Tuesday, November 19, 2002

Should Britain's Euro Decision Be A Political One?

Well Elisabeth Guigou, former minister in the Jospin government, and deputy in the current French parliament thinks it should. She argues her case in today's Financial Times:

Times are changing. Much like any other old couple, the French and the Germans seem to have understood that divorce would be too difficult to cope with. The prospect of enlargement and the considerable achievements of the convention on institutional reform are providing the EU with fresh impetus. In such a context, can Britain reasonably refuse to join the eurozone?

Of course, economic considerations must be taken into account. Britain needs to judge whether joining the single currency would benefit its economy and financial status, and the welfare of its people. As I read the various British contributions to the debate, I am surprised that they are unable to provide a clear answer to the most crucial question of all: where does the UK's economic interest lie?................Since economists do not agree, and because the opinion of business circles fluctuates along with the economic situation in the eurozone, it would seem that economic arguments in themselves are inconclusive.

In my view, political arguments should weigh heavily when the time comes for a final decision. Britain's answer to the euro question will be seen as the most important test of whether the country believes its destiny lies within the EU. The choice belongs to the British people. But they should be aware that an eventual refusal to join would considerably and lastingly diminish British influence in Europe. On the other hand, were the UK to become part of the eurozone its authority would be strengthened, both in the EU and in the wider world.
Source: Financial Times

Guigou's argument seems to be that that since the economic arguments appear to be inconclusive, the better decision strategy would be a political one. This really reveals quite clearly what the whole problem is with how we think about the Euro, and how decisions have been arrived at. The central idea is that political fiat can over-ride economic imperatives. But take a glance across the planet - to Japan, or another glance to the other side - to Argentina. Do we not have clear examples of how political over-rides on economic processes do not always end happily.

Gordon Brown is about to present his famed five economic assessments - sustainable convergence between Britain and the eurozone; sufficient flexibility within the eurozone; the effect on investment; the impact on financial services; and the effect on employment. Before deciding whether or not the economic arguments might be compelling would it not be interesting to await the results of this assessment. Does Britain not have the opportunity to wait and see whether this 'experiment' in political economics works before jumping in feet first. Should some consideration not be given to the current conflict between the ECB and the Commission (conveniently enough not mentioned by Guigou). Instead she simply asserts that "on the cost side, the loss of independence in setting interest rates appears to be the most important issue. Can one size fit all?" Indeed the interest rate situation seems to be a telling situtaion at present, with Duisenberg unable to take a good decision because there is no 'good' decision available (see my blog here). As for sustainable convergence between the UK and the Eurozone, the Eurozone itself appears to be experiencing divergence big-time (to steal an expression) right now, with Germany slumping towards deflation while Spain spirals its inflation upwards. I wish someone would explain to me how this can work.

Now interest rates may be an important issue, but they are surely not the only one. How about the affect of the inability to control the currency value on the balance of payments, or the homogeneity of the economic infrastructure and labour force? Unfortunately, instead of investigating whether or not the sum total of the associated economic problems means that the benefits of Euro membership are now as clear as they appeared to be, she simply informs us: that "an assessment-based approach underestimates the dynamic character of European economic integration." I am afraid Elizabeth that you do not convince.

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