June 07, 2003

Under What Conditions Does the Euro Make Sense?

Michael Prowse of the Financial Times makes the interesting argument that it makes sense for Britain to enter the euro zone if and only if the European Union is committed to a long-term program to create a real United States of Europe: only if European political integration is going to proceed much farther will Europe become an optimal currency area, and the euro make sense. It's an interesting argument. It may well be a correct one:

FT.com / Business: ... You may have noticed that people's attitudes towards the euro tend to correlate well with their political opinions. On the whole, those who are comfortable with the EU's political ambitions favour monetary union as soon as it is practical. The euro's opponents, meanwhile, tend to be deeply unhappy with plans for deeper European political integration and they regard federation as the ultimate evil.

This division of opinion is more rational than it may at first sight appear. It is unthinkable that the EU could now dismantle the euro and reintroduce national currencies; this would be a recipe for chronic instability in an era of global capital mobility. Yet economists such as Martin Feldstein of Harvard also have a point when they argue that the EU fails to meet the criteria for an efficient currency union. If a one-size-fits-all monetary policy is not to end in disaster, the EU must do more than merely increase wage flexibility - a difficult enough task in itself. It must also strive to increase internal labour mobility and develop fiscal policies that will tend automatically to stimulate regions depressed by a monetary policy that does not suit local conditions.

Both these goals will probably require a form of federalisation. If labour is to be more mobile, social welfare, pension and healthcare policies will need to be harmonised so that workers can move freely within the union without jeopardising their long-term security. Even then, linguistic and cultural barriers will continue to impair job mobility.

If automatic fiscal stabilisers are to function properly, the EU will need both to raise more revenue centrally and, increasingly, to make transfer payments from Brussels. Ironically perhaps, a continental monetary union is likely to function well only if the EU becomes structurally more like the US. In America, labour is mobile and federal fiscal stabilisers - increases in transfers and decreases in taxes - offset a large chunk of the decline in the relative income of states.

The point is not merely that the euro makes most sense for those who implicitly accept the case for a more federal EU (whatever it is called). It is that the EU will adopt increasingly federal structures because the alternative - allowing the rigidities of the euro to cause a long-term slump - will be less palatable. This prospect will not particularly alarm many EU states, and especially the smaller ones, because they favour greater social, economic and political integration on other grounds.

But the government has yet to explain these facts of life to the British people. Joining the euro will be an irrevocable decision. And it will benefit the UK considerably through increased trade, investment and growth. But monetary union is not a suitable policy for a loose grouping of sovereign states. To be successful it will require greater European integration.

Hence the inconsistency in Tony Blair's policy. During the past six years he and other ministers have not done nearly enough to persuade the British people of the general merits of the European project. Too often they have been either silent or critical of the UK's European partners. And Mr Brown has often pushed the line that the UK does everything better than the rest of the EU. This is manifestly untrue, as anyone who has ridden a French train or hired a German plumber will testify. But its effect has been to turn the public against the EU.

The timing of the debate over the European constitution is thus fortunate. It gives the government an opportunity to correct these past errors and to argue more vigorously than before for European ideals. If it cannot carry the nation with it, there is not much point in considering monetary union. In fact one is tempted to go further. If the government is not willing to call, and by implication is not capable of winning, a referendum on the proposed new EU constitution, it seems rather irrational to plan, at a later stage, to fight a referendum on the euro. It would probably lose - and rightly so, because it would not have properly laid the political foundations for the euro.

Posted by DeLong at June 7, 2003 05:31 PM | TrackBack


The "five economic tests" that the British gov't has said must be passed before it adopts the euro, to be sure the British economy is "properly aligned" with that of the euro zone, make no sense to me regarding their stated purpose.

Surely the whole point of joining the euro is to commit to currency union even when your economy is *not* aligned with everyone else's -- see Germany -- because the benefits of doing so purportedly are greater than the costs of being out of alignment. If so, then waiting year after year for perfect alingment to arrive is costing a whole lot of purported benefits. And even you do find yourself with a happily perfect alingment one year, you can't expect it to last.

So ISTM the tests mainly are political cover to let the gov't decide to join when it thinks it makes sense politically. When the day comes that it thinks it can win a referendum on the euro, it will judge that the tests say "pass". Until then it can pleasantly bide its time using the tests as its excuse for delay.

BTW, the same day's FT also has an interview with Milton Friedman that touches on the subject:
"I ask whether he has changed his famously sceptical views about European monetary union...

Friedman: "I've been wrong so far, so I don't have too much confidence in my view. But I think within the next 10 to 15 years the eurozone will split apart. The British government, on balance, should stay out of it."

Posted by: Jim Glass on June 7, 2003 10:04 PM

This argument is easily refuted by the fact of large-scale immigration to the UK by young French (300,000 is the unreliable figure Iíve heard but coming from near /South Ken itís believable). The bottom line is that large numbers of young Europeans have been prepared to give up superior social, health and transport services to earn a private sector income in the UK. And Iíll bet youíll find the immigration flow from Europe to the US has been one way as well. The social and political integration argument is a race to the bottom and this is evidenced by the fact that the EU countries grew faster than the US in the years that the EEC was a purely economic entity but slower after Masticht and Nice when it became a political objective.

Posted by: giles on June 7, 2003 10:52 PM

This FT article is quite in my perspective, the Euro is essentially a political decision.

Giles, I have no hard data, but the number of US citizen in Europe is of the same order than that of Europeans in the USA. And French youngs in the UK could be mostly explained by the convenience to learn English. Working au pair is not a lasting proposition. Do you have better data?


Posted by: Antoni Jaume on June 8, 2003 01:51 AM

Seems to me that the French/Germans should offer the Brits an ultimatum, either accept the Euro in some defined period of time (3 years, 5 years), or get out of the EU.

Posted by: Don_Quijote on June 8, 2003 05:44 AM

An Ultimatum? Sticking a diplomatic gun to its' collective head would be a damn good way to boost chances that the UK leaves. A UK in NAFTA, perhaps?

Posted by: Steven Rogers on June 8, 2003 07:32 AM

To any practical effect the UK is already in NAFTA. Were the UK a closed-economy, then NAFTA might mean something, but since it is already amongst the most open economies any effect would be very small. In fact if that would imply the breaking of relations with EU members, the net effect would be a closing of markets to the UK.
On the other side, I may be wrong in my perception of the UK economy.


Posted by: Antoni Jaume on June 8, 2003 08:14 AM

Yes, I can see it. A United States of Europe. The French will no longer be french, the Germans will no longer be Germans, the Spaniards will no longer be Spaniards. They will all be United Staters. Duh.

By the by, I rather enjoy being in Paris and feeling French as French can be. Of course, I could care less what the British feel like.

Posted by: lise on June 8, 2003 09:16 AM

"To any practical effect the UK is already in NAFTA. Were the UK a closed-economy, then NAFTA might mean something, but since it is already amongst the most open economies any effect would be very small."

To the contrary, the effect would be considerable, for one major reason: labor mobility.

The British, [most of] the Canadians and the Americans share the same language, so that moving from one of these nations to the other to work is no big deal.

In contrast, any British person seeking to work in continental Europe has to master another language, which is neither easy to do nor practical on a wider scale - Europe has too many languages for any ordinary person to hope to master them all, but national pride determines that foreign job-seekers, even in countries like the Netherlands or Sweden, where English is widely spoken, be adept at the native tongue.

Barring any drive to the adoption of a common European working language (which would be fiercely opposed particularly by the French, given that said language would almost certainly be English), the state of labor mobility in Europe for now and the forseeable future will be as follows: lots of continental Europeans can come look for work in the U.K or Ireland, but most of them can't look anywhere else other than at home (unless they're Germans/Austrians or Scandinavians). Conversely, for British nationals, the job market remains de facto national in scope, regardless of whatever treaties and directives are in place.

The monoglot nature of most British people, and the fierce national pride of even the smallest European nations, ensures that very little job mobility will exist in Europe for the forseeable future, and in consequence Milton Friedman is likely to be proven right about the Euro in the long run. NAFTA, on the other hand, is extremely attractive precisely for the same reasons.

Posted by: Abiola Lapite on June 8, 2003 09:30 AM

To the contrary, the effect would be considerable, for one major reason: labor mobility.

The British, [most of] the Canadians and the Americans share the same language, so that moving from one of these nations to the other to work is no big deal."

Sorry, but it seems you are not aware of the Ocean between UK and USA. That means that to low wages it is not particularly interesting to come and go between UK and USA, in relation to standard migrations. And higher level workers are already mobile enough.


Posted by: Antoni Jaume on June 8, 2003 09:55 AM

"Sorry, but it seems you are not aware of the Ocean between UK and USA. That means that to low wages it is not particularly interesting to come and go between UK and USA, in relation to standard migrations."

This is, to be blunt, absurd. If it were true, there'd be no reason for me to have moved between the two continents repeatedly over the last several years, as indeed I have. I'm speaking of a phenomenon I've observed myself, and you want to tell me that it doesn't exist? It costs less than $350 to get a return ticket from London to New York, so what is the significance of the "ocean" in all of this?

As for "higher-level workers", unless you're talking about CEOs, you've completely lost the plot. Perhaps you've heard of the H-1B program, and know something about why it's necessary? And what about the great mass of the labor force that doesn't consist of "higher level workers"? What about their mobility? Or don't they matter, even though they constitute 99% of most economies?

It wouldn't surprise me if you claimed they didn't, though. Elitism has always been the stock in trade of E.U. boosters.

Posted by: Abiola Lapite on June 8, 2003 10:15 AM

No matter, Britain will not be adopting the Euro for years at the least. The need is for fast enough growth in the Euro countries to raise employment meaningfully. America needs the same.

Posted by: lise on June 8, 2003 11:33 AM

The FT is right, but there is no European polis. Very few Brits consider themselves European, and the same can be said for French, Germans, Italians, etc. If they don't believe that they're primarily a member of the European 'community' (as opposed to the actual transnational entity), how are they to support projects which may place the European interest above that of national interests. The only 'European' identity there is exists among high-level bureaucrats. De Gaulle was quite right in asserting that the only successful Europe would be a "Europe des Patries", a Europe of nations, not a National Europe.

Posted by: Frank Sensenrbrenner on June 8, 2003 12:56 PM

Firstly I am comparating the situation between what we have now and what we would have in the case of a free movement of workers situation. And I do not believe it would change a lot on what we already have, after all you did not wait for it, isn't it?

So lets see: Are you a low wage worker? Are you married? have you children? Do you have savings to cushion between jobs time?

350$ may be little for you, but you fail to count the time involved, a day of work lost only for the travel.

Higher level workers are those who have a technical formation. They don't get hired on the spur of the moment. And now with the anti-terrorism frenzy I doubt more than ever that people would be allowed in the USA with less difficulties.

H1B are a kind of temporary work visa. One that gives less rights than the normal working visa.


Posted by: Antoni Jaume on June 8, 2003 01:07 PM

By the by, H1B has an awful effect on American technology workers. This is not a time to be offering American jobs at cut rates to international employees!

Posted by: arthur on June 8, 2003 01:43 PM

Does anyone really think that the Bush administration is keen to free trade as purported by NAFTA? Or rather they mean "it is free when we are the only benefited".


Posted by: Antoni Jaume on June 8, 2003 02:32 PM

Abiola, you seriously overestimate labour mobility in the anglophone world and underestimate it in the EU.

Giles seems to be on the same page, not understanding why more continentals move to the UK and Ireland than the other way around. Brits don't move to Europe because they have not developed much in the way of linguistic talent, while middle class Europeans often speak quite functional English. I doubt that many minimum wage, non-university educated Frenchmen or Germans feel any temptation to move to the UK. And, my Flemish company has a Swedish boss and a majority French and Swiss coding staff, as well as two Dutch employees. Two years ago, the company also had a group of Germans and Spaniards. Oh yeah, and they have two Canadians working for them. My company is not especially unusual as proessional services go.

I have the impression that low wage work is even more international than professional services. The cleaning ladies in my office are all French-speaking Portugese women, and the guy who runs the frietkot on the corner is Greek. Plenty of people seem to be taking advantage of freedom of movement.

Getting a work permit for the US, however, is painful no matter what country you come from. It took two and half years for my Canadian parents to get green cards, even though they were moving to the US to be government employees. NAFTA does not give Canadians any right to work in the US. It doesn't even make it easier to get visas. In fact, it was easier to cross the border in 1985 - before NAFTA - than in 1995.

Abiola, I wonder if you understand what the H1-B is for? It is restricted by law to skilled labour earning more than the median wage in their industry. That is not for unskilled or low wage labour.

Besides, have you ever moved to New York? Labour mobility means having money to get a new apartment and to stay in and a hotel while you look for one. This is especially difficult if you move before you've found a job, and in low wage industries few people will hire you from a long distance. Then there''s the time you take off getting your driver's license transferred, registering the kids in a new school, and if you're going to America, you have to buy a new car. Poor people in America often have difficulty moving between counties, much less countries.

Unless you have money, mobility is limited to those with friends or family to help them move. This is often true even in a single country, and even more true across borders.

Posted by: Scott Martens on June 8, 2003 02:59 PM

"Abiola, I wonder if you understand what the H1-B is for? It is restricted by law to skilled labour earning more than the median wage in their industry. That is not for unskilled or low wage labour.

Besides, have you ever moved to New York?"

I think you're the one with a comprehension problem, in particularly one with reading. I brought up the H-1B precisely to illustrate the potential for trans-Atlantic mobility that lies untapped. I never claimed that Anglophone mobility WAS already high, simply that it would potentially be much higher than what can exist within the E.U.

And yes, I HAVE lived in New York City, in the Upper East Side, in Gramercy, in the Village, in the Outer Boroughs ... Don't assume that I'm speaking out of ignorance.

Posted by: Abiola Lapite on June 9, 2003 04:32 AM

To echo Scott Marten's observations, over the past 10 years I have observed a (to me) surprising increase in labour mobility within certain parts of the EU, a phenomenon I was initially sceptical about for exactly the same reasons Abiola sets out.

I say "certain parts" of the EU, having been primarily to the UK, Benelux, Germany, Spain and Greece, and seen little of the rest of Europe.

I had expected labour mobility to consist mainly of highly educated professionals in a milieu where English or German would form the primary mode of communication. The language barriers in Europe are very real, and certainly exist.

However, the numbers of migrators in low-level jobs (assembly line work, cleaning, construction, seasonal agriculture) has swelled in the countries I've been to over the past decade. The language barrier has been surmounted, or rendered irrelevant, by a number of means:

1. Most low-level workers learn just enough of the native language (or English if the natives are so inclined, like the Dutch) to understand and follow the basic instructions neccessary to carry out their jobs. I did grunt work at a warehouse seven or eight years ago in the Netherlands, where not one of my colleagues was Dutch, and we communicated in a really atrocious but very useful English-Dutch hybrid, also with the supervisors.

2. Migrants of the same nationality are gradually forming different, sizable communities. Speaking only pidgin English is fine for the assembly line, but guarantees that you will have no social life outside the factory. People have the choice of either learning the native language, or specifically seeking out others from their home country to associate with, and I get the impression that the latter route is increasingly being taken. This has a feedback effect: the greater the community present, the more migrants from that country arrive. Thus, for instance, in the Netherlands, Ghanaians have achieved critical mass and have a sizable, growing community, while their African neighbours the Nigerians don't.

I suspect that this phenomenon, still in its infancy, will have a profound effect on European demographics, culture, and politics in a couple of decades' time, and I think a number of pro-EU Europeans don't quite realize how fundamentally this is going to change the nature of the countries they live in, and that many of them are not going to like that change very much either. (Of course, I have no qualms about it, but then I'm part of the problem, not part of the solution :) )


Posted by: Elliott Oti on June 9, 2003 12:19 PM
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