Categorized | General

Separate currencies fluctuating against each other are a real barrier to trade

Posted on 16 October 2010

Separate currencies, fluctuating against each other, are a real barrier to trade and thus to efficient levels of production. On past experience the pound can easily and quickly rise or fall by 20 per cent against the euro, with a huge impact on profitability. This exchange-rate risk discourages trade, and thus reduces productivity and living standards.This same exchange-rate risk used to exist between countries on the Continent, discouraging trade between them as well. But, since January 1999 when the euro was established, this risk has been eliminated. The result has been a remarkable 20 per cent increase in trade between eurozone countries, relative to gross domestic product. By contrast trade between Britain and the Continent has fallen relative to GDP.

In just three years since the euro was launched the average euro-country expanded its involvement in European trade by one-fifth, while we reduced ours.As trade patterns change, so do investment patterns. Any business that wants to serve the large eurozone market will now naturally move its production inside that area, in order to avoid exchange-rate risk. Since the euro began, Britain’s share of the foreign direct investment coming into Europe has fallen from one-half to one-quarter – an astonishing collapse. The amount of direct investment flowing between the 12 euro-countries is up by a factor of four.In this great process of restructuring, we shall be increasingly on the sidelines. For we are now in a new, more exposed position than before the euro was launched, since we are now the only large country in Europe where businesses face exchange-rate risk when selling on the Continent.Our productivity per hour worked is currently 20 per cent below the level in France, Germany, the Benelux countries and Northern Italy And investment in our economy is also lower relative to GDP. If we want the standard of hospitals, schools and railways that exists on the Continent, we have to join the euro. Otherwise we risk growing more slowly than the rest of Europe, which is what happened when we refused to join the Common Market after the Second World War.At present the Bank of England tries to cushion shocks to the British economy by raising or lowering interest rates.

If we joined the euro that would not be possible, since there would be one interest rate for the whole of Europe. It would be set by the European Central Bank, on which all countries including ourselves would be represented.Our view would be one among many. While the ECB should protect us against shocks affecting Europe, it would not protect us against shocks that were particular to Britain. Since we would have lost our own monetary policy to combat those shocks, it would be more difficult to offset them in the traditional manner.Yet it would not be impossible, since we would still be able to use the Budget to offset shocks to our economy. In this respect Britain would be better off than a US state when it is hit by a shock that does not affect the whole of America. For the typical US state is obliged to balance its budget year on year, including during a recession.

This means that during a recession it has to raise taxes or cut spending, both of which are positively harmful. By contrast the US state undoubtedly benefits from greater labour mobility than that between Britain and the Continent. But, all things considered, there is no reason why a single currency should not work at least as well for Britain as it does for any US state.A single currency removes one major source of shocks – the floating exchange rate. A floating exchange rate is not a smooth mechanism of adjustment; it is more like an unguided missile.

This post was written by:

admin - who has written 260 posts on Opiate For The Masses.

Contact the author

Leave a Reply

You must be logged in to post a comment.

Next Articles