We would soon repent a hasty union

There is an admirable debate about Britain's future in Europe under way. There was David Heathcoat-Amory's pamphlet released after his resignation from the Government. At the same time there appeared Christopher Johnson's book, In with the Euro, Out with the Pound and 10 pages of questions and answers put with hostile intent by three Labour MPs headed by Denzil Davies.

Although Mr Heathcoat-Amory and Mr Johnson share much of the same analysis, they reach opposite conclusions about the central question: would national governments retain much freedom to take their own decisions on taxes and borrowing in a single European currency system.

In theory economic policy would be like a car with two drivers, one handling the steering wheel, the other the accelerator and brake. Tax levels and borrowing would continue to be fixed by individual governments, while interest rates and other monetary questions would be settled by a European central bank sitting in Frankfurt.

Unless modified, this cock-eyed arrangement would create a mismatch between the decisions taken by individual governments as a whole and the actions of the European central bank. As one driver was steering the car round a corner, the other could be pressing down the accelerator and the vehicle could run out of control. A second ill consequence would be that a country running a large budget deficit would attract more than its fair share of savings from other members of the single currency area.

This is why the Maastricht Treaty does indeed limit national governments' freedom to take whatever budget decisions they choose. Co-ordination is a duty: "Member States shall regard their economic policies as a matter of common concern and shall co-ordinate them within the Council."

Then there are the notorious tests that countries wishing to join the single European currency have to pass; these cover total borrowing and the size of the budget deficit. Apart from Luxembourg, there is not a country, including the UK, in Europe which can be certain of meeting them without substantial cuts in government spending. Moreover, after entry, excessive borrowing can be punished by penalties and fines.

The test of an economic system is how well it promotes growth and stable prices and how it copes with shocks. Merging the pound into a single European currency would bring certain benefits. British interest rates would be lower. Traders and travellers would save the foreign exchange costs incurred in swapping one European currency for another. Inflation is also likely to be under better control and competition within the single market enhanced.

The most likely shock coming from outside is a world-wide recession. What normally happens is that automatic stabilisers come into play. During recession the Government takes part of the strain by increasing its borrowing to finance the loss of tax revenues and extra unemployment benefits. This tends to stabilise the economy and helps it recover from a downturn. But under the Maastricht rules strictly applied, this automatic balancing would either not happen or operate less smoothly.

Some argue there could also be shocks that affect only one or two countries and not all the members of a single currency area. These could be a sharp change in the oil price, falls in demand for agricultural products, manufactured goods or financial services. The traditional remedy - devaluation - is no longer available. Instead local wages or prices would have to decline in real terms. But here, as David Heathcoat-Amory points out, the whole thrust of Community social and employment legislation is to strengthen the position of workers versus management and make such adjustments more difficult to achieve.

The big divide comes in the next stage of the argument. Christopher Johnson, who is pro-Europe and believes that the advantages of belonging to a single European currency are worth seizing, writes that all these concerns can be met. The Maastricht budget limits would not be applied "sado-masochistically" and he doesn't really believe there could be shocks that could affect one or two countries alone. Mr Heathcoat-Amory, on the other hand, says there is no "European economy" and that the imperfections of the Maastricht controls on individual budgets would drive the European Union itself towards having a much bigger budget of its own, so that finally the United Kingdom's relationship with Brussels would be like that of Texas with Washington.

Paradoxically, as a Europhile I find myself in agreement with the Eurosceptic Heathcoat-Amory. The dynamics of economic policy-making mean that, sooner or later, one of the two drivers in the car will put the other into the back seat. Monetary questions and budget policy will come to be settled at the European level rather than by national governments.

We would thus have arrived at a United States of Europe by completely the wrong method. Rather than willing it as an objective from the beginning, as I think we should, and taking appropriate steps over a period of many years, under monetary union we should find ourselves pushed there too quickly by a series of economic/ monetary crises and we should have constructed a closer European union under duress and in a bad temper. Nobody can want that. For the time being, therefore, it is essential that the United Kingdom remains in the discussion, that no pre-election pledges are given, and that we stand ready to exercise our opt-out.