The Euro -- Further Fallout Of Iraq War In U.K. Politics

Great Debates
1

http://news.bbc.co.uk/2/hi/uk_news/politics/3029135.stm

 So is it that Gordon Brown independently decided his five tests hadn't been met, and Blair respects that?  The "five tests" have always struck me as a contrived sop to the anti-Euro forces, in that Brown (or whoever) could declare them met (or not met) at whatever time looked ripe for actually getting the populace to accept scrapping the pound.  But maybe Brown really was applying them in some quasi-scientific fashion.

 Or is it that Brown and Blair really are at daggers drawn and Brown has scuppered the tests to do Blair in the eye?

 Or does Blair recognize that his poll status (crucial in an Alistair Campbell-influenced regime) has taken too big a blow from his steadfast/slavish (depending on your view) support of GWB on Iraq, such that he can't risk further alienating the voters, and so he and Brown have cooked up this announcement in order to climb down, temporarily, from scrapping the pound, at least till Blair's Q ratings increase?
2

Brown has always had more reservations than Blair about Euro entry. Given this, the whole point about the Five Tests was always that it would give them a convenient way out if they wanted to sidestep the Euro issue at this point in the second term. Recent events in Iraq have made no difference at all, not least because most voters have strong opinions on the Euro and would vote accordingly in any referendum, rather than use it to protest about Iraq or Blair’s personality. With or without the war in Iraq, a Euro referendum would have been a huge gamble which Blair would probably have lost. That basic calculation hasn’t really changed.

3

Opinions might start to change if the Euro comes out of the current worldwide funk with stronger prospects than the pound.

4

This is just a WAG derived from a few conversations with PPE (Philosophy, Politics and Economics) students back in England, but I doubt the Euro referendum will be seriously pursued by the Labour party even if the currency comes out of the global economic downturn smelling like a rose. The main problem, said the PPE students, was that the Euro was hated by the conservatives and only grudgingly accepted at best by the left.

Even in Denmark, where the Euro was more widely embraced than in England, supporters of the Euro lost a referendum. I don’t think Brown or Blair can really be faulted for backing out of a no-win situation, although in truth they didn’t try too hard to push the Euro when they had a chance.

5

The Iraq war has certainly had a short term effect on the £.

It is now rising since the war was at the shorter end of expectations, and this may well give some policy flexibility and provide some relief to a Chancellor whose calculations on the economy have been somewhat distorted, or if you prefer, too optimistic.

Tax revenues have been less than expected, growth has been less than predicted, and due to increases in public spending, there has been concern that interest rates might have to rise or taxes increased.

I would have thought the Gordon Brown has taken all this on board and thought about the implications of being part of a larger currency and the way it would reduce his options in the future.

Given that he is chancellor he is perhaps more likely to want to retain some of the economic tools at his disposal rather than recommend they be taken away.

Currently the broadsheet press in the business sections is taking great pains to point out that UK unemployment is one of the lowest in the EU and falling (partly because of increased government spending) and puts this squarely upon the restrictions of government borrowing as a percentage of GDP in the Euro zone.

I personally think its because UK workers are easier and cheaper to dispose of when economic times get tough than their counterparts in the Euro zone.

Its also because we are cheaper as workers, we work more hours and we get less company benefits compared to say German workers who recieve far more generous redundancy and pensions terms.

What having the Euro would do for UK citizens is allow them access to capital from all over Europe without the difficulty in trying to operate accounts in another currency, this would lower our interest rates, and especially would be beneficial for companies in the UK who wish to invest in latest technology.

It would make the price of goods and services directly comparable, think of the ridiculous price of cars in the UK compares to much of continental Europe, now imagine such price differencials on CD’s, clothes insurance air travel and many other items.

Here is a true story, friend of mine went to Bruges not three weeks ago, he was sat with his wife at one of the main square cafe/bars.
Bruges is well equipped for the UK tourist, everyone speaks English and they will take UK money directly, no need to change into Euros.
My friend was drinking those small bottles of beer and was paying in £, keeping his Euro for the many gift shops.

He switched to Euro for the last couple of drinks since he wanted £ money for fuel on the journey home.

The beers cost something like £1.40 and he thought no more of it, but when he paid in Euro it cost E1.7.Which is considerably less.
This is not apparently at all unusual either, many other goods are far better paid directly in Euro and work out much cheaper than in £.

Chancellors can talk all about policy, nationalists can talk all they want about sovereignty, but if keeping the £ means paying up to 33% more than I need to for the goods and services I want, the £ can go tomorrow as far as I’m concerned.

6

Don’t bet on it. Where I live here on the US-Canada border, you can use US$ on the Canadian side, and CAN$ on the US side. A 33% markup for using currency on “the wrong side” is a little steep, but not unheard of.

Now, do you think that, if Canada decided tomorrow to change to the use of the US dollar, that the prices of goods and services there would fall by 33%? Nope.

7

IMO, this has nothing to do with economics, but everything to do with the bar owner. When store owners accept foreign currency for their customers convenience, they always do so by applying an awful exchange rate (which is at least partly justified, since they have to latter exchange this money for the local currency). This doesn’t apply when the foreign “hard” currency is highly desired in the visited country, of course, but it’s obviously not the case here. The bar owner just decided that he would accept pounds, but charge much more patrons using them. Usual behavior in very touristy places.

8

This is a very interesting thread, but I’m a Yank, and utterly confused. Could someone fill me in with a little background? In particular, what are the political issues at play in the UK with regard to the Euro versus the pound? Why is it that, as Duke put it, adoption of the Euro in Britain is “hated by the conservatives and only grudgingly accepted at best by the left”? Looking at it from this side of the Atlantic, I just can’t see any downside to all of Europe, including Britain, using a single currency. (For that matter I wouldn’t mind if the U.S. joined the EU and replaced the dollar with the Euro, but I realize that’s very much a minority opinion.) But apparently there are many people in Britain – and in Denmark – who do see a downside. But what is it they see?

9

  1. Loss of sovereignty. Having your own currency is one of the traditional hallmarks of a sovereign nation.

  2. Further integration into the EU. Involvement in the EU is already viewed negatively by some as imposing various EU regulations (both directly currency-related, such as maintaining certain fiscal and economic policies, and more general trade-related, e.g., agricultural, labor, immigration policies). Also, closer linkage to (and implicitly, responsibility for subsidizing) the other (and in some cases, poorer) EU “Euro-block” countries or banking systems (especially with entry of ex-Warsaw pact countries, etc.).

3 Fear of/disdain for “eurocrats” – “unelected administrators in Brussels wasting our money on chauffers and fancy lunches.”

  1. New world order – this sort of goes with no. 1, and is probably not such a hot issue in U.K. as it would be in U.S., but there is something very . . . earnestly Brave New World about the single currency. Even the name strikes many as a little naff. “Euro” as a modifier is not a compliment in many parts of the Anglophone world.
10

If you don’t like having important decisions make by “unelected administrators in Brussels,” why don’t you change the EU constitution to make them elected officials, or at least answerable to elected officials?

11

Strange, I was sure I voted in European elections…

I wonder where all those people got M.E.P. after their names…

12

Strong Euro is not necessarily all that good. Indeed, the US government seems to be encouraging a weak dollar these days. Why on earth would they do that?

Strong currency: Imports are cheap. Exports don’t sell well.
Weak currency: Imports are expensive. Exports sell well.

Too strong a currency means negative balance of trade. All your wealth goes away.
Of course, too weak a currency means economy goes flooey.

Right now, with the size of the purely domestic portion of the US market and manufacturing, we can afford a weak dollar for longer than Japan, the EU, and China can afford a weak dollar.

Since the Euro is so strong in addition to the weakness of the dollar, the EU gets hurt doubly.

Of course, the EU could change this situation at any time, but they seem to have some kind of ego trip going. Well, if they insist upon destroying their export market, more power to them.

13

I do not understand the appeal of a universal currency. We used to have an approximation of that decades ago, when the Canadian dollar was ‘pegged’ at a fixed exchange rate to the U.S. dollar. Then a Canadian economist won the Nobel Prize in showing how separate currencies with floating exchange rates was a good thing.

Here’s a big problem with a single currency - it ties the hands of central bankers. What does the U.S. Fed do if the economy is weak? Cut interest rates. What does it do if the economy is overheating, creating a risk of inflation? Raise interest rates.

Now what do you do if one country is in recession, and another is booming? With one currency, you’ve got a big problem.

Another issue is deficit spending. What do you do if one country keeps borrowing tons of money? The EU supposedly solved that problem by putting hard limits on the size of the deficit or debt a country can carry. That further ties the hands of government planners. But of course, the ‘special’ members of the EU (i.e. France and Germany) can sidestep those rules, as France is doing now.

Aside from these structural problems, there are a host of political and economic problems creeping into the EU. For example, the EU is trying to strongarm the WTO into forcing all countries that trade with it into meeting the same environmental and labor regulations that the EU has adopted. This isn’t likely to fly, and it’s going to put the EU at a disadvantage.

The EU is becoming increasingly rigid and bureaucratic. If I were British, I would want to maintain a close trading relationship with the EU, but I’d for damned sure want to keep my own currency and make my own political decisions.

14

In my opinion this boils down to a fundamental question: Does Britain really want to be a part of Europe or not? And on the other side: Does Europe really want to have the UK as its member - as long as the UK does not seam to appreciate its membership?

Don’t understand me wrong - I am totally “Anglophil” - I love the country and its people.

But Britain is viewed by many of the europeans (I guess speak for common views in the german and french speaking countries) as somewhat not interested in the European Union, especially since the EU had quite some differences with the US lately.

What is the opinion of you english “blokes” to this question? :slight_smile:

15

It’s a difficult issue for me, in that I am (I think) in the unique position in Europe (NI) of having use of both the currencies (in big stores / businesses anyway), albeit one is unofficial.

On a basic level (for the man on the street) it does seem to be advantageous to all be using the same currency, which could avoid confusion over pricing, exchange rates and purchase power etc… when hopping over national boundaries.

But, as Sam said, the main arguments against are that the government would lose the ability to manage the economy effectively on a national level - by altering interest rates and the like.
I’m not convinced as yet as to whether it is a good idea on not.

But I certainly don’t see my scepticism as being in any way Anti-Europe, just indicitive of a practical decision to be taken, ultimately, in the national interest.

16

The British public may also be looking at the Irish experience, in which introduction of the euro was followed by a whopping increase in inflation.

I would have the punt back in a heartbeat, personally. I don’t blame the British at all for their reluctance.

17

Huerta, APB, flonks, quite frankly I’m a bit surprised at your discounting of the very real fact that the decision to join/not join the euro, while primarily a political decision, has real-life economic consequences. If the British are (perhaps) overemphasizing the economic issues with the Five Tests, it is without a doubt that the euro zone decidedly underemphasized the economic issues, leading to such stupidities as the “Stability and Growth Pact” and equal voting on the ECB board of governors.
I once read that, as a practical matter, because the more underdeveloped countries in the euro zone have a naturally higher growth rate and inflation, to meet the ECB’s 2% inflation target the euro zone’s interest rates have to be set such that Germany is practically guaranteed to suffer deflation.

So, while Brown’s conclusions about whether the Five Tests have been met at any particular time may be affected by Brown’s Euroscepticism (and that is obviously a potential problem), the Five Tests themselves are pretty practical, and probably an exercise each euro zone nation should have gone through before they decided to join up.

Sua

18

ruadh,
I think you are giving too much credit to the British public. If they are looking at anything it’s the “Sun” newspaper and page 3.

V

19

I don’t discount these consequences; I just sense that the debate in the U.K., rightly or wrongly, is being driven mostly by how people feel about Europe (or about Blair). Certainly I think Blair’s pro-Europe position owes as much to his fondness for jetting off to rub shoulders with the elites in Tuscany or Davos as it does to any strenuous macroeconomic analysis on his part.

Although the populace is no doubt willfully uninformed on this as with many issues, here I can’t really blame them so much, as economic theory is a morass at best. Inflation is bad . . . except when we’re told now that deflation is worse. Increasing the money supply will lead to [fill in good/bad result of your choice]. The Eurozone will [create/destroy] jobs. I’m not sure anyone knows how the Euro will shake out, which may in itself be the real animating argument for the conservative (and Conservative) hesitancy to embrace the experiment.

20

The use of crude tools such as interest rates is, in my opinion, just a substitute for imagination in national economic policy.

The problem in the UK is that the national interest rate is not always useful for all sections of UK finance.

For instance, if there is a boom in consumer spending, such as might be created when house values rise and consumers borrow more money against their house and thus spend on imported goods(this is a very common scenario BTW), this will create balance of payments problems, and typically the Bank of England will raise interest rates to maintain the government set inflation targets.The hope is that this will reduce spending.
Unfirtunately this might well be the very worst thing that the manufacturing sector of the economy needs, as it will put up the cost of short term borrowing which is often used to aid cashflow.

Another example might be that interest rates may well be useful in one region of the UK and very unhelpful in the rest of the UK.This tends to manifest itself in a need to control spending in the South-East of the UK, the London zone, or maybe to defend the currency against speculators, but in the regions such as Birmingham and the great Northern industrial cities, this same increase in interest rates may be very damaging.
Conversely, reducing interest rates may well help certain parts of the economy but at the cost of other parts.

The UK has effectively got two regions which need differant economic strategies, London and the South-East, and the other being pretty much the rest of the country.
The use of interest rates affects both, but is too blunt a tool.

If the interest rate tool was taken awy from the politicians, they would have think about directing policy in tailor made ways to effect the changes they desire.There are regional assistance polices and in Wales this was effective for a time, in fact this is one of the reasons for regional governments there and in Scotland.
Both these nations felt that London biased policy simply did not take into account their interests and there was a desire for closer local control.

Other regions have similar arguments, what may be good for Lancashire is not necessarily a good policy for the UK as a whole, and it all stems from the use of things like interest rates instead of imaginative ecnomic policy.

If we were to join the Euro, then we would be free of the UK national policy of ‘London first London last and London always’ at the expense of the rest of the country.

Perhaps we, as a nation, are really becoming an extended city state, were the important policies, the power etc are all concentrated in the South-East.