Britain should urgently reconsider the case for joining the single European currency, argues a report out today which includes major contributions from three experts at LSE.
The document, 10 Years of the Euro: new perspectives for Britain, is made up of 31 essays from academics, journalists and politicians which consider the arguments for adopting the Euro. It springs from a series of discussions organised by LSE Chairman Peter Sutherland and is informally known as the Sutherland report.
It aims to put the Euro question back on the British political agenda, ten years after the single currency was adopted by most EU states.
The report is co-edited by Professor Willem Buiter of LSE's European Institute. He, Mr Sutherland, KCMG, and Professor Iain Begg (also of the European Institute) have all contributed papers to the document arguing that the world economic crisis has added a further compelling reason for Britain to join.
Professor Begg's essay argues that the five tests for joining a single currency, set by Gordon Brown in 1997, were always crude and imprecise and that deciding whether they had been met would always be in part a matter of political judgement. The tests, he says, also overlook the connection between currency regime and financial stability.
Professor Begg says that in a post-credit crunch world there is a new emphasis on financial stability over assuring low inflation, which would be easier to achieve from within the Eurozone. He also suggests that as the world creates new financial governance structures over the coming months and years, the UK's opinion on what shape they should take may not be heard unless it speaks as part of a financially-united Europe.
Professor Buiter concludes that the case for the UK joining the single currency is 'overwhelming'. He says: 'It is time to revisit the five tests, to declare them passed and...for the UK to adopt the Euro.'
The suggestion that an independent national monetary policy is essential to respond to financial shocks which may affect the UK more than other countries, is a fallacy argues Professor Buiter. Attempting to control exchange rates is an ineffective policy instrument: 'Even a gun fired at random by a drunk may, from time to time, hit the target. This is what we have seen in the UK with the exchange rate this past year.'
He also criticises the assumption that the UK has a higher owner-occupancy rate than the rest of Europe and that with residential mortgages normally at variable rates the country needs independent monetary tools to control a volatile housing market. In fact, Professor Buiter shows, both Spain and Sweden have much higher owner-occupancy rates.
The question of how effective independent interest rates have been for Britain is picked up by Sir Peter in his paper, entitled Facing Reality. He argues that UK interests have been higher than those set by the European Central Bank, but have tended to follow the same directions.
He also suggests that the economic power of the City of London may be weaker in a more regulated financial future and that members of the Eurozone will have the strongest voice when it comes to creating new financial structures. The essay also foresees a time when an independent sterling is a weak and peripheral currency compared to the reserve currencies of the dollar and euro.
Sir Peter concludes: 'We have learned the hard way through the course of 2008 that the interlinked global economy fares better with co-ordinated policies. The same logic applies to the even more closely-linked EU economies and recognition of this fact means there is likely to be better co-ordination of fiscal policy in the Eurozone in future. Outside the Euro, the UK will be outside that process and will not be shaping the rules.'
Click here to download a PDF of 10 Years of the Euro: new perspectives for Britain.
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15 January 2009