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To Euro or Not to Euro
Posted: Friday, June 13, 2003
By Stephen Kangal Caroni
The current cadre of Caribbean intelligentsia, arm-chair integrationists and emotionally-driven politicians who tend to want to accelerate the pace of the regional political integration agenda especially on the question of the adoption of a single Caribbean currency should draw guidance and take careful note from the time-consuming process being followed by the UK in assessing whether to join the European Monetary Union (EMU).
T&T within Caricom is almost similar from an economic/financial viewpoint to UK within the European Union in many critical respects.
Hitherto three EU members, Denmark (by referendum held in 2000), Sweden (a referendum is scheduled for 14 September) and UK (by a John Major-inspired opt –out clause of the Maastricht Treaty of 1992) have opted to stay outside of the EMU and not to adopt the Euro to replace their respective national currencies. At present the Euro has strengthened since its launch against Pound Sterling at 71 pence.
Britain's Labour Chancellor of the Exchequer, Gordon Brown has set out his pseudo- five economic tests (devised in October 1997) that must be met before the Blair Government decides to hold a national referendum (a draft referendum document is due in the autumn) on EMU membership or the single European currency. With elections due in the UK in 2004 this decision is likely to be finally decided after the elections. The Opposition Conservatives oppose EMU membership.
These five economic tests that are artificially separated from political considerations are:
1. Are the business cycles and economic structures compatible so that we and others could live comfortably with Euro interest rates on a permanent basis?
2.If problems emerge is there sufficient flexibility to deal with them?
3.Would joining EMU create better conditions for firms making long term decisions to invest in Britain?
4.What impact would entry into the EMU have on the competitive position of the UK’s financial services industry, particularly the City’s wholesale markets? (Only test met in Treasury’s latest evaluation)
5. In summary, will joining the EMU promote higher growth, stability and a lasting increase in jobs?
The British is currently not only concerned with the potential adverse economic effects of EMU membership but also with the ambitious draft EU Constitution to be adopted in one year’s time. It provides, inter alia, for an elected President to replace the current rotating 6-month Presidency in addition to an elected Foreign Minister.
In a statement issued to the House of Commons on Monday June 9, Chancellor Gordon Brown indicated that based on the latest evaluation completed by the Treasury only the test relating to financial services was met satisfactorily. The above-mentioned four other criteria relating to convergence, flexibility, employment and investments were not satisfied. Accordingly Chancellor Brown proposes to address EMU membership again matter in his forthcoming March Budget Statement.
The main hurdle to Britain’s future EMU membership and its June 9 decision to continue to assess the issue would appear to be variable interest rates and the British housing market. This market has escalated in value by 30% during the last year and by a mega- inflationary 300% over the last 10 years. UK has the largest mortgage debt in Eurozone that constitutes 60% of its GDP. Whereas the practice on house mortgage loans is based on long- term (25 year) fixed interest rates in Eurozone, in Britain the tendency is towards shorter periods with variable rates. Were Britain to join the EMU at present in which the European Central Bank would set a common interest rate, the variable interest rate, long term sensitive British housing market would boom after membership and bust post- 2006. There is in fact no indication of convergence on the housing market in Europe for those countries that joined the Euro four years ago.
Euro notes and coins were first issued on 1 January 2002
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