http://www.telegraph.co.uk/finance/c...than-ever.html
First, the recent fall in the exchange rate has taken the pound to a competitive rate which it would be advantageous to lock in.
The current rate is 15pc below that seen on the day the euro was created in 1999, 14pc below the rate ruling when the Treasury last assessed the five entry tests in June 2003 and 20pc below the rate of two years ago.
Second, the recent sharp swings in the UK's exchange rate have supported the idea that as a medium-sized economy, during periods of global instability the UK's exchange rate is always going to be susceptible to volatility. The euro would be a safe haven.
Third, the recent problems in the UK's banking system have highlighted the potential perils of having financial liabilities that dwarf the size of the economy.
The UK is like a gigantic hedge fund. If we were to adopt the euro, we would secure the backing of the European Central Bank and the fiscal power of the whole euro-zone.
There is something in all of these arguments, although not much in the last one. I cannot see other eurozone members being keen to pour resources into supporting the City of London in a banking crisis.
Moreover, there are two strong counter-arguments. First, joining the euro would require the UK to hand over the responsibility for setting interest rates and other forms of monetary policy to the ECB.
It sets euro monetary policy to achieve economic objectives for the eurozone as a whole, not for individual member countries. Our economy is very different from the eurozone average. Consequently, for much of the time, euro interest rates would be wrong for us.
Moreover, although the ECB has, on the whole, done a pretty good job, it has displayed marked characteristics which may be very unhelpful in current circumstances.
During its 10 years of existence, it has regularly been slower to respond to events than other central banks and less willing to change interest rates as aggressively.
And just think how bad things would be now if the UK had adopted the euro at its formation in 1999, as the europhiliacs then urged.
Our interest rates would have consistently been nearly 2pc lower than they in fact were. The result would have been an even bigger bubble in our housing market, leading to an even larger collapse and a deeper recession.
Second, it is all very well saying that the pound is now at a competitive level, but if we had already joined the euro the pound would not have been able to fall to this level.
And if we were to join it now, it would not be able to fall in future recessions – or to rise, if circumstances so required, as, believe it or not, some day they might. The simple fact is that there is no right exchange rate for all seasons. The key is to retain flexibility.
Without the recent 20pc fall in the pound, the UK's recession would be much deeper and much longer. The ability of a more competitive exchange rate to boost activity is even more crucial when the capacity of lower interest rates to stimulate demand is impaired
by the banking crisis.
Consider the plight of Italy. In time-honoured fashion, it has allowed its costs and prices to rise faster than the eurozone average.
The result has been a massive loss of competitiveness, both inside and outside the eurozone. Traditionally, Italy got out of this sort of mess by devaluing. Now it is stuck with having to grind its relative costs down through the effects of depression.
It is all very well saying that a lower exchange rate imposes no discipline and the virtuous path is to suffer. For Italy, the virtuous path could be the road to disaster. If we were in the euro, that could be our fate too.
The key reason why the UK emerged from the Great Depression of the 1930s earlier than most major economies was that it left the Gold Standard early, and subsequently enjoyed a significant boost from a lower exchange rate and lower interest rates.
Similarly, the UK managed to shrug off the recession of the early 1990s only because the exchange rate fell sharply and we were able to set our own interest rates after the pound was ejected from the Exchange Rate Mechanism in 1992.
The urge to throw in our lot with the continentals and let those nice, clever chaps in Brussels or Frankfurt manage our affairs strengthens whenever we experience one of our periodic bouts of national depression and loss of self-confidence.
The drive to join the EU in the first place originated in this way, and so did our membership of the ERM.
We are now passing through another cycle. Until recently, we suffered from national hubris – the end of boom and bust; our marvellous fiscal rules; our wonderful MPC; our outperformance of the continental economies leading to gross over-confidence, to the point where the Prime Minister took glee in lecturing our European friends on how to run their economies. Then disaster.
It is now surely clear that the Treasury, the Bank and the Financial Services Authority have made a gigantic Horlicks of managing our economy.
They, and we, are bound now to suffer from a deep depression of mood as well as economic performance. In such a frame of mind it is unwise to take radical decisions. The wise thing to do is to carry on until the mood lifts.
As one of those who was not taken in by the Brownian delusion of economic transformation, and has not experienced the associated yo-yoing of moods, let me say this: the eurozone is not going to have a picnic either.
Indeed, the strains will be intense and it is far from obvious that the ECB will be as imaginative and urgent as the Bank of England in seeking cures.
Grim though things will be here, eventually they will get better. Out of the debacle of the ERM exit, came a period of genuinely successful UK economic management and good economic performance.
It can happen again – provided that we retain control of our own affairs.
First, the recent fall in the exchange rate has taken the pound to a competitive rate which it would be advantageous to lock in.
The current rate is 15pc below that seen on the day the euro was created in 1999, 14pc below the rate ruling when the Treasury last assessed the five entry tests in June 2003 and 20pc below the rate of two years ago.
Second, the recent sharp swings in the UK's exchange rate have supported the idea that as a medium-sized economy, during periods of global instability the UK's exchange rate is always going to be susceptible to volatility. The euro would be a safe haven.
Third, the recent problems in the UK's banking system have highlighted the potential perils of having financial liabilities that dwarf the size of the economy.
The UK is like a gigantic hedge fund. If we were to adopt the euro, we would secure the backing of the European Central Bank and the fiscal power of the whole euro-zone.
There is something in all of these arguments, although not much in the last one. I cannot see other eurozone members being keen to pour resources into supporting the City of London in a banking crisis.
Moreover, there are two strong counter-arguments. First, joining the euro would require the UK to hand over the responsibility for setting interest rates and other forms of monetary policy to the ECB.
It sets euro monetary policy to achieve economic objectives for the eurozone as a whole, not for individual member countries. Our economy is very different from the eurozone average. Consequently, for much of the time, euro interest rates would be wrong for us.
Moreover, although the ECB has, on the whole, done a pretty good job, it has displayed marked characteristics which may be very unhelpful in current circumstances.
During its 10 years of existence, it has regularly been slower to respond to events than other central banks and less willing to change interest rates as aggressively.
And just think how bad things would be now if the UK had adopted the euro at its formation in 1999, as the europhiliacs then urged.
Our interest rates would have consistently been nearly 2pc lower than they in fact were. The result would have been an even bigger bubble in our housing market, leading to an even larger collapse and a deeper recession.
Second, it is all very well saying that the pound is now at a competitive level, but if we had already joined the euro the pound would not have been able to fall to this level.
And if we were to join it now, it would not be able to fall in future recessions – or to rise, if circumstances so required, as, believe it or not, some day they might. The simple fact is that there is no right exchange rate for all seasons. The key is to retain flexibility.
Without the recent 20pc fall in the pound, the UK's recession would be much deeper and much longer. The ability of a more competitive exchange rate to boost activity is even more crucial when the capacity of lower interest rates to stimulate demand is impaired
by the banking crisis.
Consider the plight of Italy. In time-honoured fashion, it has allowed its costs and prices to rise faster than the eurozone average.
The result has been a massive loss of competitiveness, both inside and outside the eurozone. Traditionally, Italy got out of this sort of mess by devaluing. Now it is stuck with having to grind its relative costs down through the effects of depression.
It is all very well saying that a lower exchange rate imposes no discipline and the virtuous path is to suffer. For Italy, the virtuous path could be the road to disaster. If we were in the euro, that could be our fate too.
The key reason why the UK emerged from the Great Depression of the 1930s earlier than most major economies was that it left the Gold Standard early, and subsequently enjoyed a significant boost from a lower exchange rate and lower interest rates.
Similarly, the UK managed to shrug off the recession of the early 1990s only because the exchange rate fell sharply and we were able to set our own interest rates after the pound was ejected from the Exchange Rate Mechanism in 1992.
The urge to throw in our lot with the continentals and let those nice, clever chaps in Brussels or Frankfurt manage our affairs strengthens whenever we experience one of our periodic bouts of national depression and loss of self-confidence.
The drive to join the EU in the first place originated in this way, and so did our membership of the ERM.
We are now passing through another cycle. Until recently, we suffered from national hubris – the end of boom and bust; our marvellous fiscal rules; our wonderful MPC; our outperformance of the continental economies leading to gross over-confidence, to the point where the Prime Minister took glee in lecturing our European friends on how to run their economies. Then disaster.
It is now surely clear that the Treasury, the Bank and the Financial Services Authority have made a gigantic Horlicks of managing our economy.
They, and we, are bound now to suffer from a deep depression of mood as well as economic performance. In such a frame of mind it is unwise to take radical decisions. The wise thing to do is to carry on until the mood lifts.
As one of those who was not taken in by the Brownian delusion of economic transformation, and has not experienced the associated yo-yoing of moods, let me say this: the eurozone is not going to have a picnic either.
Indeed, the strains will be intense and it is far from obvious that the ECB will be as imaginative and urgent as the Bank of England in seeking cures.
Grim though things will be here, eventually they will get better. Out of the debacle of the ERM exit, came a period of genuinely successful UK economic management and good economic performance.
It can happen again – provided that we retain control of our own affairs.
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