Sterling's precipitous fall towards parity with the Euro has led to a bout of speculation in the media about the possibility that the UK might bid to join the single currency. However, a poll conducted for the BBC suggests that 71% of people in the UK still oppose such a step, and only 15% say that the pound's decline has made them more receptive to the euro.
I've had a bit of a love/hate relationship with the euro over the course of its 10-year life. Initially I favoured UK entry. I was baffled by the fact that UK politicians, having seen a never-ending series of sterling crises blight the UK economy for half a century, couldn't bring themselves to ditch the wretched pound while they had the chance. In the middle of this decade, though, I became more ambiguous about it, as the ECB's inflexibility seemed to saddle the eurozone with an uncompetitive exchange rate and needlessly high interest rates.
Now, with sterling in freefall, opponents of UK euro membership are gloating that the decision to stay out has been vindicated. They argue that the fall in sterling will improve UK competitiveness, and that the independence of the Bank of England allows it to be much more aggressive than the ECB in easing monetary policy. One or two people have even opined that if we were in the Eurozone right now, we'd be looking for a way out.
Yeah, but....if we'd been in the Eurozone all along, we probably wouldn't be in the mess we find ourselves in today. The steady, inflation-focussed approach of the ECB over the last decade now looks like sheer genius when contrasted with the manic, reactive tinkering espoused by the Fed and largely followed by the Bank of England. It's striking that the Eurozone economies that are in the most trouble today seem to be the ones (Spain, Ireland) that aped the Anglo-Saxon habit of leveraging up their housing stock. The larger Eurozone economies, the ones that the UK should want to be compared with, are suffering a slowdown, but for now seem to be coping, and are certainly far less panicky and anxious than the UK about their medium-term outlook.
There's no sign that the UK government is considering a move to join the euro. The fact that the minsiter designated to respond to the BBC poll was the relatively lowly Caroline Flint shows that the issue simply isn't on the radar screen. In any case, it's sheer fantasy to think that Germany and France would let the UK join the eurozone at anything like its current level. Still, a bit more respect for the achievements of the ECB in its first decade of existence might be in order.
2 comments:
Hi Jim!
Very much enjoy your blog.
I have a question about this one. Suppose there is a big run on our banks from foreign owners of sterling deposits who wish to hold Euros. I take Buiter's case for the Euro to be that if this occurs, the UK could create all the pounds needed to keep the banks alive, but it would then trigger massive run on sterling as they sold it. No problemo if you are in Eurozone.
But Martin Wolf's view is that we'd get swap credit in this case.
Next question becomes who bears the risks of the swaps....
Peter
Buiter is right to say that the BoE could create as much money as it wants to keep the banks alive, and equally right to say that doing so would trigger a run on sterling. I'm not sure how this argument becomes a case for joining the Euro, however. My understanding is that the ability of individual countries to print money is severely constrained by the rules of the Eurosystem. For this reason I've argued in the past that Ireland's guarantee of all bank deposits is a bit of an illusion -- within the Eurosystem, the Dublin government really has no way of printing the money, if push came to shove.
As for Wolf, it's true that the UK banks could replace departing sterling deposits by funding in other currencies and swapping for sterling. However, swaps are a market like any other, and the price of doing this would quickly become prohibitive if all the big banks started to do it -- always assuming that they could find the counterparties in the first place.
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