Britain and the Euro

By Brothwood, Paul | Contemporary Review, July 2002 | Go to article overview

Britain and the Euro


Brothwood, Paul, Contemporary Review


THE debate about whether Britain should join the euro, the single European currency, has been back in the news again. The British press, important sections of which are hostile to the euro, often sees this in terms of a battle between Tony Blair, who is an enthusiast for British membership, and Gordon Brown, his Chancellor of the Exchequer, who seems far less anxious for Britain to join.

The fluctuating euro, although it has recently risen to hover at parity against a weakening dollar, is still below the level at which it was launched ($1.16) in 1999. It is currently managed by the European Central Bank (ECB). This is based on the German Bundesbank. The problem for many economists, for example Prof. Jurgen Donges, head of the German economic 'Wise Man' committee, is the lack of credibility of the ECB. Unlike Britain's Monetary Policy Committee (MPC), which has become very credible within the last three years because of its excellent record on inflation, the ECB is felt not to have performed so well. It sets its own inflation target (in the UK, the MPC has to follow a target set by the Chancellor) and many feel that it is too deflationary. Empirical evidence shows that European economies that have joined the euro have recorded sluggish growth. One example of this is Germany. Their target is 2 per cent and under. The MPC has a target of 2.5-1.5 per cent, so an inflation figure below 1 per cent is felt to be as bad as an inflation figure that is over 4 per cent. This is much more balanced and much less deflationary.

Germany, which is the biggest economy in the euro zone, suffers from a [pounds sterling]23bn debt and the future of its coalition government does not look promising. If the UK joined the euro it would be linked to a potentially unstable partner, Germany. Would it be right for the world's fourth largest economy with the lowest unemployment and inflation rates in Europe, the second largest global investor and head of the largest international club, 'the Commonwealth', to join an as yet unsuccessful currency with further underlying problems of corruption? This article will perhaps be able to answer this question.

One disadvantage of joining the euro is the loss of a domestic monetary policy. One currency will mean one interest rate between all the eleven current members. It would be arrogant to think that one economy will have the same economic conditions as any other euro member. Therefore one interest rate will be advantageous to some and a disadvantage to others. For example, if Britain was in a recession and the interest rate was set at 8 per cent throughout 'euroland' this would further worsen the recession for Britain. If the UK was in a boom and the interest rate was set too low, hyperinflation could take place and lead to economic melt down.

Another disadvantage is market flexibility. The UK has the most flexible market in Europe. If the UK joined the euro it would be difficult to sort out large unemployment problems because the government would be unable to change interest rates and it would not be allowed to ask for money from the EU and cannot borrow to fund the problem. Despite these EU regulations, it seems very likely that in the near future Germany will break them perhaps as a result of pressure from the approaching election.

Many proponents of euro membership feel that if the UK does not enter the euro our trading position with Europe would be affected; this is wrong because we buy more from European Union members than we sell to them. It would not be in their interest to reduce trading links. Also those who claim Japanese and other inward investors would leave the UK, should bear in mind that access via Britain to Europe is not the only reason why they are here. There are stronger reasons such as our language, business methods and flexible workforce. The workforce would be inflexible within Europe because of differences in language and culture. …

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