Article from The Times Business Supplement

As the UK contemplates yet again what life would be like in Euroland, we should ask ourselves will the EU grow and prosper in the years ahead?

Figures from the European Commission itself show that they expect the relative importance of the EU to the world economy to shrink substantially over the first half of this century. In the year 2000 the EU accounted for 18% of world national output. Put another way, citizens of the EU between them earned almost one fifth of the world's income.

The EU's own forecast is that this share will drop to only 10% of world output by 2050. In other words, after 50 years only one tenth of the world's income will come to EU citizens. This will still leave people in the EU relatively well off, but it shows that far bigger trade and business opportunities must lie outside the EU than will be created within it.

The biggest reason for this relative decline lies in the likely trend of populations. UN figures forecast a drop of 19% in the EU's working age population over the same fifty years. This decline will be led by Italy, with an expected drop of41%, Spain with a fall of 35% and Germany with 21%. Small growth is expected in the UK and bigger growth in Ireland. Much of this fall is inevitable, given the age structure of the current population and the present trend in family size.

In comparison the USA is expected to show 31% growth in working population. This is the result of anticipated inward migration, and a younger age structure with more young families. The UK and Ireland are mid Atlantic, having more of the dynamic characteristics of the USA than the main countries on the continent.

These same figures persuaded the Institut Francais des Relations Internationals to suggest that the EU's share of world trade will almost halve from 22 % to 12 % between 2002 and 2050. World trade will be growing, but this limits the scope for British exporters if we concentrate too narrowly on the EU to the exclusion of much faster growing Asia and the USA.

Since 1996 the US model of economic development has proved much better at increasing living standards than the EU-Euro model. Over the subsequent six years the USA has notched up growth of 20.7%, despite the setback of the Wall Street collapse and the ending of the internet craze. The EU over the same period has achieved growth of only 15.5%, being slower than the USA in every year save the bubble bursting year of 2001.

I am all in favour of the UK trading with anyone around the world where we and they can profit from exchange. We carry out around three quarters of our trade in dollars or pounds. Although the dollar is the single biggest foreign currency we trade in, no-one sees any need for us to sign up to the control of the Federal Reserve Board in order to protect and strengthen that trade. It is difficult to see why we would need to join the Euro to protect and increase that minority of our trade which we carry out in Euros.

We should ask ourselves why is the EU performing relatively poorly? What is it about the US model that lets them increase prosperity more quickly? Part of it is the more rapid immigration into the US, creating more flexibility in the labour market. But part of it is the materially lower tax rates and lighter regulation than on the European continent, giving entrepreneurs in the USA more freedom and incentive to serve the public and make a profit.

OECD figures for 2000 show the USA collected 29.6% of all income generated as tax revenue. In contrast the EU average took 41.6% of all income earned in tax. The UK and Ireland were below the EU average, with fast growing Ireland at a 31.1% tax rate much closer to the USA. Sweden and France were well above the EU average for tax take. Attempts to compare regulation and the climate for business, relying on more judgement, also usually rate the USA as a better place to do business than the heavily regulated continental countries.

The EU is imposing large burdens on itself. High tax rates and substantial government interference make it difficult to match US or Asian cost levels and flexibility in business. As a result growth rates disappoint. The EU is in danger of being caught in the vicious spiral of insufficient output, high tax rates to try to keep the revenues up, leading to poor economic performance and the imposition of still higher rates. Ireland has shown that a country with the courage to break free and post much lower tax rates soon grows very quickly, yielding more revenue from lower rates, creating a virtuous circle.

The likely big decline in the relative size of the EU economy, the shrinking of its importance in world trade, and the enthusiasm for high taxes should make us wary of hitching all our wagons to the EU. The US and Asia are the probable winners over the years ahead. Whilst Mr Brown concentrates on whether there are enough similarities between the UK and Euroland in the short term, we should remember these larger differences. The trends tell us to keep our options open, and to be friends with Asia and the USA as they surge ahead.