Published in Red Pepper in April 1995

FEDERAL ARGUMENTS

My votes against the Maastricht Treaty and my support for a referendum on European integration seem to have labelled me a "Euro-sceptic" - according to letters I receive from right wing little Englanders. Nothing could be further from the truth. Most people have some emotional attachment to the country where they spent most of their life and I am no exception. But I can't get worked up about national sovereignty. More important is deciding at what level power is most democratically exercised.

In the run-up to the Intergovernmental Conference in 1996, the Labour Party has two realistic policy choices. One, as Jonathan Michie argues*, is rejection of monetary union, to give the next Labour government some control over the exchange rate and expand spending to stimulate growth and eventually achieve full employment.

The alternative, which I advocate, recognises the limited scope that Britain has to increase jobs or welfare without foreign exchange regulation, and goes for a democratically accountable tier of federal government at the European level. This federal government should be responsible for managing the exchange rate of a single currency and carrying out redistributive economic policies, plus other matters best organised at a European level, such as environmental regulation, defence and foreign policy.

This alternative is not compatible with the Maastricht Treaty. I agree with most of Michie's criticisms of Maastricht, but the problem is not the idea of a single currency. An eventual common currency would be one way of thwarting speculators who are now responsible for 90% of foreign exchange transactions and are likely to create a run on sterling if Labour win a general election. Joining a system of managed exchange rates, leading to monetary union, should therefore have some attractions for socialists.

However, there could be appalling social consequences from a single currency based on the Maastricht criteria of maintaining price stability, strictly limiting borrowing, and stabilising exchange and interest rates. There is no requirement for limiting unemployment or poverty.

These criteria prevent the government adjusting exchange rates, a principle means of altering industry's costs to improve competitiveness. When devaluation is not an option, the only alternative to economic collapse or massive inequality is to redistribute resources.

The merging of the two Germanies with a single currency imposed at a one to one rate illustrates the point. It quickly led to the collapse of East Germany's uncompetitive industries - and to high employment. The West has had to provide massive investment but at least the Eastern economy is being rebuilt. In the UK we have emerged from recession on the back of the devaluation of our currency, an option that was not available to Eat Germany. But, unlike them, we are not seeing the level of redistributive investment needed to remain competitive and overcome economic inequalities.

In theory, the Labour leadership recognises the importance of public investment, but it has accepted the Maastricht criteria, which will severely limit its room for manoeuvre. The leadership shares Chancellor Kenneth Clarke's position on a single currency - the monetary union is possible without political union or, in Robin Cook's words, the creation of a "European super-state". Yet the idea of creating a common unit of exchange between countries as radically different as Germany and Italy before unifying internal policies, especially redistributing resources, is a bizarre economic miscalculation, according to leading economist JK Galbraith.

In a European monetary union, we should expect economic shocks which result from the different impact of economic events on differing local economies. But under the Maastricht Treaty there would be little scope for dealing with crises by redistributive methods - the most logical and effective way - as resources for redistribution are limited to 1.2% of gross domestic product by the Treaty.

European monetary union should only go ahead if there is a much larger centralised budget to promote industrial investment and protect weaker economies. Stable exchange rates and a common currency require co-ordinated social and economic policies aimed at full employment and reducing poverty, rather than the monetarist convergence of Maastricht. This demands strong, accountable and accessible Europe-wide institutions to govern an economy which has become European, indeed global, whether we like it or not.

It will take courage to choose this social federal option which, far from surrendering sovereignty, can restore democratic accountability that has already been lost to the unelected European Commission and the secretive Council of Ministers. The existing veto is a two-way process which has prevented progress, for example in dealing with the excesses of the Common Agricultural Policy.

The Labour leadership promises social justice, but this must mean effective policies to restore full employment. Without these a Labour victory will soon turn sour, particularly if it includes acceptance of Maastricht's deflationary path and single currency without mechanisms for redistribution. This is why Labour must boldly campaign for a democratic, egalitarian and federal Europe, seeking the support of the electorate for this in a referendum. Considering the low esteem in which Westminster is held, the Labour Party should not be frightened of pushing people's understandings beyond nationalistic self-interest.