Britain and the euro: not for yesterday, not for today, not for ever…?

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Britain and the euro: not for yesterday, not for today, not for ever…?

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Abstract

The EMS's Exchange Rate Mechanism (ERM) has long been a source of political controversy, playing for instance a relevant part in the final drama of Margaret Thatcher's resignation as a serving Prime Minister. Britain entered the ERM in 1990 to exit from it in 1992 and afterward, the new Euro-politico-monetary controversy has been that of joining the future single European currency, the euro. In 1992, the Maastricht Treaty set the euro-agenda; in 1999, the euro was launched in its virtual form; and in 2002, the euro appeared in every euro-zone member's citizens' pockets as coins and notes. Joining the ERM was theoretically reversible but if Britain was to join the euro, it wouldn't be the case anymore: doing so would be violating the Rome Treaty and one can hardly imagine what unpredictable ramifications that would have. We will see in the first section what the general economical debates (I) are, I will give a brief historical overview of the EMU and expose the basic benefits and costs given before 2002. In the second section, I will give more focused economical arguments for and against entering the euro-zone regarding Gordon Brown's "five tests" (II) and more or less try to sort out economical ambiguities in the research of an "optimal currency area".

Introduction: The United Kingdom, from EMS to EMU.
To join or not to join: That is the question.
1. Brief historical overview of the EMU.
2. Basics of benefits and costs advocated for and against joining before 2002.
The five tests' conditions then and now - The economists' point of view.
1. An overview of Gordon Brown's 'five tests'.
2. An economist's answer to the fifth test.
3. The evolution of the UK's economy since then.
The British political market.
1. The case for the euro, a technocratic and political point of view.
2. The weight of British political parties: Understanding British eurosceptism.
3. The case for the pound, a widely spread and sovereignist point of view.
Conclusion: From economics to politics.
Bibliography.

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[...] An overview of Gordon Brown's “five tests” The government decided that economics would be crucial and Gordon Brown, Chancellor of the Exchequer, proposed “five tests” of economic credibility that should be passed before he could recommend whether or not Britain should adopt the euro instead of the pound. Those five tests should be met “clearly and unambiguously” but in principle, they would be distinct from any political decision to join that decision should be taken by referendum. One should obviously, before even considering the results of these tests, take a look at those five tests, at their reasons and at their pertinence. [...]

[...] One has to try to classify arguments in favor and against the euro for its beneficial and negative political consequences because these consequences exist and should not be forgotten. As Adam Smith put it in The Theory of moral sentiments (1759), man of system seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board But, in the great chessboard of human society, every single piece has a principle of motion of its own.” 1. [...]

[...] History shows us clearly that issuing a new single currency for an area often if not always meant uniting this area under one single power, the power of seignorage. Economically speaking, the creation of a currency is based on confidence: it has to be, according to Wicksell (1935), good usually accepted by everybody in exchange of any good”. This means that concretely, when a single currency was adopted in an area, everybody in that area trusted that currency and isn't trust one of the firsts needs of union? [...]

[...] One consequence could have been, for example, a longer and deeper recession of the UK's economy if the euro zone was not recessing too. These differential shocks would have also meant a greater variability of unemployment, output and prices. And unfortunately, the euro zone didn't match the conditions[8] required to become a theoretically possible optimal currency area. The second argument is that to avoid an instable economy, harmonization is in the implicit EMU agenda and that that harmonization wasn't going to be towards greater wage flexibility. [...]

[...] Pro-Europeans said that all the financial trade would definitely move to Frankfurt as the ECB would be there: fact that London is Europe's financial capital, when the UK is far from being Europe's largest economy, is due to the internationalization of the city.” By joining the euro, only will it still dominate the continent's finance but will it continue to attract the great US and Japanese financial institutions looking to do business is the euro zone not to mention the Europeans. [...]

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