The government has pledged serious money for public services. But its investment faces a dual threat. If Britain joins the euro, cuts are likely to be demanded under the stability and growth pact. And the European commission's fiscal orthodoxy is already having its effect on Gordon Brown: with all EU governments under pressure to shift public services into the private sector, the Labour government is now well down this European cul-de-sac.
The Maastricht treaty that paved the way for the euro gave unprecedented power to the European Central Bank, insulating it from democratic accountability. It enshrined the aim of fighting inflation as absolute. It also placed strict limits on budget deficits. Tight control of interest rates is matched by a stranglehold on public finances. Nothing must get in the way of the fight against inflation - least of all the electorate.
Some argue there would be no difference between monetary policy run by the Bank of England, outside the euro, or by the European Central Bank, inside. In reality, it is doubtful whether a single interest rate could ever be appropriate to all EU countries simultaneously. And some central banks are more unaccountable than others. The Bank of England is formally accountable to the chancellor; bank officials have to justify their performance before the House of Commons Treasury select committee; and the Bank of England publishes minutes of its rate-setting meetings and the voting records of members.
In contrast, the European Central Bank has its lack of democratic accountability enshrined in the amended treaty of Rome: "neither the ECB, nor any member of their decision making bodies shall seek or take instruc tions from community institutions or bodies, from any government of a member state or any other body... The governments of the member states undertake... not to seek to influence the members of the decision-making bodies of the ECB."
The UK government sets its inflation target and mandates the Bank of England to meet it. The ECB sets its own target. In Britain, the inflation target is symmetric - it is as bad if inflation undershoots as overshoots. The ECB, by contrast, has an "asymmetric" target of zero to 2%. The only thing that matters is if it is overshot.
At the same time, the stability and growth pact limits budget deficits to 3% of GDP. This leaves governments aiming for deficits below 3%, regardless of the stage of the business cycle, to avoid unforeseen events pushing the actual deficit over the limit. The pact therefore effectively precludes using fiscal policy for demand management purposes.
The threat to public services from the eurozone's public finance straitjacket is bad enough. Worse, governments are trying to meet silly fiscal targets by fiddling the books, handing over public projects and services to the private sector. This allows governments to count the necessary borrowing as private, thus satisfying European fiscal targets.
The European dimension goes a long way to explaining why the Labour government is so keen to get public projects and services out of the public sector and into the private. The mania for costly "public finance initiatives" is to get public sector projects and services "off balance sheet". In the case of London Underground, a Deloitte & Touche report exposed the way in which the figures were fiddled to make privatisation look more attractive. The government presents these policies as necessary for the public sector to benefit from private management. But the public sector could "benefit" from private advice without resorting to such schemes. The way the accounting is done, though, is to ignore public assets - so losing them doesn't matter - and look only at short-term borrowing and revenues. The one practice the public sector will learn from the private sector is short-termism.
Some argue we should go into the euro because Europe has better public services. Britain endured decades of under-investment in public services, but we now have a government committed to a rising share of public spending. Joining the euro would hopelessly compromise this. Under pressure from a European commission wedded to fiscal orthodoxy, eurozone governments are cutting public spending.
The least bad of the single currency alternatives would be to scrap the system of fiscal rate-capping and democratise the European Central Bank, while pursuing active regional, industrial and employment policies. A European budget would allow automatic "fiscal transfers", so if one area is in recession, people pay less taxes to Brussels and receive a greater proportion of benefits.
However, there appears no prospect of this whatsover. The European political elite seem intent on making their single currency work by applying a scorched earth policy to the labour market: if prices and wages aren't sufficiently flexible for policies to work in textbook fashion, then the real world needs to be adjusted.
If one part of the single currency area loses competitiveness, it can no longer devalue. Instead, it must cut wages to reduce prices. Labour market deregulation will therefore be used to force wage cuts in countries unable to devalue and cut interest rates.
This is the real reason why many multinational companies are attracted to the single currency. The lack of "flexibility" in the labour market is "an almost lethal threat to monetary union", according to European Central Bank chief economist Otmar Issing. His conclusion is to deregulate the labour market and attack the "misguided incentives provided by the social security and welfare systems". The patient must not be allowed to die. All lethal threats must be destroyed. Away with labour rights and social protection, bring in the single currency.
· Professor Jonathan Michie holds the Sainsbury chair of management at Birkbeck, University of London, and is author of Public Services Yes, Euro No, published today by New Europe Research Trust, £5 from 020 7378 0436.