June 09, 2003

Joining the Euro

The British Treasury says it says "not yet" to the euro. But of the reasons it adduces for not joining the euro yet, two--the greater correlation of British with American than European business cycles, and the greater vulnerability of Britain to interest rate shocks--aren't going to go away any time soon.

Thus I cannot see what changes in the economy or in the economics (as opposed to the political) analysis in the next five to ten years could lead to a different conclusion.

So I suspect that--even though the British Treasury is saying that it is saying "not yet"--that the British Treasury is really saying "never."


Quicken Brokerage - News Center: LONDON -- Britain's Treasury announced Monday that the economic conditions are not yet right for Britain to join the 12-nation euro zone and swap its pounds and pence for euro notes and coins.

From misaligned exchange rates to oversensitivity to interest-rate changes, the economic studies commissioned by the Treasury indicate that the "clear and unambiguous" case for the United Kingdom dropping the pound in favor of the euro cannot yet be made, the Treasury said.

The general tone of the documents was not strongly in favor of or against adopting the euro, and in some cases where problems were identified the studies suggested remedies would be available. The evidence presented by the studies supports the government's position of being in favor of joining in principle but against doing so until economic conditions are right.

Chancellor of the Exchequer Gordon Brown said on Sunday that he favors joining the euro in principle and suggested he will try to rally skeptical Britons behind the European single currency. Mr. Brown told the British Broadcasting Corp. that he would campaign for Europe and the "principle of the euro" after delivering his verdict, in a bid to "sweep aside anti-European prejudice" in Britain.

"In principle I want to join the single currency, but in practical terms we have got to make sure that the conditions are right," Mr. Brown said.

The economic studies say that:

  • The long-term equilibrium exchange rate is 1.37 euros to the pound, below the present rate of 1.4255 euros.
  • That the U.K.'s business cycle is more closely linked to the U.S. than to larger members of the euro zone and that U.K. fluctuations in the rate of economic growth are greater than the euro zone's.
  • British consumers are more sensitive to changes in interest rates than their euro-zone counterparts because of the importance of housing as a source of wealth and the prevalence of variable rate mortgages. As a result, the U.K. economy would suffer more than current members of the euro zone if the single interest rate set by the European Central Bank wasn't appropriate...
  • Posted by DeLong at June 9, 2003 06:45 AM | TrackBack

    Comments

    "Thus I cannot see what changes in the economy or in the economics (as opposed to the political) analysis in the next five to ten years could lead to a different conclusion."

    But it's the political analysis that matters. Blair will hold a referendum when he thinks he can win, and fudge the analysis accordingly. Just as he fudged the intelligence reports leading up to the war. If the opinion polls had been 70-30 in favour of adopting the euro, instead of 70-30 against, the analysis would read very differently.

    Like Clinton, the only thing Blair really cares about is his place in history, and, as he hasn't really achieved anything much in Britain domestically, this is about the only thing left for him. But you're right in saying that Britain won't join in the forseeable future.

    Posted by: PJ on June 9, 2003 07:21 AM

    http://www.hm-treasury.gov.uk/documents/the_euro/assessment/euro_assess03_speech.cfm

    is the word from the horses mouth. It looks less negative than I was expecting, and includes measures to actually try to pass the tests -- inflation targets, changeover plans etcetera and begins with a long description of the advantages to be had from the euro. It doesn't say the tests have been passed but it seems to me to come as close as possible without passing them and does say that they can be passed. Now this may be code but I am still surprised by how it is being reported.

    Posted by: Jack on June 9, 2003 08:53 AM

    "Blair will hold a referendum when he thinks he can win, and fudge the analysis accordingly."

    That presumes that Blair can wrest the analysis from Brown and the Treasury, which appears to be more unlikely now than before Brown's statement. Today's joint press conference was pretty telling; Brown may 'accept the principle', but his department has the veto, and Blair may be forced to choose between his Chancellor and the euro if he wants to push through his 'legacy'.

    Posted by: nick sweeney on June 10, 2003 08:12 AM

    "Blair will hold a referendum when he thinks he can win, and fudge the analysis accordingly."

    That presumes that Blair can wrest the analysis from Brown and the Treasury, which appears to be more unlikely now than before Brown's statement. Today's joint press conference was pretty telling; Brown may 'accept the principle', but his department has the veto, and Blair may be forced to choose between his Chancellor and the euro if he wants to push through his 'legacy'.

    Posted by: nick sweeney on June 10, 2003 08:14 AM

    The key to this one is that the man in the street is dead opposed to the Euro. This is a gut reaction and it is incredibly widespread. As one taxi driver (a key bellweather of British political sentiment) told me 'by having the pound, we stay strong'. You cannot underestimate the degree of antipathy towards Europe, especially the French and the Germans, in the mind of the average Britain. Spain is OK, you can go on holiday there, but the Germans bombed us and the French ran away.

    (if you told everyone that the pound was going to have a fixed value in euros ie the same economic consequences, but would still be the pound, there would be none of this opprobium. i.e. this is an emotional issue not a debate about economic advantages)

    Blair can read that so he has shied away.

    Posted by: John on June 13, 2003 01:34 AM
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