Shoud Britain Join The Euro?

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Shoud Britain Join The Euro?

  1. 1. Should Britain join the euro?
  2. 2. Overview <ul><li>Reasons why to join </li></ul><ul><ul><li>Reasons why not to join </li></ul></ul><ul><ul><ul><li>Gordon Brown’s 5 tests </li></ul></ul></ul><ul><ul><ul><ul><li>Lucrezia Reichlin’s & Giancarlo Corsetti’s view </li></ul></ul></ul></ul>
  3. 3. Difficult relationship between the UK & the EU <ul><li>Years of indicision </li></ul><ul><ul><li>Political issues </li></ul></ul><ul><ul><ul><li>Rather US-minded and conservative </li></ul></ul></ul><ul><ul><ul><li>Warfare, education, … </li></ul></ul></ul><ul><ul><li>Economical issues </li></ul></ul><ul><li>UK’s pride </li></ul>
  4. 4. <ul><li>Hyperactive markets </li></ul><ul><ul><li>Exchange rates and speculation </li></ul></ul><ul><ul><li>Import/Export </li></ul></ul><ul><ul><li>John Maynard Keynes’ statement </li></ul></ul>Why Britain should join the Euro (1)
  5. 5. <ul><li>Economic integration </li></ul><ul><ul><li>Europe’s social democracy US’s neo-liberal capitalism </li></ul></ul><ul><ul><li>Forwards or Backwards (George Irvine, FU) </li></ul></ul><ul><li>Oppurtunity cost when UK is not to join </li></ul><ul><ul><li>Exchange rate losses </li></ul></ul><ul><ul><li>Loss of competitiveness </li></ul></ul><ul><ul><li>Loss of inward investments? </li></ul></ul>Why Britain should join the Euro (2)
  6. 6. <ul><li>Exchange rate losses </li></ul><ul><li>Intra-trade export & import (Begg et al 2003) </li></ul><ul><ul><li>Ease </li></ul></ul><ul><ul><li>Acces to scale- and technology markets </li></ul></ul><ul><ul><li>Loss of: </li></ul></ul><ul><ul><ul><li>Growth and inward investments (especially Europe) </li></ul></ul></ul><ul><ul><ul><li>Rise in competitiveness </li></ul></ul></ul><ul><ul><ul><li>Trade with Europe </li></ul></ul></ul>Oppurtunity cost when not joining
  7. 7. <ul><li>Economic integration </li></ul><ul><ul><li>Europe’s social democracy US’s neo-liberal capitalism </li></ul></ul><ul><ul><li>Forwards or Backwards (George Irvine, FU) </li></ul></ul><ul><li>Oppurtunity cost when UK is not to join </li></ul><ul><ul><li>Exchange rate losses </li></ul></ul><ul><ul><li>Loss of competitiveness </li></ul></ul><ul><ul><li>Loss of inward investments? </li></ul></ul>Why Britain should join the Euro (2)
  8. 8. Why Britain should not join the euro <ul><li>Loss of an independent… </li></ul><ul><ul><li>Monetary policy </li></ul></ul><ul><ul><ul><li>Bank rate drop from 5,25% to 2,25% </li></ul></ul></ul><ul><ul><ul><li>Hard getting out of a recession </li></ul></ul></ul><ul><ul><li>Fiscal policy </li></ul></ul><ul><li>The UK consumption is very interest sensitive </li></ul><ul><li>Euroscepticism as a fruit of chauvinism </li></ul>Doesn’t want to?
  9. 9. Politics behind the reasons (not) to join <ul><li>1997: Labour party = pro-European </li></ul><ul><ul><li>Gulf War </li></ul></ul><ul><ul><li>Recession 1991-1997 </li></ul></ul><ul><li>Nowadays: Labour party = rather chauvenistic </li></ul><ul><ul><li>UK is doing better </li></ul></ul><ul><ul><li>No need of a stronger mother </li></ul></ul>
  10. 10. The 5 tests of Gordon Brown <ul><li>Is Britain ready? </li></ul><ul><li>Treasury decides: </li></ul><ul><ul><li>Convergence </li></ul></ul><ul><ul><li>Flexibility </li></ul></ul><ul><ul><li>Investment </li></ul></ul><ul><ul><li>Financial Services </li></ul></ul><ul><ul><li>Growth & Jobs </li></ul></ul><ul><li>Europhiles & Eurosceptics </li></ul>
  11. 11. [G. Brown’s 5 tests] A. Convergence <ul><li>Corcerning interest & bank rates </li></ul><ul><li>Europhiles: Balanced since 1992 </li></ul><ul><li>Eurosceptics: More related to USA </li></ul><ul><li>Verdict: Hard to decide </li></ul><ul><ul><li>Difference between EU-states </li></ul></ul><ul><ul><li>Convergence has slipped before </li></ul></ul>
  12. 12. Black Wednesday ( 16 September 1992) <ul><li>Depreciating Dollar against Deutsche Mark </li></ul><ul><li>Lots of British export in Dollar </li></ul><ul><li>Linked to the ERM, hence an appreciating Pound </li></ul><ul><li>Speculators anticipated the dam-bursting </li></ul><ul><li>UK was forced to leave the ERM </li></ul><ul><li>Devaluation of the pound </li></ul>
  13. 13. [G. Brown’s 5 tests] A. Convergence <ul><li>Corcerning interest & bank rates </li></ul><ul><li>Europhiles: Balanced since 1992 </li></ul><ul><li>Eurosceptics: More related to USA </li></ul><ul><li>Verdict: Hard to decide </li></ul><ul><ul><li>Convergence has slipped before </li></ul></ul><ul><ul><li>Difference between EU-states </li></ul></ul>
  14. 14. [G. Brown’s 5 tests] B. Flexibility <ul><li>Corcerning: BoE instead of ECB </li></ul><ul><ul><li>Possibility to devaluate </li></ul></ul><ul><ul><li>Possibility to change interest rates </li></ul></ul><ul><li>Europhiles: Because there’s convergence, there’s no need of flexibility </li></ul><ul><li>Eurosceptics: opposite </li></ul><ul><li>Verdict: Brown probably not willing to give in </li></ul>Is the EU flexible enough for the UK?
  15. 15. [G. Brown’s 5 tests] C. Investment <ul><li>Direct Foreign Investment </li></ul><ul><li>Europhiles: DFI wil be ecouraged </li></ul><ul><li>Eurosceptics: only economic criteria count, not financial criteria </li></ul><ul><li>Verdict: Hard to decide </li></ul><ul><ul><li>Each company & economist for its or his own </li></ul></ul>
  16. 16. <ul><li>LSE Frankfurt </li></ul><ul><ul><li>Pride </li></ul></ul><ul><ul><li>Finances = keysector </li></ul></ul><ul><li>Europhiles: Without the euro, London declines </li></ul><ul><li>Eurosceptics: London has got much more to offer doesn’t need the euro </li></ul><ul><li>Verdict, once again: </li></ul><ul><ul><li>Each company & economist for its or his own </li></ul></ul>[G. Brown’s 5 tests] D. Financial services Being what?
  17. 17. [G. Brown’s 5 tests] E. Growth & Jobs <ul><li>Europhiles: euro = new oppurtunities </li></ul><ul><ul><li>Renewed competition </li></ul></ul><ul><ul><li>Outside the eurozone? </li></ul></ul><ul><li>Eurosceptics: same as in C.: only economical criteria count, not financial </li></ul><ul><li>Verdict: euro = bunch of opportunities </li></ul><ul><ul><li>Treasury: ‘Britain > Eurozone’ </li></ul></ul>Small EU Countries: Jobs & Growth UK Industrial Growth
  18. 18. Treasury’s statements about the 5 tests <ul><li>October 1997: not sufficiently converged, nor sufficiently flexible </li></ul><ul><li>June 2003: Treasury backs out completely </li></ul>
  19. 19. <ul><li>Optimal Currency Area </li></ul><ul><ul><li>Same economic structure, synchronised businesscycles ,… </li></ul></ul><ul><ul><li>Thus facing the same shocks </li></ul></ul><ul><ul><ul><li>A monetary policy that effects them in the same way </li></ul></ul></ul><ul><li>The EU’s EMU should be revisioned </li></ul>Lucrezia Reichlin’s (VUB) & Giancarlo Corsetti’s (Yale) view (2002) }
  20. 20. Correlation of long-term output growth with respect to the UK 1982
  21. 21. Should Britain join the Euro? <ul><li>Yes, but: </li></ul><ul><ul><li>Adapted monetary policy </li></ul></ul><ul><ul><li>Adapted fiscal policy </li></ul></ul><ul><ul><li>The EMU’s rules today have to be questioned </li></ul></ul><ul><li>Corsetti: ‘But these costs [of joining the EMU] should not be overestimated vis-à-vis the political and economic benefits of EMU-participation, […]’ </li></ul><ul><li>Corsetti: ‘History teaches us that politics, not economics, is the ultimate driving force of European monetary integration.’ </li></ul>

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