Time was when central bankers used to talk in code. Alan Greenspan once famously said when giving a talk, “If I have made myself clear, you must have misunderstood me.” On another occasion he said, “I worry incessantly that I might be too clear.”
It is not like that now. There’s plain speaking Ben at the Fed, but at the European Central Bank, it appears the president should be named “heart on his sleeve Jean”.
This is what Jean-Claude Trichet said yesterday. “We considered – it is not excluded – that after having carefully examined the situation, we could decide to move our rates [by] a small amount in our next meeting in order to secure the solid anchoring of inflation expectations, taking into account the situation.”
His heart rendering call for help continued; “I don’t say it’s certain. I say it’s possible,” he said, all wide eyed, and puzzled.
He went on to talk about a “state of heightened alertness.”
So it seems the euro rate will be going up soon. Capital Economics said, “But the Bank’s inflation phobia clearly increases the risks of a sharp slowdown in the eurozone economy next year, implying that interest rates may eventually have to fall sharply.”
It does mean that at some point during the next 12 months, eurozone and UK interest rates might converge. At that point, expect the discussion to begin again about whether Britain should join the euro.
We tackled this controversial topic a few days ago, and one of our readers, Mr Morgan, said, “I’m a little baffled when I see commentators (including yourselves) agonising one day about whether the Bank of England should move our rate by 0.25 per cent, and the next recommending that we have a new currency and move rates by 1 per cent (or more). Some consistency would be nice!”
There are many argument against the euro, but the arguments for are as follows:
For the first time in a quite a while the UK and eurozone economies seem to be converging.
Secondly, the pound has fallen sharply. The high value of the pound has made it difficult for UK manufacturing to stay competitive. When financial markets finally restore, London will boom again, and the pound may well go back up. Sometimes, when one sector is much more successful than others, sector problems can occur. Economists refer to this as the Dutch problem, when oil exports from Holland pushed the guilder so high, Dutch business lost competitiveness.
By joining the euro when the pound is low, we can effectively lock in the benefit of this, and then, moving forward, expand through exporting, rather than through borrowing.
I consider another argument for joining the Euro now is to off-set the chance of a double dip recession. What I mean is… I consider that the Anglo Saxon economies are out of kilter with the Euro economies and always have been. We are turning down while a large part of Europe turns up. If we wait until we get to the bottom and opinion says “look the Euro is doing well” and then move, we will do so as they start their down turn and we start climbing. As a result we will pick up a bit, then get brought back for another, albeit shorter/less harmful, recession. If we join now we will still suffer the forthcoming pain, but perhaps reduced as we get dragged up by the Euro effect.
Regardless, there is no way on earth the Euro will ever get introduced into this country as we are too arrogant and “little englander” - and yes I do think the other parts of the UK are more receptive.