No case for joining the euro

The FT's Lex column claims that now might be a good time for the UK to join the euro. I'm not sure.
It says the weak pound - DM2.44 in old money - "is a competitive rate to lock in for exporters."
True. But the fact that it is a competitive rate shows precisely the virtue of floating exchange rates. They act as shock absorbers, helping - modestly - to support the economy when it's weak and cap inflation when it's strong.
Sterling is weak in part because the UK's economic outlook is worse than the euro zone's. Locking into the euro would deprive us forever of this shock absorber.
Lex continues:

The superiority of the UK’s financial framework and central bank are also suspect after the credit crunch.

True, the Bank has lost anti-inflation credibility in recent months, one gauge of this being the fact that breakeven inflation rates are so high.
But if the gilt market thinks  an official interest rate of 5% is inadequate to restrain inflation over the long-term, why lock into an official rate of 4%? Joining the  euro will only solve the Bank's credibility problem in the same sense that cutting your leg off will cure your gout.
The decision to join, or not, the euro is one that should be regarded as irrevocable. To take it on the basis of short-term advantage - a weak pound - or evidence that might be only short-lived would surely be folly.

Comments

[Diversity]

Think back. Every time anyone serious has looked at the case for joining or not joining the euro, the long term arguments have always been in favour. that is why Mrs T and the Tories got us geared-up to join before the euro was set up, until we made a mess of Black Wednesday. The main problem since has always been to find a moment when we would not be caught out by high costs in the change. Now looks pretty good; we would even get slightly lower interest rates to cheer up the mortgage market. The exchange rate is neither high nor low. A rate between DM 2.40 and DM2.60 to the pound (€1.20 to €1.30 new money) has looked comfortable and sustainable since about 5 years before Black Wednesday.

Indeed, I have never been able to understand why we did not shift to that rate during the weekend before Black Wednesday (when the speculators had already picked off the other two untenable rates -those for the Finnish mark and Italian lire) and avoid the whole fiasco.

[dearieme]

"we would even get slightly lower interest rates to cheer up the mortgage market" - and piss off the savers market.

[Mark Wadsworth]

Off topic, but do your readers have anything to add the The List?

[Mark Wadsworth]

The List is here:

http://markwadsworth.blogspot.com/2008/05/coalition-of-willing.html

I forgot you don't allow tags.

[jameshigham]

I shall be buying a lot of these in the next few days.

[Bob B]

S&M: Thanks for that link and the analysis - which I go along with.

There is also the worrying matter of the transition route for joining the Euro. The last time that was addressed - to my knowledge - was in 2003 when the EU Commission was insisting then that the UK would have to follow the route prescribed in the Maastricht Treaty, namely: the Pound would have to join the ERM for two years and maintain a stable exchange rate against the Euro. If the exchange rate deviated outside the permissible narrow margins interest rates would need to rise or fall to restore alignment. But that would put us back into the situation of October 1990 when we last joined the ERM - with all the inherent risks. The BoE currently sets interest rates to maintain an inflation target and only accidentally will such interest rates accord with the interest rates needed to maintain the alignment of the Pound with the Euro.

From a longer term perspective, locking the UK into Euzone with the prospect of the lower real interest rates prevailing there would very likely revive the UK's house-price bubble tendency, which is already far worse, relatively speaking, than the US house-price bubble.

Anything recent on the convergence of retail prices in the Eurozone?

[Bob B]

I posted a comment but nothing has appeared.

Why is that?

[Bob B]

From this recent piece in The Economist, it seems that substantial retail price disparities continue to exist between Germany and France, which is all very curious as the single currency was meant to promote price convergence by reducing the transactions costs and eliminating the exchange risks of cross-border shopping:

"THAT coffee or cornflakes are cheaper in a German supermarket than a French one is bad enough. That French-owned products, such as Danone yogurt, Vittel water or Riches Monts cheese, are too is an affront. A basket of identical items costs 30% more in France, says a study by La Tribune, a daily. . . "
http://www.economist.com/world/europe/displaystory.cfm?story_id=11376708

Apparently, the French disapprove of too much competition in retailing. But it was always thus. Not too much has changed since Bastiat drafted that petition to the National Assembly on behalf of the candlemakers in 1845:
http://bastiat.org/en/petition.html

[Bob B]

From this recent piece in The Economist, it seems that substantial retail price disparities continue to exist between Germany and France, which is all very curious as the single currency was meant to promote price convergence by reducing the transactions costs and eliminating the exchange risks of cross-border shopping:

"THAT coffee or cornflakes are cheaper in a German supermarket than a French one is bad enough. That French-owned products, such as Danone yogurt, Vittel water or Riches Monts cheese, are too is an affront. A basket of identical items costs 30% more in France, says a study by La Tribune, a daily. . . "
http://www.economist.com/world/europe/displaystory.cfm?story_id=11376708

Apparently, the French disapprove of too much competition in retailing. But it was always thus. Not too much has changed since Bastiat drafted that petition to the National Assembly on behalf of the candlemakers in 1845:
http://bastiat.org/en/petition.html

[hovis]

Diversity your comment seems to be predicated on the notion that the euro is necessarily a good thing for the UK. A false premise I would suggest.

Secondly I would point put that "we made a mess of Black Wednesday" it was an untenable position.

You say "I have never been able to understand why we did not shift to that rate [a lower rate than we were at] during the weekend before Black Wednesday"

- so essentially you say there should be adjustments downwards when needed - errm sounds like replacing a smooth flowing mechanism for changing exchange rates with one that isnt.

So I'd like to point out to you the advantage of a floating exchange rate is that it FLOATS.

So your argument boils down to - we've been rather crap at inflation targeting and control lets give it to someone else without our interests at heart ...

[cityunslicker]

Why join a club that is about to break up. before jumping in perhaps we should ask the opinions of those in Spain and Italy about their joyous experiences?