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1
Should Britain join the euro?
2
Overview
Reasons why to join
Reasons why not to join
Gordon Brown’s 5 tests
Lucrezia Reichlin’s & Giancarlo Corsetti’s view
3
Difficult relationshipbetween the UK & the EU Years of indicision
Political issues Rather US-minded and conservative Warfare, education, …
Economical issues
UK’s pride
4
Hyperactive markets Exchange rates and speculation Import/Export John Maynard Keynes’ statement
Why Britain should join the Euro(1)
5
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)
6
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
7
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)
8
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?
9
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
10
The 5 tests of Gordon Brown
Is Britain ready?
Treasury decides: Convergence Flexibility Investment Financial Services Growth & Jobs
Europhiles & Eurosceptics
11
[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
12
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
14
[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?
15
[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
16
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?
17
[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
18
Treasury’s statements about the 5 tests
October 1997: not sufficiently converged, nor sufficiently flexible
June 2003: Treasury backs out completely
19
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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20
Correlation of long-term output growth with respect to the UK
1982
21
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.’