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spikegifted - Random thoughts

 

The Euro

August 13, 2003

When the Chancellor's '5 economic tests' are all satisfied, there'll be little or no economic reasons not the join the Euro. However, there're still plenty of political reasons not to join. Personally, whether the currency for this country is Sterling or dollars or Euro makes very little difference.

Whether people feel they're British or not has very to do with whether the country has the British Pound or not. However, it is more about what you believe in - is Britain a sovereign country even if we have a common currency with the rest of the EU and being part of the EU where a significant part of our laws are dictated by Brussels.

Don't forget, if you're unhappy with the decision of any law court in this country, you can always take the case to the European court. Moreover, the decision of the European court will over-rule the decision made even by the highest court of this country. Does this make you feel less British?

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August 13, 2003

Yes, absolutely! You and I, and many other members in this forum, are fortunate enough to be open minded about these things and will read about the issues from different sources and arrive at our own conclusion. However, many readers of the tabloids can't be bothered to the little bit of reading and the editors know that. So the 'newspapers' feed their readers with fear and paranoia and they all come out against anything that is not 'British'... Or anything that's 'European'...

The scary part is - when the UK satisfies all five economic tests, there will be, effectively, no benefit nor drawback on joining the Euro - so the referendum will be all down to 'emotions' for some people.

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August 14, 2003

I complete agree with the 'we should have the euro but not until its economically viable'. Furthermore, we should not even drag the politics of whether to join the Euro until the economic conditions are right.

I don't know why people attach so much of their 'national identity' to its currency. Money is money. You can change it from one form to another. As long as one kind of money is fairly exchanged for another, you're not going to loose out economically speaking. National identity is something you know deep down. To suggest that national identity will be lost due to adaptation of another currency is simply saying that the country is shallow - which is not the case of the UK.

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August 16, 2003

Huh... Thanks for the response.

First of all, if you have the chance to read the rest of my site, you'd know that I'm no economist. Whilst I've had training in both macro- and micro-economics and have good understanding of the drivers in both areas, I'm actually more commonly described as a financial analyst of corporates and financial institutions and more accurately a qualitative risk analyst.

Bearing that in mind, I'd be the first one to admit that the arguments set out in my little write up is not complete and certainly not bullet-proof. However, I believe that my arguments and counter-augments sufficiently supported by observation and evidence. They may or may not agree with the government's (and the Treasury's) line of reasoning and they may differ from other popular economist you'd see on newspapers and television programs.

I don't really intend to give fuller explanations on my arguments on my site, however, if you've any specific points you want to raise regarding that summary or anything else, I'm more than happy to provide you with my thoughts and reasoning.

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August 16, 2003

Well, the manufacturing industries only made up around 25% of the UK economy (2002). However, a significant part of this sector is catered for export which means that whether they're actually competitive in the domestic market (the UK) or not is less important than whether they're competitive on the international stage. (That is why, as and when the economic conditions are right, the government of the day will have to make sure that the Euro entry exchange rate is fixed at the right rate, or the UK's export-orientated manufacturing industry will take years to recover...)

On the service sector, pricing is only part of the equation. The most difficult part is 'compatibility'. The term compatibility can mean a number of things - systems, language, product delivery, etc. This country has observed that when there is compatibility, the service has increasingly moved to lower cost locations - India and Ireland, to name a couple. The service sector will not experience significantly higher competition due to the entry into the Euro, as the higher of the hurdles (compatibility) is unlikely to be overcome easily by other Eurozone countries, with the exception of Ireland.

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August 17, 2003

I'm in agreement with most of what you've said in your post. However, there's one area that I begged to differ - the setting interest rate. As you're probably aware, the decision of setting interest rate level was handed over to the Bank of England soon after Labor government came to power in 1997 (not long after the same government removed the regulatory function of the BoE and gave it to the FSA). At the same time, the setting of interest rates in Germany has always been the obligation of the Bundesbank, likewise Banque de France for France, etc. Of course, with the creation of the Euro currency, the interest rate setting function was handed over to the ECB (European Central Bank) for countries in the Eurozone. These in effect removed politician's ability to manipulate interest rates for short-term political gains - take a look at the interest rate trends during previous Labor and Conservative governments.

The purpose of giving central banks the interest rate setting mandate is so that 'economists' become the key bearer of maintaining the monetary policies while leaving the finance ministries only the function of setting fiscal policies. In some ways, the lost of ability to set forth monetary and fiscal policies has taken away much of the fire power of governments in maintaining steady growth and combating inflation. However, given that the central banks are to set interest rates with targetted inflation rates in mind, that leaves one less variable for the governments to worry about when they set their fiscal policies to promote and maintain growth.

One the question of broad guidelines over specifics in the Five Economic Tests for Britain's Entry to the Euro, I personally believe that it is a 'necessary evil'. My argument is that specifics changes over time and if the tests were set out based on specifics, it is entirely possible that economies (mean the UK's and that of the Eurozone) can cross paths but in different phase of the economic cycles (as I'm sure you're well aware). At which point, Euro-enthusiasts will accuse the government of the day of 'moving the goal posts' while it is entirely logical for the UK not to join the Euro for the economies are out of phase. This is but one, admittedly the most obvious, example of applying overly specific conditions on our entry.

I trust the Treasury's assessment of 'convergence' is based on the phases of economic cycles of different economies. If all other economic conditions have been satisfied and that the economies are 'in phase' over a period of say 6 to 9 months, I'm confident that the government of the day will open the doors for the proper political debate on whether the UK should seek Euro membership.

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August 17, 2003

I might have allowed my '...the economies are 'in phase' over a period of say 6 to 9 months...' comment to be confused which led to a bit of misunderstanding and I also recognize that I haven't explained fully why I think 6 to 9 months is 'ideal' (at least in my thinking, anyway).

In what I'd consider as being 'in phase', there needs to be evidence of the economies in question, in this case the UK and those that are considered large in the EU (Germany, France and possibly Italy - G7 members) are going through the same phase of developments as supported by a broad range of economic indicators. It is unfortunate that I picked interest rate direction is an example, as both you and I know it is but one indicator. To add to that, I think the rates of changes should also be taken as indicators because dramatic changes in policies following a decision to adopt the Euro can create a 'sling shot' effect for the UK if the rates of changes are significantly different and therefore the economy is susceptible to greater shock.

In terms of why I think 6 to 9 months is 'ideal' period for considering whether the UK and the Eurozone major economies are 'in phase' or not, I have the following reasoning: It is difficult enough to create an environment where the UK economy gradually converge with that of the Eurozone. Once we have identified that the UK economy is in fact in convergence and has achieved sufficient level of convergence across a broad range of economic measures and also the rates of changes of these indicators are such that adoption of Eurozone monetary policy will not generate great shock in the UK economy, we should take the opportunity and engage negotiations quickly. A delay can have two very distinct risks - economical and political.

First, the economics: Economies are all react to shocks, big ones and small ones. However, different economies react differently to the same kind of shocks and also some shocks affect certain economies to a far greater degree than other economies. While the UK is not in the Eurozone, the decisions taken by the ECB will not factor in the potential reaction of the UK to shocks and hence its monetary policies may be different from that of the BoE, which in turn can lead to a divergence of economic conditions. Oops...

Secondly, politics changes and sometime quickly. It is possible to argue that economic convergence (in the broad sense) is difficult enough to achieve to coincide with a Euro-friendly government and such conditions may be achieved towards the end of one such government. Therefore, it is my believe that once such conditions are achieved, the government of the day should lock the UK into the Eurozone as quickly as possible - 6 to 9 months - in order to forestall any attempts to pull out if political climate changes.

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August 18, 2003

I agree with you that there're a lot of risks (economic and otherwise) associated with being both in and out of the Eurozone. Moreover, I recognize that being in the Eurozone may not be 'overwhelmingly beneficial' to the UK.

However, I hope you recognize that being outside the Eurozone will always mean that decisions regarding monetary policies will not have any considerations given to the UK.

This is an age-old problem with all thing related to the EU - to be a fully paid-up member of Europe and make use of our position to influence (or even drive) the issues or remain an outsider and moan at Brussels (and Paris and Berlin) for not paying us sufficient attention... Different people have different angles on this issue and I don't envy the responsibility the person/body who has the responsibility of persuading people in this country one way over another.

 

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