Euro Myths - Economic Convergence (Andrew Duff MEP)

Andrew Duff MEP <info@andrewduffmep.org.uk>

Economic Convergence

Joining the ERM caused the recession of the early 1990s. Therefore ruling out the option of joining the single currency would save Britain from another ERM style recession. This is untrue. Experts agree that the recession of the early 1990s was caused by domestic factors, not ERM membership. Graham Bishop, European Financial Affairs Advisor at Salomon Smith Barney has said: "The preceding domestic policy errors were the reasons for the bust in the early 1990s, not the ERM. The British boom had already built up, history just happened to add in German reunification."
Ruling out the option to join a successful single currency is necessary to enable Britain to avoid a one-size-fits-all interest rate.This is untrue. Britain already has a one-size-fits-all interest rate in that it (along with the rest of Europe, and indeed the US) consists of lots of regions that are actually very different. The Centre for Economic Policy Research has said: "The greatest disparities within Europe are not in fact between member states but within them, e.g. between different regions in Italy rather than between Italy and Germany."
A one-size-fits-all interest rate would lead to unsustainable booms and deeper recessions.This is an anti-European smear. Over the past thirty years Britain has seen deeper booms and busts than most European countries. By joining the European zone of economic stability - if the economic conditions are right - we can guarantee that unsustainable boomsâ are eliminated for good.
The UK economy is fundamentally more sensitive to short-term interest rates than other economies in Europe and therefore it would never be suited to lower, euro-zone, interest rates.This is untrue. Alison Cottrell, Chief International Economist at Paine-Webber, has said: "The UK's sensitivity to short-term interest rates is a product of our high and volatile record on inflation in the past and, helped by an independent Bank of England, is beginning to change. As time moves on Britain is becoming less bank-rate sensitive, so the impact of the bank-rate on UK economic activity becomes less significant."
The British economy is fundamentally and irrevocably out of step with the euro-zone.This is untrue. A recent report by Andersen Consulting said that: "At a macro level, the UK is currently showing more signs of convergence with other EU member states than at any time since the early 1970s.
Euro-zone countries are more vulnerable than the individual states of the US to asymmetric economic shocks because the US federal government can cushion adverse effects on a particular state through both the social security system and by transfer payments.This is untrue. EU members are much less economically specialised than US states. Unlike Texas, Britain, for example, is no longer an oil economy, while Spain, Portugal and Greece are developing broadly based manufacturing and service sectors making them less dependent on agriculture. Economic shocks affecting only one country are now extremely rare in Europe. Most shocks affect regions within countries, and this will continue despite the launch of the single currency. Governments will respond in the same way that they have done in the past, by altering their national fiscal policies to counteract the shock.

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