Stock Explosion

The influential businessman Peter Sutherland believes it is time to put the case for joining the Euro back on the agenda for policy discussion. When the case was looked into historically and, with the publication of the Treasury’s Report on the Five Tests, effectively terminated, not joining the Euro was the more obvious choice. It’s an astute observation that the case is far from as clear cut perhaps decisively so. A growing array of decisive factors have changed. As it is ever popular to quote Keynes, it is worth bearing in mind the reproof he directed at someone who criticised the arguable inconstancy of his expressed views: “When the facts change I change my mind. What do you do?” At the time when the case for the Euro was last rehearsed, British citizens could be excused for following the wise old Americans saying “If it isn’t broken, don’t fix it”.

This there was no doubt this outlook was correct at the time and was based on a long period of a sustained increase in the quality of living and moderate inflation. It was mirrored in a long run of predominantly negative answers to the question, as administered by polling organizations, “if there were a referendum on joining the Euro would you answer Yes or No to the question ‘Should Britain join the Euro?’ It cannot be said this American saying holds true currently. Attitudes towards joining the Euro seem in flux.

One of the ingredients in the long run of prosperity was without a doubt the high value of the exchange rate of the pound against the Euro (and other currencies). Once again, things have changed. Where the exchange rate was arguably higher than it should have been before, now it is debatably too low. It was tricky to recommend locking into the Euro at the rates which were common in the late ’90s all the way through to 2007 and it would be sensible to await some appreciation before locking in now – but that some fall in the exchange rate can be welcomed is hardly beyond debate. Still, while we are on the subject of the exchange rate, it is not just quibbles about whether the rate is right or not at a particular time that should be important. Instead of that, the lesson that should well be learnt is that the recent behaviour of the exchange rate gives little ground for optimism about its role as a stabilizer when Britain’s exchange rate is floating. In fact there have been a number of studies which seem to show that the exchange rate may, for many countries, be just as much a source of shocks as a stabilizer of them.

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