European monetary union: the benefits, the problems and the traveller's tale : LETTER
The inflation risks in a monetary union depend largely on the willingness of the authorities responsible for setting monetary policy to accommodate inflation pressures. In a future EMU, the monetary authority may be less accommodating than British governments have been in the past, but that does not make EMU the only, or even the best, guarantee of low inflation. (West) Germany has had the best inflation record among industrialised countries for much of the post-war period, not because it was a member of a monetary union but because the Bundesbank always acted when necessary to counter inflation pressures. Making the Bank of England independent and charging it with keeping inflation within a low target range is more likely to result in low inflation than joining a monetary union.
European monetary union would reduce exchange rate uncertainty for those companies trading within the union, though only once a single currency is established. But such companies account for only a small proportion of the UK's total output. For all companies, other risks might be increased. For example, an inflation shock elsewhere within the union, from which UK companies did not benefit, could lead to them paying higher interest rates on their borrowings.
Transactions costs on foreign exchange deals are now so low that their elimination would be a small benefit to most companies. But UK financial institutions, which dominate European currency trading, would lose out from a reduction in foreign exchange business.
Lastly, you argue that a single currency would "strengthen Europe's position on the global economic stage". What does this mean? If it means that a single currency would improve Europe's hand in trade negotiations with the US and Japan, it is a dubious claim. A co-ordinated viewpoint on trade issues would help; a single currency would not.
The potential benefits of European monetry union are questionable, the potential costs could be very serious. A successful monetary union requires that the economies joining it are broadly the same, especially in regard to their response to external and internal inflation shocks. This is not the case in Europe. Take two examples: oil and housing.
The effect of a sustained, steep rise in the oil price will be very different in Germany, which is highly dependent on imported oil and gas; in France, where nuclear power is used to generate a high proportion of energy needs; and in the UK, where the North Sea sector of the economy would actually benefit. Imagine trying to set an appropriate, anti-inflationary interest rate policy for a monetary union including these three economies should the oil price double.
The housing sectors of European economies also differ, with the UK's high level of home ownership financed by variable rate mortgages not being found elsewhere. This makes the UK housing market more sensitive to interest rate changes than is the case on the Continent. It is easy to envisage a situation where the interest rate policy of a European monetary union was entirely inappropriate for the housing sector of the UK economy. And, since their home is most families' main asset, this would have negative repercussions for consumer spending and the overall growth of the economy.
These and other structural differences between European economies will not disappear over the next four years, nor at any time in the foreseeable future. Until they do, the economic argument against European monetary union is powerful, and far more clear cut than the political arguments for or against.
AMP Asset Management
Life & Style blogs
EU referendum: David Cameron's rules are a 'democratic disgrace', says French-born Scottish politician set to be denied a vote
Migrants in Kos: Photos show real tragedy after Brits abroad complain of 'awkward' holidays
British tourists complain that impoverished boat migrants are making holidays 'awkward' in Kos
A nation of inequality: How the UK is failing to feed its most vulnerable people
Australian man punched in the face for defending Muslim women from abuse on train
EU referendum: David Cameron to deny EU migrants and under-18s the chance to vote
- 1 Engineer pictured fixing plane's engine with 'duct tape' by concerned EasyJet passenger
- 2 Two-year-old says goodbye to bin man best friend
- 3 Saudi Arabia mosque bombing: Two volunteer security guards hailed as heroes for stopping Isis suicide bomber reaching worshippers
- 4 There is something wrong but very right about this Bible illustration
- 5 Remove smartphones from the hands of under-18s and maybe they will grow up to be less dumb
£13500 - £15000 per annum: Recruitment Genius: This is an opportunity for an i...
£14000 - £18000 per annum: Recruitment Genius: This is an opportunity for the ...
£14000 - £17000 per annum: Recruitment Genius: Full time Administrator/Secreta...
£16500 - £18500 per annum: Recruitment Genius: One of the leading Mercedes-Ben...