AS the UK Treasury Prepares to Report on Whether the British Economy Will Meet Chancellor Gordon Brown's Five Economic Tests for Euro Entry by Next June, British Public Opinion Is Moving against the Euro Membership
AS the UK Treasury prepares to report on whether the British economy will meet chancellor Gordon Browns five economic tests for euro entry by next June, British public opinion is moving against the euro membership. Even the most hardened eurosceptics accept that adopting the single currency would confer some economic advantages on Britain. For example, the euro would eliminate the cost to travellers of having to pay to change pounds into euro coins and notes on their way out of the UK and then having to pay again to exchange the euros on return.
It is just that sceptics believe that the cost of UK membership of the euro, such as the loss of an independent monetary policy, will be significantly greater than its benefits.
Unfortunately, pro-sterling campaigners have, in the past, often conceded too much to their opponents, not realising just how small many of the purported advantages of joining the single currency really are. The benefits of euro membership to the UK economy would be far more modest than even many sceptics believe.
Possibly the central argument in favour of the euro is that it would abolish exchange rate fluctuations between the UK and the rest of the EU. But Patrick Minford, one of Britains leading monetary economists, argues in an excellent new book to be published in a few weeks time by the Institute of Economic Affairs that Britains overall exposure to exchange rate risks would not diminish if it decides to joins the euro.
The euro, Minford argues, is a regional currency, not a world currency. An increasing proportion of Britains trade and investment flows probably roughly as much as with the euro, though the exact shares are very difficult to pin down is conducted in dollars. Minford argues that the variability of Britains real exchange rate could actually increase slightly if Britain joins the euro rather than maintaining an independently floating currency.
The main reason for the increase would be the historically volatile euro-dollar exchange rate. While the UKs average exchange rate with the rest of the world has proved relatively stable over the last two decades, the exchange rate between the dollar and the Deutschmark and then the dollar and the euro have been much more unstable. So although the UK would gain in stability in its dealings with the EU, the benefits would be more than wiped out by the greater instability injected into its dollar dealings. Minford says: If we remain outside, the pound can, as these swings [in the euro-dollar exchange rate] occur, go between the euro and the dollar, rather like someone sitting on the middle of a seesaw.
Supporters of the euro are fond of using work by Andrew Rose, of the University of California at Berkeley, to shore up their case. He claims that the volume of trade between two countries can be multiplied by three if they are part of a monetary union. In one report leaked last week, euro supporters relied on Roses work to claim that British gross domestic product (GDP) would grow by 20% if the UK joined the single currency.
In reality no such conclusion can be drawn from Roses analysis. He focuses on the impact of fixed exchange rates on minuscule countries such as the Vatican and the Pitcairn Islands, states which have almost nothing in common with much larger and more complex economies such as the UKs.
Another problem is that it is not possible to isolate the impact of a single currency from other factors that stimulate trade. …