June 4, 2008 | posted by Michael Baxter in Eurozone |

The debate over whether Britain should enter the euro has hit the press again.

The FT seems to be at war with itself over the issue. Lex says maybe we should join; Willem Buiter, Professor of Economics, University of Amsterdam and former Professor at Cambridge, argued in the pink’n that, “The case for the UK shedding sterling and adopting the euro has never been clearer.” But Martin Wolf disagreed with his colleagues, saying, “Silliness is abroad in the UK … Lex is wrong. Whether the UK meets arbitrary tests at a particular moment is irrelevant. What is right today may be wrong tomorrow. If a country is to join the eurozone, its people must be willing to cope with the consequences for ever, however unpleasant they may sometimes be.”

Yesterday, Money Week jumped on the bandwagon and rattled off a list of reasons why we shouldn’t join. The main arguments on either side of the debate go like this.

The argument for is straightforward. Tony Blair used to talk about the five tests – about how the UK and eurozone must be in convergence – well, or so goes the argument, that time is now.

The anti argument is straightforward too. If we had joined the euro, the UK economy would be in an awful state right now, therefore we should never join.

Well, whatever your thoughts about the matter, the key arguments expressed against, and explained by Money Week yesterday, are wrong.

Yes, it is true that if the UK had joined the euro a few years ago, the property bubble would have been even more extreme, we would have had an even more unsustainable consumer boom, and inflation would be rocketing. But that isn’t the point.

The reason we didn’t join was that the economies weren’t in alignment. It would have been ridiculous for the UK to have joined any time over the last few years. But that is why we had the tests. The experience of the last few years merely shows the policy of the five tests was right.

But the arguments for joining now are different. The pound is now at its weakest ever point against the euro. Right now, Britain is more competitive relative to other euro economies, and the potential for exporting is greater.

Traditionally, the eurozone interest rate has been a lot lower than in the UK – so if interest rates imposed by the ECB determined rates in the UK, we would suffer from the fatal cocktail of a cheap currency and interest rates that are too low – inflation would be inevitable, cancelling out the benefits of a low conversion rate.

But right now, the euro rate of interest is just 1 percentage point lower than in the UK, and most expect the gap to get even smaller. The UK is a big economy; should we join the euro, the ECB would take into account UK inflation when setting rates, so it is quite possible that next year a eurozone with the UK would have exactly the same interest rate as a UK outside of the eurozone.

If we were to join when the pound is cheap, then the trade benefits of this would be locked in.

Of course, things change. Witness the problems of Italy and Spain to see an example of how the eurozone is flawed in many respects. The euro is also taking over from the dollar in some quarters as a kind of global currency – this means the currency may become far too expensive – just as the dollar was for decades. This won’t help exports.

Economies change; just because the UK and eurozone may be in alignment next year, does not mean they always will be in the future.

But if the UK is to ever join the euro, the right time would be 2009.

Mind you, any government that says that will lose the election. So whatever the economic case, it will never happen.