Every decision is a choice between alternatives, and every choice has a cost in all the other opportunities missed. To make a wise decision, we need to be clear about the alternatives and costs - especially when there is as much at stake as there is in Britain's choice about the euro. One path is very clear: a vote to join that will take this country into the same currency as our main trade and investment partners. A lot of effort, inside the Treasury and outside, has gone into weighing up the costs and benefits of this choice.
The other path is not so obvious. Much of the debate about the euro has assumed that the alternative to going in is staying as we are. But that's wrong: the choice of staying out, whether it's an active "never" or an indecisive "not yet", will change Britain's economic and political circumstances. For all its weight, the Treasury's verdict is incomplete. The right assessment compares not the present and one possible future, but two alternative futures.
This is exactly what a recent independent report by 11 international economists (chaired by Professor David Begg at Imperial College Business School) tries to do. It looks at the likely costs and benefits of saying yes - and also of saying no. It covers some areas similar to those addressed by the Treasury's five tests - including developments in trade and investment, interest rates and employment - and other questions such as Britain's future political influence in shaping EU economic policy.
Some potential economic costs and benefits have often been overlooked in the debate about the single currency. While the arguments about a one-size-fits-all interest rate policy or the potential loss of inward investment are quite familiar, less attention has been paid to the potential for greater competition and downward pressure on prices in the eurozone.
In theory, any reduction in obstacles to trade - such as the greater transparency that comes from pricing in one currency - will increase competition and work to the advantage of consumers. The evidence is that prices within the EU as a whole have already converged to a lower level thanks to the Single Market, and that this process is continuing among the members of the euro. Prices within the eurozone still vary by far more than those within the US, which shows how much further there is for convergence to go. If this early pattern continues, it will increase the risk of future trade and investment being diverted away from the UK.
This argument doesn't apply only to goods, but to finance as well. The cost of raising capital and investing will probably be lower in a larger capital market. Within the eurozone, the cost of issuing shares or bonds will fall to the extent that the single currency increases the size of the financial markets. The costs to business of hedging their foreign exchange risk and treasury administration will also be lower within the euro area than for outside companies selling into it.
There is plenty of evidence that businesses do use national borders as a way of introducing price discrimination. Depending on how profitable they expect it to be, companies may segment their markets, charging different prices in each. One thing that makes this a potentially profitable strategy is uncertainty about the future exchange rate. If the UK were to be seen as a definite "out", rather than likely to join the euro soon, there would be more of an incentive for businesses to invest in segmenting the UK from the eurozone. In this case, the relatively small UK market would then exhibit less competition, higher profit margins and fewer scale economies.
For example, British firms might come to regard the UK as a captive market, concentrating on higher-margin sales at home but withdrawing from the increasingly competitive market across the Channel. UK productivity would gradually fall both because there was less competitive pressure and because British companies were less able to take advantage of economies of scale.
In practice, it would be difficult to assess whether this kind of strategy was starting to affect the UK economy, and there is certainly not enough information to do so at this early stage. Businesses would not start to change their strategies until it became clear that the UK was not going to join the single currency for a long time, if at all.
However, we can measure what happens to prices. So far, the signs are that the euro is leading to convergence at lower levels - particularly for relatively expensive consumer durables, such as electrical goods, where costs are easy to compare and consumers can shop around.
The limited evidence available since the introduction of euro notes and coins on 1 January 2002 suggests that the rounding-up of prices did interrupt convergence. But this was a one-off effect, and had little impact overall, despite the headlines at the time. Many big companies are starting to move towards setting a single price for their goods in the eurozone. BMW, for example, now intends to charge the same basic price, exclusive of taxes, for its new 7-series in all 12 eurozone countries, and will eventually do the same for all its models. Surveys suggest more businesses will follow.
The key point, though, is that a "no" verdict or even a "not yet" from the Treasury will be just as active a choice as a "yes". The euro has already affected our economic landscape, and "no change" is not one of the options.
Diane Coyle was a member of the Begg Commission on 'The Consequences of Saying No'. She is the author of 'Sex, Drugs and Economics', and a visiting professor at the University of Manchester's Institute for Political and Economic Governance.Reuse content