10 years of the Euro: New Perspectives for Britain Published by John Stevens Edited by Graham Bishop Willem Buiter Brendan Donnelly Will Hutton Editorial Assistance David Seymour Karine Lisbonne de Vergeron Administration Sue Baldwin Reproduction and Printing Sarum Colourview, London Office, 23-24 Henrietta Street, Covent Garden, WC2E 8DN 020 7395 0920 [email protected] 10 years of the Euro: New Perspectives for Britain 4 Table of Contents Preface . 7 Michael Artis . .9 Richard Bassett . 13 Iain Begg . .19 Graham Bishop . 25 Willem Buiter . 37 Stefan Collignon . .59 Nick Crosby . .69 Brendan Donnelly . 77 Harold Elletson . 85 David Green . .89 Nina Fishman . 97 Chris Haskins . .101 Dirk Hazell . .105 Will Hutton . 111 Richard Laming . 119 David Lea . 125 Wolfgang Munchau . 135 John Palmer . 141 David Seymour . .147 Alan Shipman . .153 John Stevens . 161 Nicolas Stevenson . .169 Peter Sutherland . 183 Dick Taverne . .191 Niels Thygesen . 197 Simon Titley . 205 Stephen Wall . 211 David Walter . .217 Michael Welsh . 223 Richard Whitman . 229 John Williamson . .235 Appendix to David Lea . .243 5 6 Preface Preface These papers are the result of a discussion convened by Peter Sutherland on the 4th of November 2008. Their publication is intended to help place the case for Britain joining the Euro back upon the political agenda and to provide the beginnings of an ongoing forum for its promotion. Additional papers addressing further aspects of the matter and more detailed analyses will follow over the coming months in the hope of creating a rallying point for more weighty interests to find the courage of their convictions. John Stevens 7 8 British Membership of the Euro: Time to Think Again? British Membership of the Euro: Time to Think Again? I believe it is time to put the case for joining the Euro back on the agenda for policy discussion. When the case was last investigated and, with the publication of the Treasury’s Report on the Five Tests, effectively terminated, the case for not joining was strong. Now I believe that the case is much weaker, perhaps decisively so. A number of important factors have changed. As this is the time for quoting Keynes, it is worth bearing in mind the reproof he directed at someone who criticised the seeming inconstancy of his expressed views: “When the facts change I change my mind. What do you do?” 9 Michael Artis British Membership of the Euro: Time to Think Again? First and most important, when the case for Euro was last rehearsed, British citizens could be excused for following the wise old American saying “If it ain’t broke, don’t fix it”. This well-founded attitude was based on a long period of increasing prosperity and moderate inflation. It was reflected in a long run of predominantly negative answers to the question, as administered by polling organizations, “if there were a referendum on joining the Euro would you answer Yes or No to the question ‘Should Britain join the Euro?’ The American adage hardly applies today. Attitudes towards joining the Euro seem likely to change as a result. One of the ingredients in the long run of prosperity was undoubtedly the high value of the exchange rate of the pound against the Euro (and other currencies). Once again, things have changed. Where the exchange rate was arguably too high before, now it is arguably too low. It was difficult to recommend locking into the Euro at the rates prevailing in the late ‘90s through to 2007 and it would be wise to await some appreciation before locking in now – but that some fall in the exchange rate can be welcomed is hardly beyond dispute. Still, while we are on the subject of the exchange rate, it is not just quibbles about whether the rate is right or not at a particular time that should count. Rather, the lesson that might be learnt is that the recent behaviour of the exchange rate gives little ground for optimism about its role as a stabilizer when Britain’s exchange rate is floating. In fact there have been a number of studies which seem to show that the exchange rate may, for many countries, be just as much a source of shocks as a stabilizer of them. Usually the countries identified as those for whom the negative verdict on the stabilizing properties of the exchange rate is appropriate are small countries for whom the gyrations of the foreign exchange market overwhelm the potential for stabilization of domestic monetary policy. Now Britain is not as small as some of those countries, but recent events do not encourage one to position the economy so that it is a victim of the market’s unreasoning tendency to move by leaps and bounds on news of the slightest change in circumstance. 10 Michael Artis British Membership of the Euro: British Membership of the Euro: Time to Think Again? Time to Think Again? First and most important, when the case for Euro was last rehearsed, Another important lesson that we have been able to learn is that British citizens could be excused for following the wise old American European Central Bank policy – contrary to some early hypercritical saying “If it ain’t broke, don’t fix it”. This well-founded attitude analyses (mostly emanating from the City of London) – has been was based on a long period of increasing prosperity and moderate well-considered and well-conducted. A recent very thorough inflation. It was reflected in a long run of predominantly negative investigation of the matter (issued as working paper of the National answers to the question, as administered by polling organizations, Bureau of Economic Research) has concluded that “it is hard to “if there were a referendum on joining the Euro would you answer find major fault with what they [the ECB] have done over the past Yes or No to the question ‘Should Britain join the Euro?’ The decade”. It is fair to say that had the UK joined the Euro a decade American adage hardly applies today. Attitudes towards joining the ago the great success of the institution – even given participation Euro seem likely to change as a result. by gifted UK central bankers – could be in doubt, such would have been the contrary pulls of British and continental interests. One of the ingredients in the long run of prosperity was undoubtedly the high value of the exchange rate of the pound against the Euro Here is another area in which things have changed –if not decisively (and other currencies). Once again, things have changed. Where – then quite lot. In the past the business cycle experience of the the exchange rate was arguably too high before, now it is arguably UK was not closely aligned with that of the Eurozone countries. too low. It was difficult to recommend locking into the Euro at the When the UK largely escaped the backwash of the 2000-2001 rates prevailing in the late ‘90s through to 2007 and it would be dotcom bubble burst and consequent recession in the United States, wise to await some appreciation before locking in now – but that the countries of the Eurozone experienced a prolonged period some fall in the exchange rate can be welcomed is hardly beyond of slow growth. For long the “UK business cycle idiosyncrasy” dispute. Still, while we are on the subject of the exchange rate, it is marked it out as unsuitable in a monetary policy partnership with not just quibbles about whether the rate is right or not at a particular the continental economies – a single monetary policy could not time that should count. Rather, the lesson that might be learnt is have been suitable for both while business cycles are not closely that the recent behaviour of the exchange rate gives little ground synchronized. Moreover it was remarked that no single UK region for optimism about its role as a stabilizer when Britain’s exchange showed an affiliation with the Eurozone countries (unlike the case rate is floating. In fact there have been a number of studies which for even the more marginal of the Eurozone countries, where it seem to show that the exchange rate may, for many countries, be was possible to find one or more regions in tune with the European just as much a source of shocks as a stabilizer of them. Usually the cycle. What seems to have been happening is that the force of countries identified as those for whom the negative verdict on the globalization has driven all business cycles closer together – there stabilizing properties of the exchange rate is appropriate are small may be a separate Europeanization effect, but if so this is obscured countries for whom the gyrations of the foreign exchange market by globalization. On these grounds then the prospect of a single overwhelm the potential for stabilization of domestic monetary monetary policy is no longer so disturbing. policy. Now Britain is not as small as some of those countries, but recent events do not encourage one to position the economy so that Some have argued that Iceland’s fate is an instructive pathology for it is a victim of the market’s unreasoning tendency to move by leaps the UK to observe. Size – or relative lack of it – is certainly one of and bounds on news of the slightest change in circumstance. the features of today’s landscape that stands out. Whilst the size of the country – even when measured in GDP relative to that of the rest of the world has not changed much, it has certainly fallen in recent years. More certainly still, the financial globalization of the world and the size of mobile capital funds make smaller countries more 11 Michael Artis Michael Artis British Membership of the Euro: Time to Think Again? vulnerable than they were.