Sunday, February 20, 2005
Last week I posted a link to the 'Dear Aunty' letter which gave some arguments on why we should not join the Euro. I also passed it on to some friends who have a better understanding of economics for their comments.
Mike said "Basically the problem is one of convergence. If you have one currency to govern all the disparate economies of Europe then you have a problem in that a sluggish economy in need of a boost might want low interest rates to perk it up. A runaway economy might want high interest rates to choke it back and prevent inflation. Therefore you only go for monetary union with similar economies. It is questionable whether the British economy is running at the same speed as the euro economies. Over the last five years that I've been tracking it sterling has ... followed the dollar closer than the euro. Up until now our Beloved Chancellor has been wary of going into the euro until he is convinced it will work....although not a fan of Mr Brown, he is rightly cautious not to hand over his best tool for controlling the UK economy."
Jim said "The argument is sensible, and in fact it is the same line of reasoning you can read in The Economist magazine, whenever they discuss the 'stability pact' (the Maastricht 3% rule and so forth). ... I have learned about a number of accounting tricks played by various EU governments, to circumvent the rule by hiding many billion Euros of borrowing using various 'off-balance-sheet instruments'. The one used by Greece did eventually become common knowledge; some others did not. But in any case, since the EU decided to let France and Germany off scot-free when they broke the 3% rule, we can safely assume that it isn't really a rule any more ... more of a guideline.
There is a respectable literature in the field of economics on the subject of what makes a natural currency union (things like labour mobility, mechanisms for fiscal transfers, etc., as discussed in the 'Aunty' article). It is a point on which 'reasonable people might differ', but on balance I think that most economists would take the EMU-sceptic position - arguing that in the long run, EMU can only work if Europe has (at least from the point of view of setting government policies on tax and spending) a single government. Of course, that would be the view of a Euro-federalist too - and a conspiracy-theorist could suppose that this is why the European Commission (and the more Europhile EU governments) were pushing EMU - since they knew that the ultimate logic of EMU would be to force the EU governments to adopt a single economic government, or else to face economic dislocation and chaos, as/when EMU started to come apart as a result of fiscal divergence between the member states.
By the way, the only part of the Aunty letter that is no longer true is the part about pensions. The other EU states' pension systems are still in a mess, but now the UK's is too. This is the result of Gordon's raid (early in the first Labour government) on the pension funds' finances. At the time, the measure ("the abolition of advance corporation tax") was not as widely reported as it should have been - but the impact was to extract tens of billions per year from the UK pension funds (by arranging that most of their income would be taxed twice). This has meant that most "final salary" pension schemes in the UK no longer have enough money to pay out the pensions that they will, in due course, be obliged to. The other EU states still have a 'pensions black hole', but now we do too."
and Matthew pointed me to This article on Why Britain should join the Euro [PDF] for a reasonably well presented argument for the other side, which also addresses the points raised in the "Aunty" article.
Technorati Tags: economics, euro
Mike said "Basically the problem is one of convergence. If you have one currency to govern all the disparate economies of Europe then you have a problem in that a sluggish economy in need of a boost might want low interest rates to perk it up. A runaway economy might want high interest rates to choke it back and prevent inflation. Therefore you only go for monetary union with similar economies. It is questionable whether the British economy is running at the same speed as the euro economies. Over the last five years that I've been tracking it sterling has ... followed the dollar closer than the euro. Up until now our Beloved Chancellor has been wary of going into the euro until he is convinced it will work....although not a fan of Mr Brown, he is rightly cautious not to hand over his best tool for controlling the UK economy."
Jim said "The argument is sensible, and in fact it is the same line of reasoning you can read in The Economist magazine, whenever they discuss the 'stability pact' (the Maastricht 3% rule and so forth). ... I have learned about a number of accounting tricks played by various EU governments, to circumvent the rule by hiding many billion Euros of borrowing using various 'off-balance-sheet instruments'. The one used by Greece did eventually become common knowledge; some others did not. But in any case, since the EU decided to let France and Germany off scot-free when they broke the 3% rule, we can safely assume that it isn't really a rule any more ... more of a guideline.
There is a respectable literature in the field of economics on the subject of what makes a natural currency union (things like labour mobility, mechanisms for fiscal transfers, etc., as discussed in the 'Aunty' article). It is a point on which 'reasonable people might differ', but on balance I think that most economists would take the EMU-sceptic position - arguing that in the long run, EMU can only work if Europe has (at least from the point of view of setting government policies on tax and spending) a single government. Of course, that would be the view of a Euro-federalist too - and a conspiracy-theorist could suppose that this is why the European Commission (and the more Europhile EU governments) were pushing EMU - since they knew that the ultimate logic of EMU would be to force the EU governments to adopt a single economic government, or else to face economic dislocation and chaos, as/when EMU started to come apart as a result of fiscal divergence between the member states.
By the way, the only part of the Aunty letter that is no longer true is the part about pensions. The other EU states' pension systems are still in a mess, but now the UK's is too. This is the result of Gordon's raid (early in the first Labour government) on the pension funds' finances. At the time, the measure ("the abolition of advance corporation tax") was not as widely reported as it should have been - but the impact was to extract tens of billions per year from the UK pension funds (by arranging that most of their income would be taxed twice). This has meant that most "final salary" pension schemes in the UK no longer have enough money to pay out the pensions that they will, in due course, be obliged to. The other EU states still have a 'pensions black hole', but now we do too."
and Matthew pointed me to This article on Why Britain should join the Euro [PDF] for a reasonably well presented argument for the other side, which also addresses the points raised in the "Aunty" article.
Technorati Tags: economics, euro
