Whatthink.html

What do UK Economists think? (Economist, 17.4.1999, p 31ff)

The Economist conducted a poll of 256 economics professors in the UK (members of the Royal Economic Society and Fellows of the British Academy, not including your lecturer) of whom 164 responded with the question "Do you think that it will be in Britain's economic interest to join the European single currency within the next five years?" The results were as follows:

Specialisation	Number of responses	% Yes	% No
All	164	65	35
EU/Monetary Union	11	73	27
Macroeconomics	24	67	33
International Econ	22	64	36
Monetary Econ.	15	33	67
Finance	18	83	17
Labour	21	67	33
Industry/Business	23	65	35
Public Sector	12	58	42
Econ History	14	71	29
Other	39	64	36

It is noted that the Monetary specialists are the only group against membership, though the Public Sector specialists are more ambivalent than the majority of these 'economic experts' about the desirability of membership. The Economist also interviewed economists on both sides (each of which contains both left and right wingers, and Keynsians as well as free market monetarists)

Those in favour:

argued benefits of more stable exchange rate, benefiting from protection against capital flows between member countries.
remaining outside would reduce inward investment from abroad into the UK (foreign direct investment (FDI)
Since many UK companies will be using Euro anyway, monetary control in the UK will be weaker
loss of influence over monetary and financial institutions if we remain outside
increase in competitivness from reduced transactions costs and greater transparency of costs and prices
But - considerable criticism of the arrangements for monetary control by the European Central Bank - too secretive and not accountable enough to Council of Ministers and European and national parliaments. ECB should have clearer targets on inflation and be required to defend decisions to the political authorities.

Those Against

that the ECB will be too focused on inflation control at the expense of higher unemployment (the left wing fear)
that the ECB will lack the necessary legitimacy and political credibility to control the Euro area money supply properly
that the Euro area is too diverse and too fragmented, with too much difference in economic conditions and responses to be managed as a single currency area
that there is insufficient European fiscal policy (constrained to be no more than 1.3% of GDP in total) to balance and manage regional differences and economic cycles, and that the limit on national budget deficits to be no more than 3% of GDP is too constrictive to allow politically sustainable management of economic activity
that labour and product markets are too inflexible to cope with the regional differences in growth rates and capacity constraints - so unemployment black spots will undermine the enterprise (lack of common language etc. a serious constraint on labour mobility)

The Economist article concluded that the major issue is the extent to which the Euro will encourage and speed up flexibility and adjustment of labour and product markets within Europe - the generation of a genuine Single market - or that these inflexibilities will sink the euro enterprise. The second fear (especially of the right wing) is that the European response to possible failures of the Euro will be towards greater government (especially European Government) intervention in these markets, making them even more inflexible. Since 1999, there has been little evidence that either of these two extreme scenarios seem likely.

Endnote: The Economist also points out (in a separate article on the Big Mac purchasing power parity exchange rates - April, 1999), that the weakness of the Euro, especially against the dollar, since its inception was entirely to be expected, since the initial rate was substantially over-valued (by about 15%) against the dollar. Thus the apparent weakness of the euro is not necessarily a market comment on the sustainability of the enterprise itself, but merely an adjustment in the market rate of exchange.