that has such far-reaching political and social implications. Hence the impact of joining the Euro on the City will not be addressed in this submission, since its impact on equally important sectional interests¾the National Health Service, the small business sector, and so on¾is not being accorded equal importance.

5. ‘Potential benefits’

Only three such benefits are considered: higher growth, stability and a lasting increase in jobs. This is a highly selective and unrepresentative list; we will add a brief discussion of other potential benefits and costs in a final section.

It is assumed that higher growth is an unquestionable ‘benefit’. The Green Party’s view is that growth can bring costs as well as benefits (see Douthwaite, 1992). Rather than espousing growth as inevitably beneficial more effort should be expended to find ways of measuring the economy that reflect human well-being. Such alternative methods of measurement (see e.g. the Index of Sustainable Economic Welfare) suggest that growth is now undermining the welfare of both the planet and its people. The evidence concerning the growth impact of entry into the euro is conflicting, but it seems clear that higher growth will continue to be an objective of the Eurozone. The train rushes onwards at ever greater speed towards an undefined and increasingly unappealing destination; we should get off this train and find another way towards a more humane and attractive future.

Evidence from the Eurozone over the past couple of years suggests that the euro is not providing stability. Quite the reverse. As countries confront the economic inflexibility of the Growth and Stability Pact their economies are destabilised. In Ireland this causes over-heating; in Portugal and Germany pressure on public spending, unpopular spending cuts, and political instability. This is inevitable within the competitive economic system as presently structured: a ferociously contested race is unlikely to generate stability. The objective of the Green vision for a steady-state economy is exactly such stability. This would be achieved by the ending of the fight for economic advantage between countries or between sectional interests within countries.

A lasting increase in jobs is another objective which is assumed to be universal. This seems perverse since most citizens of this and the other EU countries would prefer less rather than more work. The objective of a Green economy would be to maximise well-being by establishing which work is important and beneficial for society and then sharing it fairly between the members of that society. The link between employment and financial survival would be cut via the introduction of a Citizens’ Income scheme. Thus we would be able to ensure a lasting reduction in jobs with a corresponding increase in leisure.

Taking the three ‘potential benefits’ together it is clear that they are in fact mutually inconsistent. An economy that generates higher growth cannot simultaneously achieve stability. Nor can an economy that produces a lasting increase in jobs. By contrast an economy that priorities sustainability can offer an increase in the well-being of its citizens in the short term, and their only possibility of a healthy life in the long term.

Other potential benefits and costs

Entry into the Eurozone is likely to have widespread impacts on many aspects of our lives. The Green Party is deeply concerned about the lack of political accountability of the European Central Bank and the loss of democratic control by British citizens that entry into the Eurozone implies. However, this paper is limited to the economic consequences of euro entry and we therefore limit ourselves to discussion of three issues: debt, trade, and the consequences of European economic competition.

Figure 1. External Debt of Developing Countries: 1971-1997

Source: Benjamin Holt, Global Policy Forum, New York

It is lamentable that the five economic tests are so exclusively focused on the UK’s national interests. No consideration has been included of the likely impact of the euro on the citizens of the Third World, who have far greater economic needs. The dominance of the dollar as a global currency has resulted in the huge levels of debt that are weighing down the developing economies (see Figure 1). It would be a tragedy if the euro’s only effect on this morally unacceptable situation were to replace these dollar debts with euro debts. The eradication of Third World debt and the creation of an international currency that allows for the balancing of the interests of all the world’s economies and peoples should find a place within the discussion of any future global currency.

The euro is also intended to compete with the dollar as the currency of international trade. This sets the scene for a cut-throat competition between two major economic blocs (the EU and USA, with China developing into a third) as the backdrop to all our lives in the 21^st century. It is not a pleasant prospect. It is the logical end-point of an economic ideology that privileges competition over cooperation. Its consequences are likely to be growing inequality, a further erosion of the standard of living of the majority of the world’s population (although this is barely imaginable in some cases), and war. The euro is proposed as increasing the ability of the European Union to compete with the USA. Our objective should rather be to find ways of cooperating to the advantage of the world’s poor children.

The trade which the euro is competing with the dollar to control is itself damaging to the planet. The environmental costs of the international transport of goods, and the exclusion of trade-related CO₂ emissions from the Kyoto protocol, enable corporations to move goods across the globe at the expense of the planet, which is treated as a free good. Arguments about the euro assume that trade is another unquestioned benefit. The Green Party challenges this assumption and proposes instead the development of local economies with trade being left a residual role in providing those goods that cannot be produced locally. We are in agreement with Keynes:

I sympathise, therefore, with those who would minimise, rather than those who would maximise, economic entanglement between nations. Ideas, knowledge, art, hospitality, travel¾these are the things which should of their nature be international. But let goods be homespun whenever it is reasonable and conveniently possible, and above all, let finance be primarily national

References

Arthur, L., Kennoy, T., and Smith, R. (2003), Pamphlet on Cooperatives (Cardiff: Welsh Institute for Research into Cooperatives).

Daly, H. E. (1992), Steady-State Economics, 2nd edn. (London: Earthscan).

Douthwaite, R. (1992), The Growth Illusion: How Economic Growth has Enriched the Few, Impoverished the Many, and Endangered the Planet (Bideford: Green Books).

Douthwaite, R. (1996), Short Circuit: Strengthening Local Economies for Security in an Unstable World (Totnes: Green Books).

Mendell, M. (2000), ‘Local Finance in a Global Economy’ in P. Hamel, H. Lustiger-Thaler, and M. Mayer (eds.), Urban Movements in a Global World (London: Routledge).

Small Business Statistics (2001) from www.sbs.gov.uk/content/statistics/stats2001.pdf.