What Currency Devaluation Means for the Average Joe

Q1. The British pound has lost value (weakened/depreciated) against the Euro in the last 2 years. Based on what a weak dollar means for Americans, a) which groups in Britain benefit from a weaker pound and which are harmed and b) which groups in Europe benefit from a weaker pound and which are harmed? Q2. What would be the biggest advantage for Britain if it joined the euro? What would be the biggest disadvantage? Who Cares About the Weak Dollar? What currency devaluation means for the average Joe. By Michelle Tsai, 25 Sept. 2007, Slate.com

The U.S. dollar fell to a new low against the euro on Tuesday, thanks to more bad news about home sales. One American greenback is now worth about 0.71 euros, or 0.49 British pounds. Five years ago, the dollar and the euro were about the same in value, which means that a Roman holiday has gotten significantly more expensive. But continental vacations aside, how does the weak dollar affect the average Joe? With higher prices on almost everything imported from abroad. As our currency loses value, a dollar buys less and less from manufacturers in other countries. Because the euro has been so strong, this effect is especially pronounced when it comes to European imports: All things equal, a pair of eyeglass frames from a European designer that cost about 150 euros—or $192—last September would now go for $211 because of the soft dollar. This puts foreign businesses at risk of losing American customers to domestic competitors; some end up lowering their prices—and losing profits—as a result. But those businesses still need to make up for the shortfall, so they cut back in other ways. A carmaker like Audi or Volkswagen, for example, might start offering fewer models in the United States or stripping some bells and whistles from its vehicles. The weak dollar can hurt you even if you stick to buying American. Domestic manufacturers can start to raise their own prices, once the cost of European products starts to go up. The euro sticker shock also applies to American-made products that come from European raw materials, like J. Crew's cashmere sweaters or Cole Haan shoes made from Italian leather. Wal-Mart and Target shoppers probably won't need to worry for the time being, though. Much of what you buy from those mass merchants—toys, stereos, T-shirts—comes from Asian countries where currency values are more or less pegged to the U.S. dollar. A dollar will still be worth about 7.5 Chinese yuan no matter how much value it loses relative to the euro. The big-box retailers also tend to have supplier contracts that are written in U.S. dollars, so there's less currency risk. But temporary protections like artificially low prices and contracts in American currency can't go on forever if the dollar keeps weakening. Global companies will see their U.S. businesses shrink—not because they're selling fewer products, but because $1 million in sales is worth less than it used to be. Businesses will need to recoup their losses at some point by raising prices. If oil companies had to raise prices for that reason, the effects would be felt throughout the U.S. economy. Eventually—if too many things start costing just a bit more—we could have inflation on our hands. There is at least one way that a weakened dollar helps American consumers. Armed with strong currency, more Europeans are snatching up property in chic neighborhoods around the United States. This influx of capital could stabilize local housing markets.

How Many Currencies? Paul Krugman, Blog: Conscience of a Liberal, 12 January 2010, Some commenters on my Europe/euro post offer a reductio ad absurdum: if Spain should have its own currency, why not every state/town/family in America? Strange to say, economists have thought about that — a lot. It’s called optimal currency area theory. (Optimal? Optimum? Nobody seems to know — or care). The basic idea is that there’s a tradeoff. Having your own currency makes it easier to make necessary adjustments in prices and wages, an argument that goes back to none other than Milton Friedman. As opposed to this, having multiple currencies raises the costs of doing business across national borders. What determines which side of this tradeoff you should take? Clearly, countries that do a lot of trade with each other have more incentive to adopt a common currency: the euro makes more sense than a currency union between, say, Malaysia and Ecuador. Beyond that, the literature suggests several other things that might matter. High labor mobility makes it easier to adjust to asymmetric shocks; so does fiscal integration. [Asymmetric shocks: bad economic conditions in one place (inflation) that call for one policy (cutting government spending) simultaneous with bad economic conditions in another place (unemployment) that call for exactly the opposite policy (increasing government spending). Why high labor mobility would help this problem: workers would move from the area with high unemployment to the area with inflation, and presumably low unemployment. The entrance of workers would lower wages in the high inflation area (basic supply and demand: an increase in labor supply lowers wages) which would lead to lower costs for firms which would lead to lower prices across the area. Fiscal integration: fiscal policy is the taxing and spending power of the government, so fiscal integration would be having a single central body setting government policy for all members of the EU so that members states like Greece would not be able to engage in irresponsible behavior.] When EMU [European Monetary Union] began as a project, there were a number of studies comparing the EU with the United States. What all of them suggested was that Europe was less suitable as a currency area, basically because of lower labor mobility and lack of fiscal union. That didn’t settle the question of whether the euro was a good idea, but it did suggest that appealing to the success of the United States with a single currency didn’t tell you much.... ------The UK's five tests UK convergence with eurozone European monetary policy has enough flexibility to adapt to problems Impact on jobs in UK Impact on financial services in UK Impact on foreign investment in UK

The great euro debate Deciding whether to join the European single currency is one of the most momentous facing Tony Blair's government. BBC News, 7 May 2003 The debate goes way beyond party lines, splitting political parties and raising passions in a way few others do. The same goes for business. Many business leaders are opposed to UK membership of the euro. But those in favour of the currency could point you to others who back the euro. So what are the main political and economic arguments for and against the euro? And how would joining the currency affect the UK's sovereignty?

THE ECONOMY The economy, and how it could be affected by joining the euro, is central to the debate. In November 1997 Gordon Brown set out five economic tests along which the country's readiness can be measured. Each test assesses whether the British economy will benefit or suffer from the move. Supporters of the euro believe that a shared cash currency would allow Britain to compare its own prices and wages more easily with those of its European counterparts. This, in turn, would lead to greater convergence. Joining the euro would almost certainly mean better conditions for businesses considering long-term investment in Britain. Some large multi-nationals have warned that they only chose to invest in Britain on the assumption that it would eventually join the euro. With a shared currency, though, comes a pan-European interest rate and limits on the government's ability to borrow money. Interest rates are set for the eurozone by the European Central Bank (ECB) in Frankfurt. The Bank of England will be left with just one vote, like all the other central banks in the eurozone. Shocks to the economy, such as the terrorist attacks of 11 September, make it harder for the ECB to find the right rate. Whether Britain should lose its own economic identity is hotly debated. Britain emerged from 11 September stronger than its European counterparts: does Britain want its economy linked so closely with others if this means it could be affected by such economic slowdowns? A final consideration is that some features peculiar to the British economy could be affected by the move to the euro. Many people in Britain, for example, have mortgages with variable interest rates, as opposed to Europe's more common fixed interest rates. Britain also has the most flexible labour markets, with low interest rates meaning more jobs.

POLITICS As on most issues, British politicians are hugely divided over the question of the euro. But those divisions also cross party lines. Labour has internal groups campaigning on either side of the debate. The cabinet includes some sceptics and other signed-up members of the pro-euro camp. Some have said that ultimately the decision on the euro is a political one and that the economic advantages of joining the euro can never be guaranteed. Ultimately, Britain must decide whether to let decisions over its economic life be made outside the country. Labour was elected with a policy of holding a referendum if the five economic tests were met. [So far, the tests have not been met, so no referendum has been held. Some do not believe the tests ever will be met.] And some warn that Britain could be left out in the cold if it doesn't join the euro, unable to include key decisions in the European Union, particularly once the EU expands to 25 members. But there are many who say it is possible to be pro-Europe, but against membership of the euro. The No Campaign says "the euro is forever - if it's a disaster, we can't leave."

SOVEREIGNTY Britain's sovereignty is its right to control its own affairs - in other words, its complete independence and self- government. Some argue that joining the euro would lead to greater stability and shared growth in the EU. But others say committing to Europe further by joining the euro will involve handing over too much control. Indeed, there are those who argue that Britain has already relinquished its sovereignty to an extent. Concerns of dilution of power over our own affairs are countered by claims that joining the euro would give Britain more scope to influence European policy. They say the EU needs economic reform - and that the UK must be a euro member in order to influence that reform so that it best suits British interests.