The Sun's 20 bad arguments on Emu

Podium; The Director General of the CBI addresses its South Eastern Annual Dinner on arguments against the euro
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The Independent Culture
The Sun launched its broadside against even thinking about joining the euro with lurid stories of a pounds 34bn cost to go in, of dumping the pound as "a road to disaster", and by listing 20 perils of the single currency. Some of those 20 points are populist versions of serious arguments - nothing wrong with that - but some are just plain nonsense.

And its not just the Sun which mixes up good arguments against the euro with poor ones. Serious commentators - who should know better - present, as clear arguments against, assertions that are questionable, or misleading, or wrong, or which simply miss the point.

There are three arguments in particular, presented by opponents as clear and strong arguments against joining EMU, which on closer inspection are not. First, exchange rate flexibility. Giving up exchange rate flexibility - opponents argue - means giving up the ability to offset unsustainable cost increases with currency devaluation. And they warn that without that flexibility an impossible burden of adjustment will be thrown onto Europe's inflexible labour markets.

But while that's a fine piece of economic theory - the sort of thing you learn in A-level economics - look at how exchange rates actually move over three- or five-year periods, and you'll find that they are as likely massively to overshoot the required adjustment, or to move in exactly the opposite direction to that required, as they are to move in the fashion the theory predicts, the fashion required to offset cost competitiveness problems.

Second, "asymmetric exogenous shocks". Some opponents claim these provide a compelling case against. But what they don't admit is that the possibility of exogenous shocks can argue either for or against the euro, depending on what sort of shock we're talking about.

The possibility of shocks such as German reunification is - absolutely right - an argument against a single currency. So if we think there's a danger of that sort of shock recurring, that should make us cautious of the Euro. But the fact that Britain is an oil exporter - and more exposed to oil price movements than other European countries, which is presented by opponents as an argument against, - can be a powerful argument for the euro. And you only have to think back to 1979-81 to understand why.

If oil prices soar while we are an independent currency, the pound could soar as well - and non-oil exporters could be driven out of business - non-oil exporters who can't magically re-emerge when the pound falls again. If oil prices soar when we are in a Euro, the rest of the economy can continue to enjoy the stability it requires to flourish. The fact that we're an oil exporter can be an argument for going into the euro, not against.

And as for huge levels of preparation costs, nobody would rationally opt-out, with all the risks that entails, in order to avoid the changeover costs of new tills and ATM machines, which in many cases will represent simply normal replacement expenditure or the bringing forward of investments in next generation technology.

So we need to strip away from the anti-case both high-sounding economic theory unconnected to reality and scaremongering about transition costs. Which still leaves a good case against joining the euro and the opponents should concentrate on making that good case, not cluttering it up with phoney arguments. We need to assess carefully the risks highlighted by those arguments. And we then need to balance those risks against the benefits of going in.

The benefits of a single market of transparent prices and reduced investment risks include giving a spur to more intense competition and faster industrial change and faster productivity growth across Europe. The benefits of a single European capital market could provide the sort of wide and liquid access to capital provided by NASDAQ in the US, and which will also spur competition and industrial change through more transparent performance comparison. There are the benefits of freeing our economy from some of the damaging volatility which exchange rate flexibility can bring. And there is the danger that we may be less attractive to some inward investors if we stay out.

My own judgement is that the balance of arguments is more likely to be in favour than against, and that has also been the conclusion so far of the majority, but by no means all, of CBI members. But equally it is vital that confused or mistaken or unproven arguments against are clearly challenged, whether they be populist arguments from the Sun, or initially plausible assertions of economic theory which on closer inspection are without merit.

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