Monday, December 15, 2008

Vive l'euro!


So, Britain's arrogant reluctance to join European Monetary Union is now coming back to haunt us. After a heady decade of better growth than the stagnant eurozone, the tide has turned - the pound is hurtling towards parity with the euro, and our holiday plans are in tatters. What can we do but join the euro? (See Willem Buiter's Maverecon blog in the FT for further details: http://blogs.ft.com/maverecon/)

Wait a minute though.
First, Britain's chaotic deleveraging is a rather different scenario to what most Eurozone countries are facing (with the dramatic exception of Spain and maybe Ireland). Levels of personal debt are higher here, and of course most of us have variable rate mortgages leaving consumption extremely sensitive to interest rate decisions. So, having the chance to run a more 'prudently reckless' monetary policy (ie zero interest rates by February) without having to wait around for the ECB is probably worth something.

But there is a second point in favour of monetary independence, ironically stemming from Herr Steinbrueck's helpful intervention the other day condemning Gordon Brown's 'crass Keynesianism' and refusing Germany's cooperation in a Europe-wide fiscal stimulus. Because the UK is arguably in a much worse downward spiral than most of the rest of Europe, we need more fiscal stimulus than the others, but Germany is not playing ball (see Krugman on this here). Fortunately though, this matters less to Britain than the Eurozone countries because it has its own currency. Put simply, the fiscal stimulus needs to be coordinated because some of the extra cash will be spent on imports, giving opportunistic member states the prospect of increasing their exports without having to raise their deficits (surely this is not what world-leading exporter Germany has in mind?). But thanks to the collapse of the pound, the UK will be less subject to this 'leakage' effect - who in Britain can afford to spend their stimulus money on a BMW now? We will be forced to buy as much at home as we can, thus ensuring a lot of our stimulus money gets spent generating British jobs.

So, is life rosy outside the Eurozone? Well, as long as we can finance our fast-growing national debt. And that's not a certainty, as Buiter explains in a terrifying blog entry here. Maybe I should book my holiday now after all....