April 14, 2003


Eurozone benefits would not balance the costs (Christopher Smallwood, April 13 2003, Financial Times)
The gains from joining the eurozone are not likely to be spectacular. According to the European Commission, the savings in transaction costs could amount to 0.1-0.2 per cent of gross domestic product, worth 1bn-2bn a year. But the capitalised value of this stream of savings is not much greater than the change-over cost that would be required to produce them.

Equally, eliminating exchange risk may boost trade with eurozone countries, but economic theory and empirical studies suggest the impact will be limited because the risk, in any case, can largely be diversified away in modern capital markets. And since the pound has been more stable against the dollar over the past 20 years than the euro - if we reconstruct the euro historically - any benefit will be offset by greater volatility against the dollar and those currencies in effect tied to it.

Even if we consider benefits such as price transparency or deeper European capital markets, the answer is the same - yes, worth having, but in each case not worth more than a fraction of one per cent of GDP a year.

By contrast, subjecting the UK to inappropriate macroeconomic policies may cause a loss of output amounting to several per cent of GDP a year for many years.

The damage that would be done by joining the euro at too high an exchange rate is widely recognised. Modelling by Oxford Economic Forecasting has suggested that entering at an exchange rate that was 10 per cent overvalued would cause GDP to fall about 4 per cent, and industrial production about 5 per cent, below the levels that would otherwise have been expected. These falls would be deeper and longer-lasting than those associated with a high pound at present, because the opportunity to react by cutting UK interest rates would not be available.

What is less widely appreciated is that the loss of the Bank of England's control of interest rates would be felt long after entry, in part because our industry and foreign trade is structured differently from the eurozone's. For example, we trade more with North America and Asia.

As a result, economic developments would affect the UK differently from the rest of the eurozone. Renewed recession in the US, further global falls in equity prices, or a purely domestic development such as a downturn in the housing market and consumer borrowing - any of these would hit the UK harder than the eurozone generally. But the European Central Bank, watching its Europe-wide indices, would not cut interest rates to the extent required for the UK. The resulting downturns in the UK would therefore be deeper and more prolonged than if the country had been outside the eurozone.

If Britain is to have a future, it lies in the Anglospere, not the EU. And we devoutly believe it should choose to have a future. Posted by Orrin Judd at April 14, 2003 11:34 AM

I have never seen it reported in the US

press, but British businessman are

organized to keep out the euro, on, as

far as I can tell, purely economic arguments,

not the political ones that bedeviled

the earlier relations between UK and

the Common Market.

Posted by: Harry Eagar at April 14, 2003 5:29 PM