June 09, 2003

The Consequences of Britain's Saying "No" to the Euro

David Begg, Olivier Blanchard, Diane Coyle, Barry Eichengreen, Jeffrey Frankel, Francesco Giavazzi, Richard Portes, Paul Seabright, Alan Winters, Anthony Venables, and Charles Wyplosz say that The Consequences of Saying No--or, rather, not yet--to the euro are much bigger than the British Treasury thinks. A Britain that is not in the euro has no influence on how the euro zone develops. And they believe that over time--a couple of decades?--British trade will reorient itself toward Europe. Thus the choice is between joining the euro now (and helping the euro zone evolve in a direction that is good for Britain) and joining the euro later (and in the meantime having no influence into how the euro zone evolves). Posted by DeLong at June 9, 2003 07:33 AM | TrackBack

Comments

I think this is possibly the strongest argument in favour of the UK immediately joining the Euro, however I find it unconvincing for 2 reasons. First, there seems to be a gulf in attitudes between the French and German politicians on the one side and the British (particularly the Conservative party) on the other. In France and Germany there is currently a lack of political will for tackling the issues that may hold back a successful Eurozone e.g. labour market regidity (a Thatcher for Europe anyone?). Secondly, I do not see how Britain's voice from inside the Eurozone pushing for more de-regulation will be any louder than the many other voices outside wanting the same e.g. the Eurozone's trading partners, the IMF, the ECB perhaps. No growth in France and Germany is surely the loudest voice of all but will it be listened to? I doubt it.

Posted by: Mike Beeby on June 9, 2003 09:03 AM

I think this is possibly the strongest argument in favour of the UK immediately joining the Euro, however I find it unconvincing for 2 reasons. First, there seems to be a gulf in attitudes between the French and German politicians on the one side and the British (particularly the Conservative party) on the other. In France and Germany there is currently a lack of political will for tackling the issues that may hold back a successful Eurozone e.g. labour market regidity (a Thatcher for Europe anyone?). Secondly, I do not see how Britain's voice from inside the Eurozone pushing for more de-regulation will be any louder than the many other voices outside wanting the same e.g. the Eurozone's trading partners, the IMF, the ECB perhaps. No growth in France and Germany is surely the loudest voice of all but will it be listened to? I doubt it.

Posted by: Mike Beeby on June 9, 2003 09:04 AM

No one, whether in or our of the Eurozone, has any influence on the future development of the Euro, except a small coterie of central bankers with a deflationary bias. If Britain joined the Euro, why wouldn't it end up in the same macroeconomic hell as Germany?

Posted by: Gareth on June 9, 2003 09:25 AM

This is just another variant on the unconvincing old argument that goes "we have to join the vanguard of unification to Punch Above Our Weight[TM]", or "the United States of Europe is a Historical Inevitability[TM]", intended to invoke a sense of panic accompanied by fatalism in the audience.

Dreary scaremongering rubbish. France and Germany are already in the Euro, much to their discomfort, and what influence have they shown to affect its' course thus far? If they can't affect it from within, when there are only 12 members to account for, why should Britain on its' own have any major influence in a 25 member Eurozone?

Posted by: Abiola Lapite on June 9, 2003 10:15 AM

I remember reading several articles last year where people of various nations around the world were polled as to whether they liked living in their home country and would they like to move.
Surprisingly, the only country where a majority (something like 54%) of the people said they would move to another country if they could was the UK. I know many British expats and most are not unhappy they left (with the exception of some Scottish people, but then Scotland is more like Europe anyway). Besides the complaints about the weather (which would be worse in the case of the Irish), the middle class professions in England are paid poorly, and have to cope with a very high cost of living (especially in London). Basically, unless you're rich, England stinks, and most of them chose Spain, France, or another country of continental Europe as the place they would ideally move to if language was not a barrier.

So everyone can say how wonderful it is that England is not part of Europe, that it has wonderfully flexible labor laws, that it is 'business friendly', but I think that for the average guy this means very little and they'd probably be better off in a more european style social democratic system.

Now I know that the serious economists here will be able to quote me various formulas and theories as to why I am wrong, but after all economics is an inexact social science and from what little I know researchers in the field are still messing around with trying to evaluate little, unimportant things like 'quality of life' and put an economic value to them. To my mind, these things are much more important than has previously been given credit by most mainstream economists (and seems to have been left out of Milton Friedman's famous theories). Just ask the British...

Posted by: non economist on June 9, 2003 10:37 AM

This argument seems more likely to be found correct, with the passage of time, if the UK joins and wrong if it does not. If the UK does not join, then why would the next 20 years bring a reorientation toward trade with the Continent? If it does not join now, why would a Eurozone not constructed to serve UK interest be more attractive to the UK than it is now?

Claims that the authors know the direction of both UK trade trends and the UK citizenry's desire for adopting the euro make this a pretty tenuous argument. If my assumptions proved correct instead, then the urgency this article offers is quite overstated.

Posted by: K Harris on June 9, 2003 11:05 AM

Agreed. We are always comfortable in France and Germany and Netherlands, and never have the sense we could not happily live in any. Are there nuisances, of course? But, life in France seems quite pleasant for all our French friends and they are not forever wishing to move to London or Chicago. England can stay out, England can enter. Europe is at peace, and offers a nice middle class life easily as pleasant as in England, perhaps a trifle more so.

Posted by: dahl on June 9, 2003 11:16 AM

Isn't joining the EU a combination of three economic realities: (a) getting the benefits of being in its free trade zone; (b) trying UK monetary policy to the monetary policy of the ECB; and (c) trying the hands of fiscal policy during recessions in the same way U.S. state governments are tied. Policy (a) strikes me as a good idea while policy (c) strikes me as a bad idea. Whether a nation should tie its monetary policy to that of the ECB might be good if the nation was prone to excessive monetary stimulus otherwise - but that seems not to be the case for the Brits. So wouldn't the wisest course of action be free trade without the rest of the EU trappings?

Posted by: Hal McClure on June 9, 2003 11:39 AM

"France seems quite pleasant for all our French friends and they are not forever wishing to move to London or Chicago."

Do you know just how many young French people there are working in the Greater London area these days, and vice versa? It's easy enough to maintain comfortable stereotypes about how much better life is on the continent when you don't have to worry about silly things like "facts".

Posted by: Abiola Lapite on June 9, 2003 11:42 AM

Facts is facts. Just how many young French people are working in London these days? Just how many young French people are working in Paris? Just how many young French people are working in New York? Just how many young American people are working in Paris, where we were just working? Curious, we even had fun in France. Imagine.

Posted by: dahl on June 9, 2003 11:48 AM

There are at about 400,000 Frenchmen currently residing in the Greater London Metropolitan Area, if I recall correctly.

"Curious, we even had fun in France. Imagine."

Hooray for you, but you don't account for the British populace all by yourself, and they don't want the Euro or more integration.

Posted by: Abiola Lapite on June 9, 2003 12:43 PM

How can so many apparently intelligent people get it soooooo wrong? Haven't they got eyes to see what's happening in Germany? Do they understand nothing of Europe's problems? Oh well, never mind.

Posted by: Edward Hugh on June 9, 2003 12:46 PM

Get it. The Euro countries will be fine even -shudders - if England stays away. Perhaps there are even a few reasonable people in France who like being French.

Posted by: dahl on June 9, 2003 12:49 PM

But how can so many apparently intelligent people have it all sooooooo wrong. Have they not eyes to see what is happening in Germany? Do they understand nothing of Europe's current problems.

I agree with Brad's last post, the Treasury are in fact diplomatically saying never. This formulation is just 'polit-speak', and this is the whole euro problem, economic arguments are never examined on their merits, but always politically. I think this was Marty Feldstein's point from the start.

Not to worry, I think five years from now the argument will have settled itself.

Posted by: Edward Hugh on June 9, 2003 12:54 PM

I think the Brits should wait in New York and book a passage on the return voyage of the Titanic. Maiden voyages are full of surprises.

Posted by: Tom Maguire on June 9, 2003 04:33 PM

According to the Conseil supérieur des Francais de l'étranger there are roughly 180,000 French nationals in the UK. (65,000 were "registered").

The 2001 UK census indicates there were roughly 59,000 French in the UK and 50,000 Brits in France (I assume they are just the registered migrants). The figures are dated, but they are "official" (and reasonably balanced).

Posted by: Stephane on June 9, 2003 10:21 PM

Noting how many youthful individuals there are wandering around the world seems a pretty iffy way to measure the relative merits of various societies. Youth travel (travels?). Youth seek advanture. I know the sort of observation of work overseas allows us to get away from the hard data that seem inadequate to capture satisfaction with one's culture and yearning for another, but getting away from one kind of data doesn't really justify misusing other data. I wasn't dissatisfied with the US and I spent a number of years working elsewhere. I'd bet French and Irish and English and Persian youth live and work abroad for any number of reasons that don't reflect ill on their own nations.

Posted by: K Harris on June 10, 2003 05:41 AM

Edward - "But how can so many apparently intelligent people have it all sooooooo wrong. Have they not eyes to see what is happening in Germany? Do they understand nothing of Europe's current problems."

Pity so little heed was taken of all those German economics professors back in 1998:
http://www.internetional.se/9802brdpr.htm

Posted by: Bob Briant on June 10, 2003 06:46 AM

To put it in context, saying that the euro can not thrive means really that no country of Europe can hope for anything else as a future apart from a politically irrelevant dependence of the USA, kind of bigger Puerto Rico at best.

DSW

Posted by: Antoni Jaume on June 10, 2003 10:53 AM

"..the idea of monetary union [in Europe] as a barrier against the 'Anglo-Saxon' world has been made more explicit than ever before: in March 1996, for example, the Belgian Finance Minister said baldly that monetary union was about 'preventing the encroachment of Anglo-Saxon values' in Europe. And when it became clear even to the wilfully blind that the economic policies followed in pursuit of monetary union were destroying jobs, not creating them, ravenging the public finances, not restoring them, devastating confidence, not fostering it, a whole slew of European politicians changed tack and proclaimed the essentially political, not economic, ambition underlying the single currency idea. . ."

- from the preface to Bernard Connolly: The Rotten Heart of Europe (P/B edition 1996), p. viii.

Bernard Connolly, a Brit, was an EU Commission official and head of the Commission's monetary policy unit at the time he was sacked in 1995 for making critical comments about the European monetary union project. The preface to the first edition includes this passage:

" . . My way of thinking about economics and my confidence in the face of criticism owe a great deal to Rudi Dornbusch and Olivier Blanchard, both of the MIT, the first of German origin, the second French. I worked very closely with them in 1983-5, when I was secretary of the Commission's Macroeconomic Advisory Group, of which Rudi was the first Chairman and Olivier an outstandingly creative member. At that time, the Commission was more open to analysis and intellectual debate than it became once Jacques Delors had got his feet firmly under the table. . ."

Posted by: Bob Briant on June 10, 2003 01:35 PM

From what little I know about economics, it seems that the lack of labor mobility is one of the biggest problems with the currency unification.
However, it would seem likely that as time goes on this will cease to be so problematic.

After all, with the growth of the EU and the the increasing number of countries joining the central currency, Europe will soon benefit from a large pool of eastern european workers who are likely to be more easily enticed to live away from home to earn more.

As it stands, perhaps the UK does not stand in need of european workers because they basically have an unlimited pool of low income, easily mobile workers that can come from their former colonies.

Posted by: non economist on June 10, 2003 03:26 PM

Without some inward migration into western Europe to slow existing trends towards population ageing and eventual decline it will become impossible to sustain the European social model on anything remotely like its previous scale.

Recent proposals by governments in the major mainland economies to scale down welfare entitlements and extend the length of working lives to retirement and state pension eligibility have already provoked widespread public protests - for a recent summary on the state of play, see: http://www.guardian.co.uk/eu/story/0,7369,974986,00.html

Sadly, as Denis Healey said to a Labour Party Conference in 1978: "It is not possible to re-write the laws of arithmetic."

Posted by: Bob Briant on June 11, 2003 07:58 AM

"To put it in context, saying that the euro can not thrive means really that no country of Europe can hope for anything else as a future apart from a politically irrelevant dependence of the USA, kind of bigger Puerto Rico at best."

So, because the failure of the Euro supposedly forecloses some outcome you dearly desire (never mind whether your predictions are true or not), it MUST and SHALL succeed!

That's very peculiar reasoning: I didn't realize the universe owed us the fulfillment of our political yearnings ...

Posted by: Abiola Lapite on June 11, 2003 01:03 PM

Latest news about the EU Commission in Brussels:

"In a report released on Thursday the National Audit Office concluded that, for the eighth year in succession, Brussels' books were not in a fit enough state to endorse." - for: www.ePolitix.com

The full report in PDF format from the NAO website can be downloaded at:
http://www.nao.gov.uk/publications/nao_reports/02-03/0203701.pdf

Posted by: Bob Briant on June 12, 2003 04:51 AM
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