The Euro

[spikegifted]

Originally posted by Big RICHARD
Spikey - Are you an economist? Your site claims that the 4 out of the 5 economic test targets have not been met, but rarely substantiate these claims with a balanced argument. Would you like to give a balanced argument?

Huh... Thanks for the response.

First of all, if you have the chance to read the rest of my site, you'd know that I'm no economist. Whilst I've had training in both macro- and micro-economics and have good understanding of the drivers in both areas, I'm actually more commonly described as a financial analyst of corporates and financial institutions and more accurately a qualitive risk analyst.

Bearing that in mind, I'd be the first one to admit that the arguments set out in my little write up is not complete and certainly not bullet-proof. However, I believe that my arguments and counter-auguments sufficiently supported by observation and evidence. They may or may not agree with the government's (and the Treasury's) line of reasoning and they may differ from other popular economist you'd see on newspapers and television programs.

I don't really intend to give fuller explanations on my arguments on my site, however, if you've any specific points you want to raise regarding that summary or anything else, I'm more than happy to provide you with my thoughts and reasoning.

[spikegifted]

Originally posted by Slick
Which is one of the reasons I said it would be bad for our economy. It may benefit you the consumer, but it will have really bad consequences on British firms which will eventually affect you when unemployment rises etc and it will cause us to go into further deficit on our B/P.

Well, the manufacturing industries only made up around 25% of the UK economy (2002). However, a significant part of this sector is catored for export which means that whether they're actually competitive in the domestic market (the UK) or not is less important than whether they're competitive on the international stage. (That is why, as and when the economic conditions are right, the government of the day will have to make sure that the Euro entry exchange rate is fixed at the right rate, or the UK's export-orientated manufacturing industry will take years to recover...)

On the service sector, pricing is only part of the equation. The most difficult part is 'compatibility'. The term compatibility can mean a number of things - systems, language, product delivery, etc. This country has observed that when there is compatibility, the service has increasingly moved to lower cost locations - India and Ireland, to name a couple. The service sector will not experience significantly higher competition due to the entry into the Euro, as the higher of the hurdles (compatibility) is unlikely to be overcome easily by other Eurozone countries, with the exception of Ireland.

[Saracen]

Originally posted by DaBeeeenster
Can anyone point me to a concise list of the five economic tests? I've NEVER seen them! People keep talking about them all the time but I have no idea what they actually say.

They are at the Treasury Website.

The problem, in my view, is that the questions are so broad and vague that you can make the answers agree suit whatever and whenever you want. So the tests says "business cycles" must be "compatible", but by what objective measurement? What amount of divergence implies "compatible", and over what period?

Originally posted by DaBeeeenster
Slick, which areas of the mainland european economy do you think are dissimilar to the UK?

I dont see what cultures being different has got to do with it

I can answer what I meant when I said much the same thing.

Economies run in cycles. Various factors affect those cycles. Some factors we can influence (local, regional or national ones), some (international) we can't. We are all affected, for instance, by a dollar or yen slump, or surge. The crucial point is that the cycles have a phase and an amplitude. Even if the economies of, say, the UK and Portugal can be in phase right now, the differences in amplitude and phase means that they will not be in a few months or years.

Some countries are heavily industrialised while some are more agrarian. Some rely heavily on seasonal factors like tourism while others are oriented towards high technology. The factors that affect us may well not be the same as the factors that affect other countries. It is therefore quite possible to find ourselves in a slump when others are in boom, or vice versa.

For me, true economic convergence implies more than that required rates for interest, etc are the same. Economic cycles must also be the same (or very similar) in both amplitude and duration, or they will move out of convergence again.

If, and I believe it's a very dubious if, the economies of the EU do truly converge, then much of my arguments against membership will cease. I will still have some personal reservations, based on centralisation of power and levels of bureaucracy, but much of the technical arguments will be moot. However, I don't see true convergence in even the medium term, let alone long term. For me, in economic terms and particularly in terms of cycles, when I say "short term" I mean within, say, 5 years. Medium means 5 to 25 or 30 years and, evidently, long-term means more than that.

You simply cannot change economies overnight. Even if you through huge sums of money at a country that has a much less modern infrastructure than ours, it STILL takes years. The post-Communist Soviet Union/Russian Federation are finding that out. You have to modernise whole swathes of industry, educate and train large percentages of the population, build road networks and modernise rail networks, build ports and so on. This is a major concern for me in the proposed expansion of the EU into many Eastern European countries.

Membership of the EU implies the removal of national borders, and the result is increased mobility of labour. Many of the traditional barriers to mobility do not exist within the EU membership. Such an increase in mobility of labour tends to encourage emigration of qualified people to countries where the standard of living is higher. Whilst it might help the UK to get an influx of doctors and engineers from Eastern Europe, it could well be at the expense of denuding those countries of the cream of their population - thus making it even LESS likely that they will be able to converge economically. After all, pay rates are massively at variance. And THAT can have the effect of further dislocating manufacturing to areas where labour costs are low. The removal of trade barriers that currently exist around the EU group make it easier and more financially feasible for companies to do just this. So we risk losing yet more of already challenged sectors like manufacturing and our economy having to rely more and more on invisible trade (banking, insurance, etc) and newer high-tech industries like computing, genetics, and so forth. We can't all be doctors, computer experts, geneticists or analytical chemists.

These are some of the factors I was referring to by "cultural" differences. Another would be underlying factors like the proclivity to buy your home versus renting. The trends in the UK and Germany are classic examples. Interest rate changes are an especially effective tool for countries that have high rates of home ownership, or rather, high rates of mortgage ownership . If the government hike (or cut) interest rates, it hits mortgage rates more or less instantly, so the government know they can increase or decrease the amount most people have in their pockets pretty quickly and easily. If, however, you have a country where the housing market is primarily rental, then such interest rate changes do not have the same effect.

[spikegifted]

Saracen:

I'm in agreement with most of what you've said in your post. However, there's one area that I begged to differ - the setting interest rate. As you're probably aware, the decision of setting interest rate level was handed over to the Bank of England soon after Labor government came to power in 1997 (not long after the same government removed the regulatory function of the BoE and gave it to the FSA). At the same time, the setting of interest rates in Germany has always been the obligation of the Bundesbank, likewise Banque de France for France, etc. Of course, with the creation of the Euro currency, the interest rate setting function was handed over to the ECB (European Central Bank) for countries in the Eurozone. These in effect removed politician's ability to manipulate interest rates for short-term political gains - take a look at the interest rate trends during previous Labor and Conservative governments.

The purpose of giving central banks the interest rate setting mandate is so that 'economists' become the key bearer of maintaining the monetary policies while leaving the finance ministries only the function of setting fiscal policies. In some ways, the lost of ability to set forth monetary and fiscal policies has taken away much of the fire power of governments in maintaining steady growth and combatting inflation. However, given that the central banks are to set interest rates with targetted inflation rates in mind, that leaves one less variable for the governments to worry about when they set their fiscal policies to promote and maintain growth.

One the question of broad guidelines over specifics in the Five Economic Tests for Britain's Entry to the Euro, I personally believe that it is a 'necessary evil'. My argument is that specifics changes over time and if the tests were set out based on specifics, it is entirely possible that economies (mean the UK's and that of the Eurozone) can cross paths but in different phase of the economic cycles (as I'm sure you're well aware). At which point, Euro-enthusiasts will accuse the government of the day of 'moving the goal posts' while it is entirely logical for the UK not to join the Euro for the economies are out of phase. This is but one, admittedly the most obvious, example of applying overly specific conditions on our entry.

I trust the Treasury's assessment of 'convergence' is based on the phases of economic cycles of different economies. If all other economic conditions have been satisfied and that the economies are 'in phase' over a period of say 6 to 9 months, I'm confident that the government of the day will open the doors for the proper political debate on whether the UK should seek Euro membership.

[Saracen]

Yeah, I know the BofE sets the interest rates, but they set it according to what suits the UK, not the Euro zone. Also, perhaps it's just the cynic in me, but I have serious doubts about the depth of the separation between political interference in the setting of the rate. If the government really want rates up or down, does it not seem likely that there is a backdoor method of indicating to the BofE's Monetary Policy Committee what their desires are?

Besides, the separation of the government from the interest the is somewhat phantom, anyway. The government handed over operational control of interest rates to the BofE MPC, but that control just allows the MPC a little lattitude in how to achieve the governments Inflation Targets. The government still retians control over policy, and leaves it to the MPC to work out best how to achieve that target.

In other words, handing of control of interest rates to the BofE is over-stating the situation.

Having the BofE with operational control over interest rates does have two advantages tough. It prevents short-term manipulation for political purposes. Hopefully, the events when we crashed out of the ERM and changed interest rates several times in a few ours won't happen again. That particular Tory debacle got the BofE well and truly raped by currency speculators the world over

Also and more significatly, of course, it means that the government have someone to blame when rates go up. "It wasn't us ..... blame the BofE" the Chancellor whined.

[Saracen]

Originally posted by spikegifted
One the question of broad guidelines over specifics in the Five Economic Tests for Britain's Entry to the Euro, I personally believe that it is a 'necessary evil'. My argument is that specifics changes over time and if the tests were set out based on specifics, it is entirely possible that economies (mean the UK's and that of the Eurozone) can cross paths but in different phase of the economic cycles (as I'm sure you're well aware). At which point, Euro-enthusiasts will accuse the government of the day of 'moving the goal posts' while it is entirely logical for the UK not to join the Euro for the economies are out of phase. This is but one, admittedly the most obvious, example of applying overly specific conditions on our entry.

I trust the Treasury's assessment of 'convergence' is based on the phases of economic cycles of different economies. If all other economic conditions have been satisfied and that the economies are 'in phase' over a period of say 6 to 9 months, I'm confident that the government of the day will open the doors for the proper political debate on whether the UK should seek Euro membership.

Oh, I emphatically agree about conditions coinciding whilst trending in opposite directions. If our interest rate is high and going down, but Germany's is lower than ours and going up, then sooner or later they are likely to be the same .... for a while.

But that is not convergence. At least, not in my book. Convergence requires that the major indicators are consistent throughout the zone - at least to the point where the policy needed in each country is essentially similar.

I mean, you are never going to get to the situation where all economic indicators in all EU countries are the same, and stay that way over a sustained period. But if our economies have 'converged' to the point where interest rate adjustments suit ALL countries equally, over a substantial period, then we would have an element of convergence. Assuming that this utopian situation prevailed on all other major indicators (public spending, investment, inflation, etc) then we would have a degree of convergence such hat the economic aspects of my reasons for arguing against the Euro would be negated.

In order to achieve this, you have to be specific in the sense of defining criteria and ranges of acceptability in variance. But to word things as generally as the 5 Tests are worded makes it clear that the government can justifiably argue convergence whenever they damn well please, simply by picking a degree of acceptability that suits them at the time. In other words, they say that everything is not perfect, but it's close enough. I also have doubts that six to nine months is long enough to ensure that the cycles have converged. These cycles can be slow to change, and very hard to alter from their course. Some cycles run over years, even decades, not months.

Hence my comment that the five tests were not economic at all, but were political. Things will be "close enough" when the government thinks it can win a referendum, and not before.

I also have to say that I have less faith in the Treasury's "assessment" than you do. Partly because the decision as to how close you need to be to be "close enough" is political, and partly because I've been exposed to enough politicians, including being invited to dinner with a previous Chancellor of the Exchequer (though he WAS Chancellor at the time ), to be highly cynical about the way political minds work in private compared to how they portray themselves in public. Believe me, "Yes, Minister" was not far off the mark and the Political Prime Directive is the Eleventh Commandment .... "Thou shall not get caught".

[spikegifted]

I might have allowed my '...the economies are 'in phase' over a period of say 6 to 9 months...' comment to be confused which led to a bit of misunderstanding and I also recognize that I haven't explained fully why I think 6 to 9 months is 'ideal' (at least in my thinking, anyway).

In what I'd consider as being 'in phase', there needs to be evidence of the economies in question, in this case the UK and those that are considered large in the EU (Germany, France and possibly Italy - G7 members) are going through the same phase of developments as supported by a broad range of economic indicators. It is unforturnate that I picked interest rate direction is an example, as both you and I know it is but one indicator. To add to that, I think the rates of changes should also be taken as indicators because dramatic changes in policies following a decision to adopt the Euro can create a 'sling shot' effect for the UK if the rates of changes are significantly different and therefore the economy is susceptable to greater shock.

In terms of why I think 6 to 9 months is 'ideal' period for considering whether the UK and the Eurozone major economies are 'in phase' or not, I have the following reasoning: It is difficult enough to create an environment where the UK economy gradually converge with that of the Eurozone. Once we have identified that the UK economy is in fact in convergence and has achieved sufficient level of convergence across a broad range of economic measures and also the rates of changes of these indicators are such that adoptation of Eurozone monetary policy will not generate great shock in the UK economy, we should take the opportunity and engage negotiations quickly. A delay can have two very distinct risks - economical and political.

First, the economics: Economies are all react to shocks, big ones and small ones. However, different economies react differently to the same kind of shocks and also some shocks affect certain economies to a far greater degree than other economies. While the UK is not in the Eurozone, the decisions taken by the ECB will not factor in the potential reaction of the UK to shocks and hence its monetary policies may be different from that of the BoE, which in turn can lead to a divergence of economic conditions. Oops...

Secondly, politics changes and sometime quickly. It is possible to argue that economic convergence (in the broad sense) is difficult enough to achieve to coincide with a Euro-friendly government and such conditions may be achieved towards the end of one such government. Therefore, it is my believe that once such conditions are achieved, the government of the day should lock the UK into the Eurozone as quickly as possible - 6 to 9 months - in order to forestall any attemps to pull out if political climate changes.

[Saracen]

Originally posted by spikegifted
Secondly, politics changes and sometime quickly. It is possible to argue that economic convergence (in the broad sense) is difficult enough to achieve to coincide with a Euro-friendly government and such conditions may be achieved towards the end of one such government. Therefore, it is my believe that once such conditions are achieved, the government of the day should lock the UK into the Eurozone as quickly as possible - 6 to 9 months - in order to forestall any attemps to pull out if political climate changes.

That presupposes that being in the Eurozone is seen as being a desirable thing. To me, it is not.

Even if the economics were in favour of membership, and I've made clear why I feel they are not, there are other reasons than economics why I will vote "No" at any Euro membership poll. The economic arguments are merely part of the picture.

Another of the reasons I'd vote no is precisely BECAUSE we'd be locked in. Once in, getting out will be next to impossible. So we'd be taking a huge gamble that membership is in the best long-term interests of the country. If it proves to be an incorrect choice, we're stuck with it.

Another reason is that I am not in favour of a United States of Europe, and make no mistake, the Euro is the first step in the last stage of the creation of such a European super-state.

It seems to me the prospects for the UK economy if we join the Euro could be broken down into five possibilities :-

1. Overwhelmingly beneficial, despite the risks
   
2. Marginally beneficial, despite the risks, so entry is not a clear-cut advantage to us
   
3. Neutral in terms of benefit. So if it's risky, why join?
   
4. Marginally adverse, so entry would not be smart, even if there were no risks
   
5. Overwhelmingly adverse, so we'd be fools to go in

Only in the first case, where the benefits of membership overwhelmingly outweigh not only the risks attached to entry but the less-desirable political side-effects too, would entry be a smart move.

Of course, nothing in this world is entirely risk-free, and staying out has some risks too. The case is certainly not black-and-white in favour of staying out, and anyone who claims that the case either for or against entry is entirely one-sided is either stupid or being disingenuous. But, if we stay out, we can always join later. Maybe the terms would not be as advantageous, maybe they would. It depends on the situation at the time.

My prediction for the end result? Regardless of the will of the people, we'll be manipulated into entry. Either we'll be taken in without being asked (like our membership of the EEC), or it'll be a con-trick, somehow rigged or loaded. The exact phraseology of the referendum, question is still not resolved. Neither is the question of exactly WHO gets to vote. But I think the attitude of the labour government, and much of the tory opposition, is that we're going in.

My reaction to that? I'm intending to emigrate.

[spikegifted]

I agree with you that there're a lot of risks (economic and otherwise) associated with being both in and out of the Eurozone. Moreover, I recognize that being in the Eurozone may not be 'overwhelmingly beneficial' to the UK.

However, I hope you recognize that being outside the Eurozone will always mean that decisions regarding monetary policies will not have any considerations given to the UK.

This is an age-old problem with all thing related to the EU - to be a fully paid-up member of Europe and make use of our position to influence (or even drive) the issues or remain an outsider and moan at Brussels (and Paris and Berlin) for not paying us sufficient attention... Different people have different angles on this issue and I don't envy the responsibility the person/body who has the responsibility of persuading people in this country one way over another.

[DaBeeeenster]

Originally posted by spikegifted
Try here...

They are not tests though, are they? To test something you need to be able to accurately measure 1 or more things.

They sound more like hypotheses to me.

[tanman]

Ive no really read all the posts but i dinna want the euro. I work with people who have converted to the euro and the prices of everything has went up 20 - 30% imagine what price hike would happen here.

Tan

[spikegifted]

Originally posted by DaBeeeenster
They are not tests though, are they? To test something you need to be able to accurately measure 1 or more things.

They sound more like hypotheses to me.

I think this particular point has been covered and if you refer to the discussion Saracen and I had regarding accurate measures vs. broad guidelines you'd find our views.

[Saracen]

Originally posted by DaBeeeenster
They are not tests though, are they? To test something you need to be able to accurately measure 1 or more things.

They sound more like hypotheses to me.

Crikey. We agree.

That's why I say they are political, and that the tests will magically all have been met as and when Blair (or the replacement Prime Minister and his cronies decide the 6th test has been met - i.e. the political time is right for a referendum, meaning they think they can win it.

It's also why I said above :-

The problem, in my view, is that the questions are so broad and vague that you can make the answers agree suit whatever and whenever you want. So the tests says "business cycles" must be "compatible", but by what objective measurement? What amount of divergence implies "compatible", and over what period?