Friday, 29 December 2006

Don’t swallow that note, or that argument, either

Yesterday, Adrian Sanders MP wrote an entry in his blog (speakers on when you visit it!) entitled Don’t swallow that coin, in which he argued that early doubts about the euro have been proved unfounded. I am unable to leave a reply on the blog (MySpace is fighting me!) so I am obliged to do so here.

Though it is true that early scepticism about the euro has given way to cautious optimism, the evidence that Mr. Sanders gives for hailing it as an untrammelled success is flawed. His statement that “the new currency is competing with the Dollar for top spot in the world's list of currencies” is at least a bit premature. The Euro accounts for only 25 per cent of global foreign exchange reserves as compared with 66 per cent for the dollar.

Similarly, his claim that “ more and more of the world's goods and resources are being priced in Euros rather than Dollars”, though perhaps true, may exaggerate its significance. While the accession of ten new members to the European Union (and in three days it will be 12) has required them to peg their currencies to the euro rather than to the dollar, the enlargement process is stalling, and anyway is ultimately limited. A few other countries may be seeking to shift their own currency peg to the euro, but the dollar remains the yardstick by which others are measured.

In fact, some of Mr. Sanders’ claims are frankly outlandish. That the face value of printed notes is now greater than that of the dollar, having doubled in five years, is neither relevant nor automatically to be welcomed. The dollar’s fall relative to the euro may have assisted this transition, but it is not helping European exporters (at least, not on the Continent). Meanwhile, the fact that the money-supply has doubled in five years is usually a sign of inflation.

Of course, if the European Central Bank had deliberately chosen an inflationary policy it might be understandable, as some of the larger Euro-zone countries have been struggling with deflationary pressure over the past few years. Certainly anything that could save Germany and France from their stagnation should be welcomed. However, the UK has been happily free of deflation and growing steadily over the past few years – in fact it is inflation that under Gordon Brown has been causing us concern. Thank heavens, therefore, that we have an independent central bank that can respond to our specific economic circumstances!

Mr. Sanders attempts to ridicule Britain’s monetary independence by suggesting that “by staying out, [all] we retain [is] the Queen's head on the bits of paper we exchange for goods and services, our banks make massive profits out of us, and we keep our coins”. In fact, the Bank of England has done (and forgive me for what must be one of the most apposite puns in history) a Sterling job in maintaining price stability – far better than the ECB, which has overseen a mini-recession in Germany while other member-states have witnessed inflation.

Furthermore, the pound has managed to steer a course between the euro and the dollar, which is handy because half our trade (the half Mr. Sanders ignores) is still with the dollar zone. So while Mr. Sanders may be right to say that “If you run a business that trades with the Euro zone you pay exchange rate commissions to the banks on your transactions, that increase your costs and reduce your competitiveness”, he neglects the fact that if you run a business trading with the dollar zone and we had adopted the euro, you would have experienced massive and unpredictable volatility in exchange rates that would have disrupted any long-range economic calculations. This is far less of an issue for our European neighbours, as they have increasingly shifted from trading globally to trading regionally, but the fact that they are doing so does not prove that the Single Market generates better returns than global trade; it merely proves that trade will follow the path of least resistance.

Mr. Sanders’ suggestion that “The Euro is achieving … a single currency zone and market that could match and compete with the Dollar and US economy on equal terms” is ludicrous. The European economy may be as large as that of the USA, but this was not caused by the Euro. Neither has the euro-zone’s economy performed as well as that of the dollar zone, though America does appear to be moving into a period of slower growth.

It is clear from his blog that Mr. Sanders has been drawn in by the economic (supra-)nationalism of the euro’s perceived success against the dollar and has lost sight of the real goal, which is the British economy. This is a shame. Whether Britain will fare better within the euro-zone or with its own currency is a matter of national policy that should be based on sound economic reasoning and not a puerile competition with the Americans over whose currency is the biggest. I would heartily concur with Mr. Sanders that one should not swallow either euro or British coins. I suggest one should not swallow his argument, either. Whether we decide to swallow the euro will require more – and more elevated – debate than Mr. Sanders provides.


Adrian Sanders said...

Hi Tim

Have posted you critique on my blog.


Tom Papworth said...

Thank you, Adrian.

And fair's fair...

Adrian noted when posting my response that:

"I did not claim the Euro was an untrammelled success, just that predictions that it would never get off the ground and would fail were wrong.

I post this on the day Slovenia has swapped its currency for the Euro, as we should consider to do in due course, subject to a yes vote in a referedum.