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Should Britain join the euro?

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Overview

Reasons why to join

Reasons why not to join

Gordon Brown’s 5 tests

Lucrezia Reichlin’s & Giancarlo Corsetti’s view

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Difficult relationshipbetween the UK & the EU Years of indicision

Political issues Rather US-minded and conservative Warfare, education, …

Economical issues

UK’s pride

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Hyperactive markets Exchange rates and speculation Import/Export John Maynard Keynes’ statement

Why Britain should join the Euro(1)

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Economic integration Europe’s social democracy

US’s neo-liberal capitalism Forwards or Backwards (George Irvine, FU)

Oppurtunity cost when UK is not to join Exchange rate losses Loss of competitiveness Loss of inward investments?

Why Britain should join the Euro(2)

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Exchange rate losses

Intra-trade export & import (Begg et al 2003) Ease Acces to scale- and technology markets Loss of:

Growth and inward investments (especially Europe) Rise in competitiveness Trade with Europe

Oppurtunity cost when not joining

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Economic integration Europe’s social democracy

US’s neo-liberal capitalism Forwards or Backwards (George Irvine, FU)

Oppurtunity cost when UK is not to join Exchange rate losses Loss of competitiveness Loss of inward investments?

Why Britain should join the Euro(2)

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Why Britain should not join the euro

Loss of an independent… Monetary policy

Bank rate drop from 5,25% to 2,25% Hard getting out of a recession

Fiscal policy

The UK consumption is very interest sensitive

Euroscepticism as a fruit of chauvinism

Doesn’t

want to?

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Politics behindthe reasons (not) to join 1997: Labour party = pro-European

Gulf War Recession 1991-1997

Nowadays: Labour party = rather chauvenistic UK is doing better No need of a stronger mother

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The 5 tests of Gordon Brown

Is Britain ready?

Treasury decides: Convergence Flexibility Investment Financial Services Growth & Jobs

Europhiles & Eurosceptics

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[G. Brown’s 5 tests]A. Convergence

Corcerning interest & bank rates

Europhiles: Balanced since 1992 Eurosceptics: More related to USA

Verdict: Hard to decide Difference between EU-states Convergence has slipped before

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Black Wednesday (16 September 1992)

Depreciating Dollar against Deutsche Mark Lots of British export in Dollar Linked to the ERM, hence an appreciating Pound Speculators anticipated the dam-bursting

UK was forced to leave the ERM Devaluation of the pound

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[G. Brown’s 5 tests]A. Convergence

Corcerning interest & bank rates

Europhiles: Balanced since 1992 Eurosceptics: More related to USA

Verdict: Hard to decide Convergence has slipped before Difference between EU-states

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[G. Brown’s 5 tests]B. Flexibility

Corcerning: BoE instead of ECB Possibility to devaluate Possibility to change interest rates

Europhiles: Because there’s convergence, there’s no need of flexibility

Eurosceptics: opposite

Verdict: Brown probably not willing to give in

Is the EU flexible enough for the

UK?

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[G. Brown’s 5 tests]C. Investment

Direct Foreign Investment

Europhiles: DFI wil be ecouraged Eurosceptics: only economic criteria count, not

financial criteria

Verdict: Hard to decide Each company & economist for its or his own

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LSE Frankfurt Pride Finances = keysector

Europhiles: Without the euro, London declines Eurosceptics: London has got much more to offer

doesn’t need the euro

Verdict, once again: Each company & economist for its or his own

[G. Brown’s 5 tests]D. Financial services

Being what?

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[G. Brown’s 5 tests]E. Growth & Jobs

Europhiles: euro = new oppurtunities Renewed competition Outside the eurozone?

Eurosceptics: same as in C.: only economical criteria count, not financial

Verdict: euro = bunch of opportunities Treasury: ‘Britain > Eurozone’

Small EUCountries: Jobs &

Growth

UK Industrial Growth

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Treasury’s statements about the 5 tests

October 1997: not sufficiently converged, nor sufficiently flexible

June 2003: Treasury backs out completely

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Optimal Currency Area Same economic structure,

synchronised businesscycles,… Thus facing the same shocks

A monetary policy that effects them in the same way

The EU’s EMU should be revisioned

Lucrezia Reichlin’s (VUB) & Giancarlo Corsetti’s (Yale) view (2002)

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Correlation of long-term output growth with respect to the UK

1982

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Should Britain join the Euro?

Yes, but: Adapted monetary policy Adapted fiscal policy The EMU’s rules today have to be questioned

Corsetti: ‘But these costs [of joining the EMU] should not be overestimated vis-à-vis the political and economic benefits of EMU-participation, […]’

Corsetti: ‘History teaches us that politics, not economics, is the ultimate driving force of European monetary integration.’