May 30, 2008
When will the UK wake up and join the Euro Area?
The case for the UK shedding sterling and adopting the euro has never been clearer.
From a conventional macroeconomic perspective (asymmetric shocks, cyclical convergence, the 39 tests or whatever), there is no reasonable argument for a small, highly open economy like Britain to retain monetary independence. The belief that an independent national monetary policy allows you greater greater scope for effective macroeconomic stabilisation is an example of the monetary fine-tuning fallacy. With a high degree of international financial integration, the exchange rate does not function as a buffer against asymmetric shocks, permitting a less costly adjustment of international relative costs and prices than would have been possible at an irrevocably fixed nominal exchange rate. Instead it becomes a source of extraneous, uncessessary noice and volatility and of at times persistent misalignment.
The best way to deal with asymmetric shocks is to smooth national consumption through international insurance: increased portfolio diversification and increased cross-border labour mobility. International portfolio diversification is encouraged by the reduction in exchange rate risk that comes with membership in the Euro Area. Joining Schengen and eliminating the other remaining administrative obstacles to labour mobility (including the temporary restrictions imposed on migration from some of the new member states) would boost the diversification of human capital.
There is another powerful argument for the UK to adopt the euro yesterday. The UK has a very large financial and banking sector, which conducts much of its activity by buying and selling financial instruments denominated in foreign currencies rather than in sterling. As a country, the UK has massive gross external liabilities and assets. These are well over 400 percent of annual GDP each, as compared with under 100% of annual GDP for the USA and around 700% of annual GDP for Iceland. It is not much of an exaggeration to describe the UK as a hedge fund, a highly leveraged entity, borrowing shorter than in lends and invests. It has a lot of short-maturity foreign-currency-denominated foreign liabilities and quite a lot of illiquid, non-sterling denominated foreign assets
It’s not a bad way to make a living, but it means the country needs a lender of last resort and market maker of last resort. It has one for sterling-denominated financial instruments. The Bank of England, after malfunctioning temporarily following the onset of the crisis in August 2007, now performs this function effectively. The Bank of England, however, cannot print euros, dollars, Swiss francs or yen. That means the Bank of England cannot be an effective lender of last resort or market maker of last resort if UK banks find themselves unable to roll over their foreign-currency-denominated short-term liabilities or if they find themselves unable to sell their foreign currency-denominated assets in international wholesale markets that have become illiquid.
To deal with a run on the non-sterling short-term liabilities of the UK banking sector or with a ’strike’ in the wholesale non-sterling markets, the Bank of England would be dependent on the goodwill of other central banks, through swaps and credit lines in foreign currency. They would have to be willing to go long sterling when the markets are yelling: ‘go short’. Possible, but an (uncessary) risk.
The key question is: is the UK more like the USA and the Euro Area or more like Iceland? I would argue that, from the point of view of being able to act as an effective, credible lender of last resort and market maker of last resort in financial instruments that are not denominated in the national currency, the UK is more like Iceland than like the Euro Area and the USA. Only the USA and the Euro Area are serious global reserve currencies, with around 60 percent and 26 percent of the global stock of reserves respectively. Sterling, with around 4 percent, no longer plays with the big boys and girls.
To have a large, internationally active banking sector and financial system, your currency has to be a serious global reserve currency if you are to be able to provide the lender of last resort and market maker of last resort services required to minimize the risk of a bank run or market liquidity crunch bringing down large chunks of your banking system. You can decide to take the risk of running a large globally active financial sector with a local currency like sterling or the Icelandic krona, but you will be taking an unnecessary and costly risk. Sooner or later that risk will be reflected in your cost of capital and make you uncompetitive.
So, if the UK wants to remain the seat of the world’s financial capital, there is only one choice: adopt the euro now, and wonder why you did not do so in 1999.
Finally, there are the political arguments for joining the Euro Area. The future of Europe is a federal one. The euro is an important symbolic step towards deeper political integration. The UK can continue acting the way it has since the EU (or its predecessor institutions) were first created: stand on the sidelines, snipe, join late and relucantly and then moan about things not turning out the way they should have. Or the UK could be at the heart of Europe and help shape the debate and the future development of its proto-federal institutions. The UK now punches below its weight in the EU and globally, because it is not a full member of the EU - its opt out from stage three of the monetary union makes it a bit player at best. If you are not in the Euro Group, you don’t count.
So macroeconomic stability, the defence of London’s status as a global financial center and the political logic of deeper European integration all call for the dumping of sterling and the adoption of the euro. Just do it.
I think I can wait a little longer for post-democracy.
Posted by: Tim Skinner | May 30th, 2008 at 2:28 pm | Report this commentI can’t see how London’s position can be that precarious; how does Professor Buiter think that London became Europe’s - if not the world’s - leading financial centre in the first place? And don’t say ‘because of the strong position inherited as a result of sterling’s previous role as a reserve currency’ because most of the expansion has taken place since that role, or perhaps I should say burden, was surrendered decades ago, and London’s edge has so far, if anything, increased, rather than decreased, since the Euro was introduced.
Oh - and the British people don’t want the Euro either. Surely has to count for something?
Posted by: David | May 30th, 2008 at 4:54 pm | Report this commentI’m sure you will have seen Martin Wolf’s column today arguing essentially the exact opposite.
Posted by: Anon | May 30th, 2008 at 4:58 pm | Report this commentI find this rather interesting.
Joining is surely the end game - but given that a referendum would surely need to be won convincingly on this, it requires a very strong political leader. Given the current state of the government, this is just not on the agenda. As for the next government, (all is pointing to a Cameron win) I can’t see a Tory ever campaign for anything that has to do with the EU.
So earliest prediction (from a political perspective, and assuming the EZ continues to suck in nearby economies to move in synch with it) would be for the next labour PM - ie, another 8-10 yrs…
David - agreed on London. But don’t forget London’s rise has more to do with regulation arbitrage (remember the birth of the Eurodollar market?) than currency.
Also, take a look at Denmark- who famously rejected EMU as well. They are now all the signs that Denmark is gearing up to join. Hence showing that whatever public opinion thinks now can change. And I’m not even touching on the political leadership vaccum on the subject.
Posted by: Anon | May 30th, 2008 at 5:03 pm | Report this comment@anon
I wouldn’t rule out the British population changing their minds about this if it could be shown that euro membership would be beneficial. These things tend to be seen pragmatically here - remember that the 1975 membership referendum campaign was won quite easily by the pro side when Britain was notably poorer than most other then-EEC members and it was felt continuing membership would help us to close the gap.
But we are light years away from any similar feeling that we will really lose out unless we adopt the Euro.
Posted by: David | May 30th, 2008 at 5:28 pm | Report this commentA minor point, but still relevant: it looks like Scotland is heading towards independence. An independent Scotland would be very likely to join the Euro and participate in Schengen as a ‘full’ EU member.
What impact could this have on the remaining chunks of the UK? Is it likely to force the issue, or would it be an irrelevance?
Posted by: Robbie | May 30th, 2008 at 5:28 pm | Report this commentLondon has a great position because of reasons that have little to do with Euro. Willem Buiter’s argument is plain yawning.
1) The power of the English Language. It’s Business standard and it’s spoken most properly here. Americans love this.
2) Liberal regulatory standards and labour standards, great for companies that suffer from inflexible labour policies elsewhere.
3) Great time zone (geographical).
4) Natural choice for many emerging markets like India, Pakistan or gateways to those markets like Hong Kong or Singapore which happen to be commonwealth countries to do business in Europe due to simple fact many of their diaspora live in the UK. Since these markets with enormous populations would be the major engines of growth, Euro or no Euro, London is the best candidate to capture the benefits of growth on Europe’s behalf.
Other commonsensical arguments for UK’s monetary independence.
1) Every country needs a tailor made economic, monetary and inflation-control policies. The UK is no different. This is especially true as economies in the Eurozone like France and Germany are diverging. Just look at how Sarkozy is crying fowl about France export suffering from a strong Euro or the airbus case, while the less affected Germany remains aloof.
The political argument for joining the Euro is an even scarier one. I don’t even want to talk about it. Let’s hope Britain wouldn’t become just another nondescript province of the United States of Europe say in 50 years time, based of the current pace of consolidation of powers in the European Union.
Posted by: Al | May 30th, 2008 at 8:29 pm | Report this commentLondon without the Euro can’t be all that unattractive; after all Professor Buiter was persuaded to locate himself here. Or perhaps Frankfurt was too exciting for him. I jest, of course.
Posted by: David | May 30th, 2008 at 9:41 pm | Report this commentOf course I had read Martin Wolf’s recent column arguing against Euro Area membership for the UK. My blog was indeed provoked by his argument. I always enjoy Martin’s columns, especially when I disagree with him.
The macroeconomic stability and political integration arguments for UK membership in the Euro Area are familiar. The financial stability argument for adoption of the euro by the UK is new. It was motivated by the financial crisis that started in August 2007 and is still a threat, albeit a somewhat diminished one.
I had never anticipated seeing a complete paralysis of all asset-backed securities markets, a freeze of most domestic and international wholesale markets and the implosion of interbank markets. The lender-of-last-resort and market-maker-of-last-resort roles of the central bank suddenly turned out to be much more crucial even in advanced economies that I had considered possible even a year ago.
For a nation with a huge banking sector (in absolute terms and relative to GDP) the central bank, as lender of last resort and market maker of last resort, has to be able to provide funding liquidity and market liquidity in the currencies that the banks’ short-term liabilities and illiquid assets are denominated in. The Bank of England can do that job for the sterling-denominated bits of the banking sector’s balance sheet but not for the foreign-currency-denominated bits. A financial centre whose central bank issues a global reserve currency has a clear cost advantage over a financial center whose central bank issues a currency with only a residual global reserve currency role — it does not have to buy insurance against foreign currency illiquidity risk.
So the UK may face the choice between a thriving internationally active banking and financial sector and keeping its own currency. The UK is more similar to Iceland than to the USA, as regards the ability of its central bank to act as an effective foreign currency lender of last resort and foreign currency market maker of last resort.
Posted by: Willem Buiter | May 30th, 2008 at 10:12 pm | Report this commentGB will only join the Eurozone if ever unemployment and inflation reach such painful levels, and remain so for long enough to convince Brits that the Euro might after all be best for them and the GB economy.
It is interesting that Ireland is in the Eurozone: one tends to overlook that fact, although the Irish are very good at backing winners (at horse races, for example) and are very sharp when it comes to calculating the odds of winning or losing. They picked a winner when they opted for the Euro, imo.
Posted by: J.J. | May 31st, 2008 at 9:47 am | Report this commentAll British Eurosceptics bar none forecasted the same thing – or variations of things - about the euro: Mickey Mouse currency, forever weak, will soon collapse, etc, etc. Now their line of argument is that there are emerging signs of Eurozone implosion because of the divergence between countries like Germany and the Netherlands, on the one side, and Southern or peripheral countries, e.g. Spain, Portugal, Greece, Italy, Ireland. The same line of argument goes that the real test to the Eurozone will be in the next ten years (as the Eurosceptic prognosis for the first ten years has so spectacularly failed).
While economic experts are unable to agree on the merits of UK euro membership (e.g. Prof. Buiter vs. Martin Wolf) it is worth focusing on REAL FACTS, particularly the following:
1. The transactional costs – One inescapable fact about the Euro and Schengen opt-outs are the transactional costs that these opt-outs shove onto the real British economy: In the case of the Euro opt-out, 78% of visits abroad by UK residents in the 12 months to March-08 were to Europe, according to the ONS. It is safe to assume that the bulk of that figure would be to Eurozone countries (in any case, this is set to increase as there are a further 9 countries committed to join the Euro). Additionally, the UK has the transactional costs related to the trade with the Eurozone, which accounts for a large part of the external trade of the UK. A serious calculation needs to be done about the transactional costs incurred, unproductive costs paid by individuals and businesses alike. With regards to Schengen, the opt-out costs are of several types: a) Thousands of extra Home Office immigration officers required to check the passport of that 78% of travel flows on their return to the UK (as Schengen covers or will cover the whole of the EEA + Switzerland, except the UK and Ireland); b) time wasted on unnecessary queues, and c) visa costs imposed on the hundreds of thousands of legal UK residents without an EU passport, who need a Schengen visa to travel to the rest of the EU.
2. The comparative UK and Eurozone performances – Eurosceptics say that the real test of the Eurozone starts now. I would turn this argument on its head: The real test for the UK opt-out of the Eurozone starts now. Why? Because over the past ten years the UK economic growth has been largely fuelled by a consumer debt binge. As this cheap credit era has now come to an end, possibly for the foreseeable future, it will be most interesting to see how the next ten years pan out for the UK economy. Conversely, the Eurozone AS A WHOLE, has not had a credit fuelled bubble over the past ten years, even if individual countries such as Spain and Ireland have.
3. The UK freedom to set its own interest rates has its counterpart on the ‘automatic transmitter’ effect that any change in the interest rate has on the exchange rate. A practical example was shown yesterday on Euronews, which reported that petrol prices at the pump have seen the greatest increase in the UK of all major European countries, at 17% compared to 4% in Germany. The reason for this is clear: the exchange rate, i.e. the weakness of the pound. As the successive interest rate reductions by the BoE have had little effect on mortgage costs, the main effect has been the opposite to the one intended: increase the prices of food and petrol even further than would have been the case with a stronger exchange rate pound-dollar or pound-euro.
Therefore, I would advise economic experts (and of course Eurosceptic economic ‘experts’) to focus more on FACTS and less on THEORIES.
Posted by: JorgeG | May 31st, 2008 at 12:27 pm | Report this commentSilly me, I did not realise the strikes in Spain,France Italy etc were because the citizens wanted to pay more for their petrol.
Posted by: Peter Bolt | May 31st, 2008 at 12:57 pm | Report this commentPerhaps if we in the UK were allowed to purchase our needs from where we wanted, not subsidise the EU for the favour of buying from them.
Do you seriously imagine the EU would allow “The City” an independent operating role?
The only way the Uk would join the EU currency is if people actually saw the benefits up close. We British tend to be very conservative when it comes to closer integration with europe, largely due to scaremongers constantly screaming in peoples faces, while those who are in favor keep quiet. It is my belief that if the UK’s economy stalls while Europe’s continue to grow (thanks to enlargement/increased trade)then the people in the UK will come round to the benefits of the EU.
Posted by: Simon | May 31st, 2008 at 1:55 pm | Report this commentIt’s kind of a shame that we introduced competitive policies while many members in Europe continue to support policies that stifle competition and prevent their economies adapting to a new global world. The result is that the UK continues to remain competitive and more flexible to global downturns in comparison to say France
It is a pity when Willem Buiter is completely right. It is much more fun to disagree with him.
Jorge, above, adds the important points that the annual transactional costs of staying out are considerable, and if our costs and inflationery pressures get out of line we have to make sacrifices to put that right whether we are in the euro zone or outside it.
Martin Wolf’s conclusion against joining the euro was not based on economic theory. It was a statement that, in his judgement, the British people would for the forseeable future prefer the type of sacrifices that we have to make outside the euro zone to those we would have to make from time to time within it. As I recall campaigning in the referendum on joining the EU, the Briish electorate were not convinced about the virtues of going in until they thought it over in the referendum campaign period. In my judgement, we have reached the time when staying out of the euro begins to look silly, as staying out of the EU did then; and the British electoraate will agree with me when faced with the choice. My difference with Martin Wolf is about politics, not economics.
Posted by: David Heigham | May 31st, 2008 at 3:16 pm | Report this commentJorgeG has made some very good points.
William Buiten is right that joining the Eurozone will enhance the position of the City as financial centre. In my view, the City would gain in importance even more because it has no match in Europe, and the City would have to work a bit harder as its influence over the interest rate setting institution would diminish were it to be the ECB instead of the BoE.
If the UK prefers independence in every area, then it would be much better to leave the EU and have a status like Norway or Switzerland. This would save EU taxes, give full control on immigration, etc… However, this is a much riskier bet.
Posted by: Ahmad | May 31st, 2008 at 10:59 pm | Report this commentJorgeG is right when he says that staying out of Schengen imposes costs on the UK. He is also right that part of the explanation for the UK’s relatively stronger economic peformance over the last ten years is strong credit growth. Britain now faces a period of adjustment.
But the credit boom would have been even bigger had the UK been in the eurozone, because interest rates would have been even lower. Also, the adjustment facing the UK would now be much more severe, comparable to the years of economic stagnation facing Spain. A weaker sterling will at least help the UK rebalance. How will Spain manage this? Or the other member-states that have lost competitiveness, such as Italy? Ensure disinflation relative to Germany? Good luck!
German petrol prices have risen from around euro1.25 a year a go to euro1.50 now, a similar margin to in the UK. A 4% rise? That would be knews to the Germans!
Posted by: simon tilford | June 1st, 2008 at 8:10 am | Report this commentLast week was the 10th anniversary of the ECB and Otmar Issing (member of the ECB Executive Board & former Chief Economist at Deutsche Bank) was on German TV * expressing the majority view that the Euro has brought stability. In the 10 years before the ECB, inflation in Germany (the graph was shown on TV) reached 7% at one point, whereas the graph for the 10 years of the ECB’s existence was more or less level. It’s true that many Germans hanker after the Deutsche Mark, but they seem to forget the 7% inflation peak pre-ECB .
In order to benefit from membership of the Eurozone (a market of ca. 300m people?) a country has to have some aces in its economy.
Broadly speaking France (biggest tourist destination in the world, with 75m visitors p.a.) and the Club Med countries have tourism, Germany has its industrial base, which produces its export surplus. Eastern Europe benefits from investment from German companies.
On the debit side, there are still some specific problems: France is having to be freed from the 35-hour week, Spain’s property market is in trouble and the Mafia in Italy siphons €63 billion p.a. out of the Italian economy.
The individual Eurozone member countries have freedom to set their own levels of Sales Tax, and this should be kept in mind when discussing the level of consumer demand - which got a big boost in Germany in 2006 as the govt had already said the Sales Tax would be increased the following year. So it’s not surprising German consumer spending is lower now.
* I also spotted Prof. Buiter on CNBC last week.
Posted by: J.J. | June 1st, 2008 at 8:52 am | Report this commentThis kind of insulting attitude on the part of other Europeans about matters like Schengen and the Eurozone is intolerable. “When will the UK wake up?”, he asks, as if we have been asleep. We have taken a long, pragmatic look at these institutions, devoid of the kind of Euro-whitewash that is present in some other countries (I cite Italy as an example) and decided that WE DO NOT WANT THEM. If or when they really do turn out to have practical benefits, then they will be considered by the British people, not before, and we will not be pressed into it by a bunch of Eurofanatics. It would take many years of lagging growth in the British economy for the political situation on the Euro to change and it will not be helped by being lectured by fellow EU members
Posted by: Robert Carruthers | June 1st, 2008 at 10:00 am | Report this comment@ Robert Carruthers
‘We have taken a long, pragmatic look at these institutions, devoid of the kind of Euro-whitewash that is present in some other countries (I cite Italy as an example) and decided that WE DO NOT WANT THEM.’
How can you be so sure? Has there been a referendum on these two key EU pillars? No, the decision has been made by a British politicians ‘whitewash’. In that respect, countries like Denmark and Sweden have a level-1 lesson in democracy for the UK: They only opted out of key EU pillars after popular referenda. You ASSUME that the British people do not want the Euro or Schengen. OK that is quite possible, but if you don’t consult them in a referendum after allowing the TWO SIDES to campaign this is not democracy, it is the elites (largely public school elites), together with the foreign-owned tabloids, deciding for the people.
The euro and Schengen are both, among other things, key elements in the completion of the Single Market that the UK voted in a referendum in 1975. Therefore, it is arguably the case that successive UK governments had no democratic legitimacy to OPT-OUT of these pillars without consulting the people in referenda.
Finally, if it is indeed the case that the British ‘DO NOT WANT THEM’ (i.e. Schengen and the euro, after the appropriate referenda), then you might as well say WE DON’T WANT THE EU, because Schengen and the euro are the REAL EU (admittedly, a very imperfect institution, just as any man-made construct), not the one the UK is in.
In short, saying WE DON’T WANT THE EU is a logical, grown up and consistent stance to take. But to say that WE WANT THE EU BUT WE DON’T WANT SCHENGEN OR THE EURO (i.e. the current status quo) is illogical, infantile and utterly inconsistent.
Posted by: JorgeG | June 1st, 2008 at 11:43 am | Report this commentI think Professor Buiter is right. I would like, however, to respond to a few others posts.
* Tim Skinner - I don’t quite see how a decision to opt into a currency somehow ushers in a ‘post-democratic’ age. A new currency, even a supranational one, does not in itself mean (a) that democratic institutions, even locally, are compromised; nor (b) that a decision to pull out later on is legally off the table. That’s a rather silly assertion to make.
* Robbie - I think you’ve touched on a very interesting political question. I do think that if Scottish independence were to happen–and it’s not entirely clear it would, and I must say I’d be rather saddened if it did–it would make an English opt-out even less ECONOMICALLY defensible.
* Al - Your points are all entirely valid, but I think Professor Buiter is arguing that there are inherent risks to the UK-wide economy in London’s preëminence outwith the Eurozone.
* JorgeG - Your introduction is I think the most fascinating. Eurosceptics wish to push the argument that ‘caving in’ to monetary union would somehow handicap the government’s ability to drive the economic agenda. That is patently untrue, and the argument for divergence–in terms of economic performance as well as policy–reinforces that. Ireland and France may be in the same monetary union, but their respective growth has had to do with how policy is filtered and adopted at the local level. Hence, Ireland’s debt-driven economy, compared to, say, France’s or Germany’s. In fact, governments can do more to regulate if they felt banks were being irresponsible lenders. That is a government regulatory policy, not necessarily a central bank interest-rate setting one.
I would also like to point out an irony in the Eurosceptic’s line of argument. That is this desire to paint Europe as ‘a bad thing’ to the UK because it would make the country a ’state’ within a federal Europe. And yet they studiously ignore that the UK has effectively already played this role with a foreign power: to the United States of AMERICA. The irony, of course, is this: that whereas it talks to the US as an UNEQUAL, asymmetrical partner, it can be an equal–and important–actor within the EU. That is to say, the UK will never be anything BUT the junior partner in its relationship with the (hegemonic) USA, but will always be a co-equal partner to its European allies–as one mid-level power to another.
The Iraq war should have put to rest that massive contradiction (an obviously incorrect one at that) in the sovereignty argument…you can either be the puppet of a giant, or in the driver’s seat of one: your choice.
Posted by: Rene C. Moya | June 1st, 2008 at 6:42 pm | Report this commentOK - so if UK is in the euro areas, it still cannot print AUD, JPY, NZD, USD which the financial instituitions will have their liabilities denominated in. So, how does this solve the problem?
To gain the ability to ‘print’ Euros, I suppose some sort pre arranged FX swap agreements will do. Having a complete set of USD (with Fed), AUD, JPY etc swap would put BoE in a better position than just joining EU.
BoE can also have large stack of Gold which can be exchanged into USD, Euro etc to act as lender of last resort if necessary.
Transaction cost - yes, it can be an issue but banks are now issuing Euro debit cards etc. These issues can be solved without joining euros and China has no problem whatsoever exporting theirs DVDs player to EU without joining Euro.
As long the the UK runs sounds economic policy, in or out of Euro is irrelevant. Have the government behaves irresponsibly, and Euro won’t help (the time is nigh for Italy, Greece, France). Please note that French government is is not allowed to print Euros but its debts are in Euros. There is a reasonably chance that one day the French government will have to default on its Euros debt if it carries on like this. the British government will never have to default on Sterling debts (which it can print).
Posted by: Steven | June 1st, 2008 at 10:07 pm | Report this commentI am surprised at Professor Buiter’s simplistic arguments in favour of the UK joining the Euro. The arguments adduced in favour seem to be that you have to be a member to maintain London’d position as an international financial centre; dubious since London became a centre with an independent currency while Paris and Frankfurt, despite their tremendous advantage, withered. Moreover, an international financial centre certainly does not have to act as a lender of last resort to foreign banks. Lastly, I am sure that the Professor is well aware of the theoretical conditions for membership of an optimal currency area, most of which the UK does not satisfy and certainly there is no assurance that even if we did the UK would always continue to satisfy those conditions.
Posted by: Ian | June 2nd, 2008 at 4:58 pm | Report this commentI know I shouldn’t advertise another news media’s articles on a competitor’s pages BUT there’s an interesting article on the BBC Europe page today commenting on 10 years of the Central Bank of Europe. Food for thought (and ammunition?) for both pro-euro and anti-euro supporters alike.
Posted by: derek tunnicliffe | June 2nd, 2008 at 5:19 pm | Report this commentI am second to none in my admiration for Willem. But I think his arguments given above on the need for the UK to enter Emu are nonsense. (The supporting comments abvoe are mostly far worse.) I hope to explain why I disagree with him either here or, more probably, in a future column.
The exception to my view that his arguments are nonsense is his belief in a federal Europe. That is an ideological preference. I do not share it. But I can understand those who do.
Posted by: Martin Wolf | June 2nd, 2008 at 9:47 pm | Report this comment3 quick points:
1. Monetary policy - So the UK would be better off with a 4% interest rate? The lack of sovereignty on this issue is now having its affects on the economies of Ireland and Spain.
2. Schengen - Does this seriously have much of an affect on labour mobility? With labour mobility so important in establishing a single European monetary policy this is a key question that needs answering. As far as I am aware, UK residents already have the right to go work in other EU countries, regardless of Schengen. Even if there is more associated red tape, most British workers choose not to move to other EU countries because of reasons to do with language and culture. This is far more important than Schengen. Indeed, do those within the EU Schengen area move about that much? I doubt it is anywhere near the level that those in the USA move between states, which is a large region much more suited to a single monetary policy precisely because of its much higher rate of labour mobility. Indeed, I would expect British workers would much more favour going to work in the USA or Australia for example than France or Germany. Perhaps the exception is bar jobs on the Costa del Sol.
3. Politics - The UK has no influence? I would say that the UK acts as a good check on many EU activities. Of the core countries, it is definitely the most vocal about the absurdities of the CAP and is still influential in other supra-national organisations such as the UN. For sure, Gordon Brown is useless at influencing his EU counterparts but would Tony Blair be a possible candidate for EU Council President had he not positioned himself and the UK so well in the EU?
Posted by: big arrogant rob | June 3rd, 2008 at 9:58 am | Report this commentMr. Buiter is obviously a mEUle … ( a mole planted by the European Commission) who, although he has obviously resided in the UK for a while, understands little about our economic tradtion. Perhaps he should return from whence he came asap, taking with him the writings of Adam Smith??????????
Posted by: elizabeth schumann | June 3rd, 2008 at 4:33 pm | Report this commentMartin Wolf:
??I think his arguments given above on the need for the UK to enter Emu are nonsense.?
In your column ?Britain is better off outside the euro? you state: ?Even my colleagues on the Lex column argued last week that the UK was close to meeting the economic tests for joining. The only obstacle to entry Lex could find was political. Lex is wrong.?
I don?t doubt your economic and financial acumen, however you talk as if you were in possession of the truth. I have reread your above column and find your arguments most unconvincing, particularly the one which compares British economic growth with Eurozone and German growth during the 1999-2007 period. Are you one of the dwindling few who doesn?t know that the British economic growth during the above period has been largely funded by consumers using their houses as cash machines plus a rapid increase in government spending, e.g. through PFI?s which are the equivalent of borrowing from future generations?
Please do write another column to see if next time your arguments are more convincing. I admit that W. Buiter?s arguments are not rock solid (and slightly technical for my modest economic knowledge), but you should have the humility to admit that, by and large, the jury is still out both on the performance of the Eurozone and the merits of the British opt-out. That?s why I prefer to focus on FACTS. And perhaps, in a future column you could try and explain:
a) If there are no transactional costs for the UK by being out of the Euro, i.e. opt-out = gravy train for banks but extra costs for consumers and businesses. If there are, could you please try and quantify them?
b) if the net effect of the UK ?independence? to set interest rates is / has been positive (in terms of putting more money in consumer?s pockets over the past few months), given that at every BoE rate cut the pound loses value in the currency markets, i.e. fuelling inflation by increasing the import ?mountain? bill;
c) what part of the 28% growth in the UK economy between the first quarter of 1999 and the first quarter of 2008 was NOT achieved by growth in consumer spending (fuelled by more and more debt, in turn fuelled by cheap & easy credit) or government spending.
big arrogant rob
I suggest you get informed about Schengen. The aim of Schengen?s was not to achieve freedom of movement for EU nationals. They already have/had that freedom with or without Schengen. Instead Schengen?s objective is two-fold:
1. At the citizen?s level, to achieve TRUE freedom of movement of PEOPLE, i.e. a) freedom of movement without having to show your passport to a member of the police of any EU state; and b) freedom of movement for EVERYBODY, not just those in possession of an EU country passport
2. At the economic level, to complete the Single Market, as stated by the preamble to the Schengen convention: ?WHEREAS the Treaty establishing the European Communities, supplemented by the Single European Act, provides that the internal market shall comprise an area without internal frontiers?. As not everybody can travel freely between the UK and the rest of the EU and vice versa (e.g. those in possession of an African or Indian passport need a visa to travel from the UK to the rest of the EU or vice versa), it is therefore a fact that the UK is no longer part of the Single Market but rather part of a free trading area.
Posted by: JorgeG | June 3rd, 2008 at 6:05 pm | Report this commentMartin Wolf:
‘…I think his arguments given above on the need for the UK to enter Emu are nonsense.’
In your column ‘Britain is better off outside the euro’ you state: ‘Even my colleagues on the Lex column argued last week that the UK was close to meeting the economic tests for joining. The only obstacle to entry Lex could find was political. Lex is wrong.’
I don’t doubt your economic and financial acumen, however you talk as if you were in possession of the truth. I have reread your above column and find your arguments most unconvincing, particularly the one which compares British economic growth with Eurozone and German growth during the 1999-2007 period. Are you one of the dwindling few who doesn’t know that the British economic growth during the above period has been largely funded by consumers using their houses as cash machines plus a rapid increase in government spending, e.g. through PFI’s which are the equivalent of borrowing from future generations?
Please do write another column to see if next time your arguments are more convincing. I admit that W. Buiter’s arguments are not rock solid (and slightly technical for my modest economic knowledge), but you should have the humility to admit that, by and large, the jury is still out both on the performance of the Eurozone and the merits of the British opt-out. That’s why I prefer to focus on FACTS. And perhaps, in a future column you could try and explain:
a) If there are no transactional costs for the UK by being out of the Euro, i.e. opt-out = gravy train for banks but extra costs for consumers and businesses. If there are, could you please try and quantify them?
b) if the net effect of the UK ‘independence’ to set interest rates is / has been positive (in terms of putting more money in consumer’s pockets over the past few months), given that at every BoE rate cut the pound loses value in the currency markets, i.e. fuelling inflation by increasing the import ‘mountain’ bill;
c) what part of the 28% growth in the UK economy between the first quarter of 1999 and the first quarter of 2008 was NOT achieved by growth in consumer spending (fuelled by more and more debt, in turn fuelled by cheap & easy credit) or government spending.
big arrogant rob
I suggest you get informed about Schengen. The aim of Schengen’s was not to achieve freedom of movement for EU nationals. They already have/had that freedom with or without Schengen. Instead Schengen’s objective is two-fold:
1. At the citizen’s level, to achieve TRUE freedom of movement of PEOPLE, i.e. a) freedom of movement without having to show your passport to a member of the police of any EU state; and b) freedom of movement for EVERYBODY, not just those in possession of an EU country passport
2. At the economic level, to complete the Single Market, as stated by the preamble to the Schengen convention: ‘WHEREAS the Treaty establishing the European Communities, supplemented by the Single European Act, provides that the internal market shall comprise an area without internal frontiers’. As not everybody can travel freely between the UK and the rest of the EU and vice versa (e.g. those in possession of an African or Indian passport need a visa to travel from the UK to the rest of the EU or vice versa), it is therefore a fact that the UK is no longer part of the Single Market but rather part of a free trading area.
Posted by: JorgeG | June 3rd, 2008 at 6:06 pm | Report this commentAcc. to Jean-Clause Trichet, ECB president, who was shown on German TV last night making a speech about the 10 year anniversary of the ECB,
Posted by: J.J. | June 3rd, 2008 at 6:17 pm | Report this commentin the 10 years of the ECB’s existence 15,7 million jobs were created in the Eurozone.
That is 1m more, he said, than “on the other side of the Atlantic”.
This is just typical europhile propaganda, you note that they never refer to the amount of jobs, and indeed whole industries that have been lost in the eu as a whole due to the lowest common denominator one size fits all legislation that has spewed out of the eu unelected commission.
There is no doubt whatsoever that the eurozone is currently unstable, the germans think the euro is to weak the Italians think it is to strong, and this divergence will only grow, not dissipate.
The best direction for the UK is not only to keep out of the euro, but also to withdraw from the political control of brussells, and simply have trade agreements with the other eu countries.
Posted by: Barry Davies | June 3rd, 2008 at 6:58 pm | Report this commentJorgeG
Many thanks for informing me about Schengen. I was particularly inspired by your random capitalisation of words.
Even with this new-found enlightenment, however, I still insist that the UK’s decision to not be a part of the Schengen area has very little impact on the labour mobility of UK workers, as Willem Buiter suggests, relative to the other factors that I mentioned.
You say that you prefer to focus on FACTS. Maybe you could supply some on the non-native proportions of the workforce in Europe’s major cities. I suspect London will be somewhere near the top and that the Schengen countries will derive little benefit in the form of migrant workers just because of the “TRUE freedom of movement of PEOPLE” that the area enjoys.
Posted by: big arrogant rob | June 3rd, 2008 at 7:33 pm | Report this commentThe problem with euro ’sceptics’, whether opposed to the adoption of the euro, or opposed to a federal United States of Europe, is profound: they have - absolutely - nothing to offer.
Some of them will argue for status quo. ‘Things have gone far enough’, we are told, ‘why not simply stay as we are?’ The problem is this: status quo is not on offer. Deeper european integration, including a continental push for full-scale federation or confederation will occur, whether we like it or not. The clamours from governments of India, China, Brazil will become louder. Does the UK truly merit a seat of its own at the G7, they will ask? what about the UN security council then ? Size matters I’m afraid.
Others will argue, in effect, for ’splendid isolation’. Globalisation or indeed its opposite, trade tariffs, will see them off quite quickly. North Korea is not the land of plenty by any measure. Once again : size matters.
Keep sterling, and so preserve our freedom to devalue our way back into prosperity ? hasn’t exactly worked for Zimbabwe, has it ?
Rely on our so-called ’special’ relationship with the US for our continued prosperity ? The US has lots of ’special’ relationships these days. Are we anymore special than Poland or Ireland ? or India or Pakistan ? and by the way, talking about Poland or Ireland, did that ’special’ relationship thing really usher these countries into increased prosperity ? or wasn’t it more, er, EU membership ?
Opposing the euro or indeed a federal Europe might appeal to the King Canutes among us. But it will do nothing for our bank accounts.
Posted by: eurofederalist | June 3rd, 2008 at 9:20 pm | Report this commentbig arrogant rob
‘I still insist that the UK’s decision to not be a part of the Schengen area has very little impact on the labour mobility of UK workers.’
You are right. The Schengen opt-out has no impact on the labour mobility of UK workers. This is why I tried to explain what Schengen means. You call it enlightenment; I call it stating the facts. Schengen has no impact or bearing on labour mobility of EU workers; where it has a fundamental impact is on the following:
a) The UK status vis-à-vis the Single Market, because Schengen’s aim was to ensure freedom of movement of PEOPLE (and apologies about the random capitalization) as a crucial element for the completion of the Single Market. The UK opt-out neatly reflects the ‘free market’ hypocrisy of the British government, opposition and the dominant UK ‘think tanks’. They all ‘think’ that the Single Market, as a free market, comprises freedom of movement of a) goods, b) capital and c) workers, but conveniently ignore the crucial 4th element = d) freedom of movement of PEOPLE, i.e. sellers and buyers of goods or services. For example, a UK resident worker but non-EU passport holder who has to travel to other parts of the EEA (i.e. the Single Market) due to his/her work requires a visa to travel to the rest of the EU/EEA and vice versa. This is a costly procedure with no guarantee of success. In the same way a non EU national resident in Paris who wants to come to the UK for a weekend of shopping in London, for example, would have to apply for a UK visa. As applying for a UK visa is a daunting and costly administrative procedure (and, statistically, very likely to fail), it is likely that this person, unless he/she is very wealthy will reconsider his London weekend shopping trip and decide to stay in Paris or go for a shopping weekend to Germany instead. So what happened to the Single Market? Very simple: THE UK IS NO LONGER PART OF IT. IT IS PART OF A FREE TRADING AREA.
b) In terms of freedom of movement, the UK sees the EU exclusively in economic terms, but this is not as the large majority of EU countries see the EU. The large majority of EU countries see the EU (rightly or wrongly) as an ‘ever closer union’. One of the first and most obvious elements of this ‘closer union’ was to abolish the need to queue to show your passport (and in the case of the UK, have it scanned) to a member of the police of another EU country when you wanted to travel to that country, for whatever reason. Moreover, as mentioned above, the Schengen freedom of movement applies to anybody and everybody, not just to EU citizens. The UK is free to ‘go it alone’ and apply its selective, dogmatic thinking with regards to Schengen, but the fact remains that the UK is the only country out of the 30 EU/EEA countries (including Switzerland) that has refused to join Schengen. What does this say about the UK? If you put this into context with the fact that the UK has the largest CCTV network per head of population in the world, what it says, in my modest opinion, is: Police State.
Posted by: JorgeG | June 4th, 2008 at 10:32 am | Report this commentSchengen is a side issue. The real test is whether a country gives other EU citizens full rights to work. France is at last moving on this, Germany, and several other countries are not - hardly very communautaire! The UK, of course, was a pioneer in this field, although regrettably it did not so far extend this sensible policy to Bulgaria and Romania
Personally, I’ll only take lectures that emanate from countries like Spain on what it is to be European when those countries show their commitment to the project by actually paying a few quid towards funding it like we do.
Posted by: David | June 4th, 2008 at 11:51 am | Report this commentI was amazed to read this story by an eminent professor.
It reminded me of a moment in my career when I visited with the top management of our Taiwan subsidiary. They were immensely proud of the profit they were making and claiming enormous credit for their business acumen. In fact they thought themselves so smart that they should be running the mother company, which was struggling.
I scratched my head and wondered: “don’t you guys realise that the only reason you make a profit is because the product transfer pricing is set that way and we still need to invest in Taiwan.”
Likewise, linking the achievements of the City to the British economy is delusionary - especially from a very smart professor. Of course, the British economy benefits from the City and as long as the government continues to provide a suitable regulatory framework will continue to benefit.
Probably the British taxpayer should be grateful that their currency is not linked to the Euro or the Dollar. The speculative excesses of the financial markets are less likely to come home to roost in the pound sterling - the problem should be with other central banks.
The real problem at the moment is that British banks have become unreliable. By trying to mimic the speculative activities of the city they have made themselves, and the British taxpayer, vulnerable.
Call me old fashioned, but the main job of my bank is to keep my money safe. I don’t see any upside for myself in their speculating in sub-prime mortgages, incomprehensible derivates, or whatever South Sea Bubble is in view at the moment. The only potential beneficiary of these delusionary speculations are the shareholders and execs on bonus plans - not the depositors who ought to be their primary customers.
Even worse is when they compel the British citizen to pick up the bill when things go wrong - to protect the depositors.
It is about time the government stepped in to regulate the banks. Banks are here to keep money safe; speculators are here to speculate. Please do not mix it up.
This topic has nothing to do with whether Britain should join the Euro. As a European taxpayer I see no reason why the ECB should underwrite the delusionary fantasies of British bankers. First priority for the Brits is to clean up their banks.
The problem is not confined to UK as today’s headlines about Lehmann illustrate. Surely the brand value of Lehmann is “safe and reliable”, now they lose hundreds of millions on something I doubt even their chairman understands.
Posted by: Chris | June 4th, 2008 at 1:14 pm | Report this comment[…] former member of the Bank of England’s Monetary Policy Committee is in no doubt. In his view Britain should join now. The FT’s Martin Woolf strongly […]
Posted by: Fleishman-Hillard Europe » Blog Archive » ECB record surpasses expectations, but where’s the Euro Group? | June 9th, 2008 at 8:48 am | Report this comment[…] a really advanced reader, here’s Dutch economist, and former MPC member, Willem Buiter proposing entry now. And here’s his senior at the FT, Martin Wolf, disagreeing with him. Bit […]
Posted by: A2 Euro Task - links « Qmceconomics | July 2nd, 2008 at 4:13 pm | Report this comment“As a country, the UK has massive gross external liabilities and assets. These are well over 400 percent of annual GDP each, as compared with under 100% of annual GDP for the USA and around 700% of annual GDP for Iceland. It is not much of an exaggeration to describe the UK as a hedge fund, a highly leveraged entity, borrowing shorter than in lends and invests. It has a lot of short-maturity foreign-currency-denominated foreign liabilities and quite a lot of illiquid, non-sterling denominated foreign assets”
Interesting column. Presumably in a serious financial crisis some of these short term liabilities would be difficult to role over. Steven [June 1st], seems to make a valid point i.e. being in the Euro would not make a significant difference, but I dare say that depends on which currencies the UK borrows in and the relative strength of the pound and euro in such a situation. Is it possible to say where the UK does its borrowing? Hope you can come back to this topic one day [notwithstanding the hostile reaction of some of the above comments]
Posted by: paulembley | July 5th, 2008 at 10:58 pm | Report this comment