'Should the UK join the Euro?' poll discussion

[Deleted User]

bigheadxx wrote: »

1. The ERM was the pre-cursor to the Euro, currency convergence via the ERM was necessary, supposedly, for EMU to take place. The fact is that if the ERM had not existed then the currencies would not have been put into such an obvious target for speculators.

Arguably, if German reunification hadn't happened at the time it did, if we hadn't joined at the time we did or at the rate we did, then it wouldn't have been such a target either.

2. Are you saying that now the pound has been devalued by 30% against the Euro that you feel your income has fallen by the same amount?

That's an interesting switch, there. That's a bit like asking, if your house and everything in it - including you - shrunk by 10% in all dimensions, would you feel smaller? Well, the answer would be no - until you stepped outside. And even then, you might not conclude that you and your house had shrunk, but that everything else had grown. So whilst I might not necessarily feel poorer, I do notice that everywhere else has suddenly become a lot more expensive. Is there any real difference between the two - which is my perception and which is reality? Have I really become poorer, or is everywhere else really more expensive?

But what I might feel about it wasn't actually my question. That's why I asked if there was any "real difference" between the two, and if the "net results" were the same, not how people might feel about it. If, for argument's sake, we'd stuck with the same exchange rate but internal prices and wages had all been deflated by 30%, we'd probably notice it more, but wouldn't we be in the same kind of place as the guy in the shrunken house at the end of it?

bigheadxx

Marvin_the_Martian wrote: »

Arguably, if German reunification hadn't happened at the time it did, if we hadn't joined at the time we did or at the rate we did, then it wouldn't have been such a target either.



That's an interesting switch, there. That's a bit like asking, if your house and everything in it - including you - shrunk by 10% in all dimensions, would you feel smaller? Well, the answer would be no - until you stepped outside. And even then, you might not conclude that you and your house had shrunk, but that everything else had grown. So whilst I might not necessarily feel poorer, I do notice that everywhere else has suddenly become a lot more expensive. Is there any real difference between the two - which is my perception and which is reality? Have I really become poorer, or is everywhere else really more expensive?

But what I might feel about it wasn't actually my question. That's why I asked if there was any "real difference" between the two, and if the "net results" were the same, not how people might feel about it. If, for argument's sake, we'd stuck with the same exchange rate but internal prices and wages had all been deflated by 30%, we'd probably notice it more, but wouldn't we be in the same kind of place as the guy in the shrunken house at the end of it?

Such a system would always be a target.

On your second point you make no sense. We have had a devaluation of 30% against the Euro, you are saying that is the same as income being cut by 30% which it clearly isnt.

My original point was that real incomes will fall in Ireland because it cannot make a competitive devaluation of its currency. It has limited its options.

The net effects are not the same. You also added to this post "wages and prices deflated by 30%" Real cuts in income would not necessarily mean lower prices. In effect you have voided your own argument by adding another variable.

[Deleted User]

bigheadxx wrote: »

Such a system would always be a target.

Why?

On your second point you make no sense. We have had a devaluation of 30% against the Euro, you are saying that is the same as income being cut by 30% which it clearly isnt.

I asked a question; I made no assertion. If your answer is to repeat your assertion with the word "clearly" as if that establishes it, we're still no nearer an answer to the question.

My original point was that real incomes will fall in Ireland because it cannot make a competitive devaluation of its currency. It has limited its options.

Irish employers make that call, not the Irish Government. So why will they cut wages?

The net effects are not the same. You also added to this post "wages and prices deflated by 30%" Real cuts in income would not necessarily mean lower prices. In effect you have voided your own argument by adding another variable.

I haven't actually made an argument yet; I was asking a question. But since you bring it up, under what circumstances would cuts in income not result in lower prices? For that matter, under what circumstances would devaluation not result in higher prices?

bigheadxx

Marvin_the_Martian wrote: »

Why?



I asked a question; I made no assertion. If your answer is to repeat your assertion with the word "clearly" as if that establishes it, we're still no nearer an answer to the question.



Irish employers make that call, not the Irish Government. So why will they cut wages?

DUBLIN, Oct 13 (Reuters) - The global recession seems to have reached its bottom but Ireland won't share in the upturn without reversing some of the wage gains of its 'Celtic Tiger' years, new central bank Governor Patrick Honohan said on Tuesday.

Marvin_the_Martian wrote: »

I haven't actually made an argument yet; I was asking a question. But since you bring it up, under what circumstances would cuts in income not result in lower prices? For that matter, under what circumstances would devaluation not result in higher prices?

Lower incomes may lead to an initial lowering of prices as businesses try to move stock and maintain cash flow. However lower demand brought about by lower incomes will ultimately lead to less supply and therefore a higher price.

You are suggesting that if Mr average has his income cut by 10% that prices will fall by 10% to compensate! If this happens to Mr average, as has happened to many people then choices within his control ie different car, different holiday destination, different shopping habits are the tools at his disposal to compensate.

It is widely reported, around the world that incomes are falling at the same time prices are rising:

http://www.boston.com/business/articles/2009/08/05/prices_rise_wages_fall_in_june/

As I have stated in previous posts, we have had a devaluation of around 30% with the Euro. Have prices increased by this amount? No

The example I used earlier was Irish beef exports to the UK.
Has the price in shops increased by 30%? No The bigger picture is that UK exports of beef to the continent are up because of the exchange rate leaving Irish suppliers without the demand for their product resulting in them cutting the price and selling it to the UK.

[Deleted User]

bigheadxx wrote: »

DUBLIN, Oct 13 (Reuters) - The global recession seems to have reached its bottom but Ireland won't share in the upturn without reversing some of the wage gains of its 'Celtic Tiger' years, new central bank Governor Patrick Honohan said on Tuesday.

Right. So they need to cut wages in order to be competitive again?

Lower incomes may lead to an initial lowering of prices as businesses try to move stock and maintain cash flow. However lower demand brought about by lower incomes will ultimately lead to less supply and therefore a higher price.

I fail to see how that follows. The lower supply would seem to be offset by the lower demand, and further, the company's wage costs are down. Why would the price of the product end up higher than it was originally?

You are suggesting that if Mr average has his income cut by 10% that prices will fall by 10% to compensate!

Actually I wasn't. What I actually said was, "If, for argument's sake, we'd stuck with the same exchange rate but internal prices and wages had all been deflated by 30%, we'd probably notice it more, but wouldn't we be in the same kind of place as the guy in the shrunken house at the end of it?"

What I was expecting was something along the lines of "it wouldn't work out like that in practice because XYZ", rather than you taking this as an actual scenario that I was attempting to present as a literal reality. No, I would not necessarily expect prices to fall by exactly 10% to compensate for an exactly 10% cut in incomes - and neither would I expect domestic prices to remain precisely the same in the event of devaluation.

What I was suggesting, in fact, was that devaluation was roughly equivalent to giving everyone a pay cut and at the same time cutting all domestic prices by the same amount. Of course, it's not quite as simple as that, because people's savings and liabilities also shrink by the same amount in the case of devaluation, which is something that doesn't happen in the reduced-income scenario. But that's where I was coming from.

It is widely reported, around the world that incomes are falling at the same time prices are rising:

http://www.boston.com/business/articles/2009/08/05/prices_rise_wages_fall_in_june/

And yet, from the same week, we have this: http://www.independent.co.uk/news/business/news/deflation-accelerates-in-eurozone-and-japan-1765922.html
And from six weeks later we have this: http://www.eubusiness.com/news-eu/eurozone-economy.hq
"The worst deflation was seen in Ireland, where August saw a 2.4 percent fall for prices compared to a year earlier, and the overall rate remains far removed from the rate of 3.8 percent inflation a year earlier."

As I have stated in previous posts, we have had a devaluation of around 30% with the Euro. Have prices increased by this amount? No

I'd put it to you that if you were in the market for a product in the Eurozone, it would cost you somewhere around an extra (1/1-30%) - 1 = 42.857% (or would have done, were it not for the fact that the Eurozone has been experiencing a bit of deflation) compared to what it did two years ago. I don't believe I ever suggested that domestic prices would increase by such an amount. I said that I'd noticed that everywhere else has got a lot more expensive. I didn't say that here had - though our level of inflation is running higher than that in the Eurozone, which is what I'd expect given that our currency is worth a lot less than it was compared to the euro, and given that we also have a Single Market.

The example I used earlier was Irish beef exports to the UK.
Has the price in shops increased by 30%? No The bigger picture is that UK exports of beef to the continent are up because of the exchange rate leaving Irish suppliers without the demand for their product resulting in them cutting the price and selling it to the UK.

Well, now you have me confused. Earlier you say that wage cuts ultimately result in lower demand and consequently lower supply and higher prices - now you're saying that the lower demand has forced Irish farmers to cut their prices. You can't have your cake and eat it. Which is it? Is the price of Irish beef "ultimately" destined to be higher than it was, as you seem to suggest in your early paragraphs? Or will it be kept low to ensure competitiveness? Or would you seriously suggest that Irish farmers are going to charge their own people more for beef than the British?

bigheadxx

Marvin_the_Martian wrote: »

Right. So they need to cut wages in order to be competitive again?



I fail to see how that follows. The lower supply would seem to be offset by the lower demand, and further, the company's wage costs are down. Why would the price of the product end up higher than it was originally?



Actually I wasn't. What I actually said was, "If, for argument's sake, we'd stuck with the same exchange rate but internal prices and wages had all been deflated by 30%, we'd probably notice it more, but wouldn't we be in the same kind of place as the guy in the shrunken house at the end of it?"

What I was expecting was something along the lines of "it wouldn't work out like that in practice because XYZ", rather than you taking this as an actual scenario that I was attempting to present as a literal reality. No, I would not necessarily expect prices to fall by exactly 10% to compensate for an exactly 10% cut in incomes - and neither would I expect domestic prices to remain precisely the same in the event of devaluation.

What I was suggesting, in fact, was that devaluation was roughly equivalent to giving everyone a pay cut and at the same time cutting all domestic prices by the same amount. Of course, it's not quite as simple as that, because people's savings and liabilities also shrink by the same amount in the case of devaluation, which is something that doesn't happen in the reduced-income scenario. But that's where I was coming from.



And yet, from the same week, we have this: http://www.independent.co.uk/news/business/news/deflation-accelerates-in-eurozone-and-japan-1765922.html
And from six weeks later we have this: http://www.eubusiness.com/news-eu/eurozone-economy.hq
"The worst deflation was seen in Ireland, where August saw a 2.4 percent fall for prices compared to a year earlier, and the overall rate remains far removed from the rate of 3.8 percent inflation a year earlier."



I'd put it to you that if you were in the market for a product in the Eurozone, it would cost you somewhere around an extra (1/1-30%) - 1 = 42.857% (or would have done, were it not for the fact that the Eurozone has been experiencing a bit of deflation) compared to what it did two years ago. I don't believe I ever suggested that domestic prices would increase by such an amount. I said that I'd noticed that everywhere else has got a lot more expensive. I didn't say that here had - though our level of inflation is running higher than that in the Eurozone, which is what I'd expect given that our currency is worth a lot less than it was compared to the euro, and given that we also have a Single Market.



Well, now you have me confused. Earlier you say that wage cuts ultimately result in lower demand and consequently lower supply and higher prices - now you're saying that the lower demand has forced Irish farmers to cut their prices. You can't have your cake and eat it. Which is it? Is the price of Irish beef "ultimately" destined to be higher than it was, as you seem to suggest in your early paragraphs? Or will it be kept low to ensure competitiveness? Or would you seriously suggest that Irish farmers are going to charge their own people more for beef than the British?

None of your suggestions give any credence to the argument that we should adopt the Euro. You are compounding the argument that the current system works.

The country is in a mess due to government action over the last 10 years. We are in a worse state than most other Euro countries. Without a devaluation we would have had to absorb the crisis into our economy resulting in lower wages and lower output. WE dont have to cut wages in the same way that Ireland does.

The argument for the UK adopting the Euro was that it would boost exports. Had we adopted the Euro 5 years ago there would be no falling exchange rate pricing us into the market and we would not have been able to slash interest rates to stimulate demand and businesses. Rather like the ERM crisis in 1993 where interest rates were kept high, with devastating consequences for business and consumers and the economic upturn began as soon as interest rates were lowered and the pound allowed to float.

If you look at Ireland, over 40% of its food and drink exports are to the UK and the exchange rate has put these exporters under severe pressure. Irelands food and drink exports are set to be £1BN lower this year than last. Ireland is heavily dependant on the UK as a buyer of its goods even if not as much as 20 years ago.

The really simple way to look at how the exchange rate is affecting Irelands already depressed economy, 700 million Euros spent in Nortern Ireland last year by shopping tourist from Eire, and 90 million euros in lost tax revenue as a consequence. People say that the British want to keep the £ for sentimental reasons but it is the Irish government pleading with its people to spend their money in Ireland rather than handing money over to HM Government in the UK ,that is asking its citizens to think about the nation rather than personal economics.

[Deleted User]

bigheadxx wrote: »

None of your suggestions give any credence to the argument that we should adopt the Euro. You are compounding the argument that the current system works.

Hang on a minute. Let's dispense with the straw men, shall we?

One, I have not actually advanced an argument that we should join the euro. I am questioning this specific argument against it. There's a subtle but important difference.

Two, I have not claimed that devaluation doesn't "work". The question I raised was purely on this subject of devaluation versus cutting incomes. You seem to be of the opinion that cutting incomes doesn't "work"; I'm trying to get a better understanding of why you think this is the case.

Three, did you lift these arguments straight from Dan Hannan's blog?

The country is in a mess due to government action over the last 10 years. We are in a worse state than most other Euro countries. Without a devaluation we would have had to absorb the crisis into our economy resulting in lower wages and lower output. WE dont have to cut wages in the same way that Ireland does.

Not in the same way, I agree - but I'm not convinced it's necessarily better. My salary in 2009 amounts to around €14,000 a year less than it did in 2007. (Or $18,000 or ¥3,700,000, if you prefer.) Am I still as well off in 2009 as I was in 2007? Maybe it might look that way if I never had to leave the "shrunken house" - but certainly not if I wish to spend any money outside the UK, or if I wish to import anything from the UK, or if I have to buy anything from anywhere that has to raise its prices because it imports anything from outside the UK, etc. And certainly not if I was a British pensioner in Spain or France. And it's also interesting that if you had money to save in 2007, you'd have been far better off putting it into a Euro account than putting it into an ISA here. We've taken an across-the-board pay cut, and screwed our savers, inter alia. The "pound in our pocket" is not worth what it was. Prices will rise.

Granted, it's not such bad news if you're a borrower, and our exports will do rather better - but imports are more expensive, which is particularly worrying given that we've been a net importer of energy since 2004. We all know what happened to energy prices in early 2008. Is there a connection there? We may have to face the very real possibility that fluctuating exchange rates will have more of a direct impact on household expenditure than ever before - and that the potential problems of a less flexible currency are outweighed by the benefits of having a relatively stable one. And given that the long-term picture in the case of the Pound has been one of barely interrupted decline since 1945, there is an argument that while shackling ourselves to the euro may be sub-optimal, and may - shock, horror! - force us to face up to the systemic defects in our economy, the alternative could well be worse.

The argument for the UK adopting the Euro was that it would boost exports.

Proponents claim that it has the potential to do so within the Eurozone, at least, on the grounds that it removes the uncertainties involved in fluctuating exchange rates.

Had we adopted the Euro 5 years ago there would be no falling exchange rate pricing us into the market and we would not have been able to slash interest rates to stimulate demand and businesses. Rather like the ERM crisis in 1993 where interest rates were kept high, with devastating consequences for business and consumers and the economic upturn began as soon as interest rates were lowered and the pound allowed to float.

In 1993 we were in a rather different situation - interest rates had been kept high for a while in order to shadow the DM, we went in at a historically high rate of DM2,95 to the pound, and we also went in at a time when Germany was experiencing the pain of reunification. Further, the Bundesbank - unlike the ECB - set its rates only for Germany, not for the whole of the Eurozone. The ECB, by contrast, would have to take the state of the UK's economy into account in setting its rates as it's one of the 'big three'. And if we had joined ERM II in 2004, the Pound would have been gone by 2007 - and until May 2007 the Pound/Euro exchange rate was relatively stable so there was little chance of a repeat of the ignominious exit from the ERM that happened last time.

What impact that would have had on our economy since 2004 is invariably going to involve some assumptions, because there would probably be some impact on fiscal policy. Granted, we would be under some pressure now, and the Treasury would have to get more creative with its budget - but we wouldn't be in the same position as Ireland is now with respect to 'shopping tourism' for the simple reason that it's just not that easy for Joe Consumer in the UK to get their weekly shopping elsewhere - logistics play a large factor in that - and in addition, Ireland wouldn't be in the position that shopping tourists were flocking to the North either.

And that's an interesting point: would Ireland be in as much difficulty now, if it didn't have the destabilising factor of a UK outside the Euro but in the Single Market and right on its doorstep?

If you look at Ireland, {...}

So Irish businesses will have to cut costs and prices in order to stay competitive. But at least its savers won't be robbed in the process. So why is devaluation better?

bigheadxx

Marvin_the_Martian wrote: »

Not in the same way, I agree - but I'm not convinced it's necessarily better. My salary in 2009 amounts to around €14,000 a year less than it did in 2007. (Or $18,000 or ¥3,700,000, if you prefer.) Am I still as well off in 2009 as I was in 2007? Maybe it might look that way if I never had to leave the "shrunken house" - but certainly not if I wish to spend any money outside the UK, or if I wish to import anything from the UK, or if I have to buy anything from anywhere that has to raise its prices because it imports anything from outside the UK, etc. And certainly not if I was a British pensioner in Spain or France. And it's also interesting that if you had money to save in 2007, you'd have been far better off putting it into a Euro account than putting it into an ISA here. We've taken an across-the-board pay cut, and screwed our savers, inter alia. The "pound in our pocket" is not worth what it was. Prices will rise.

So you earned about £40,000 in 2007 and you earn about £40,000 here in 2009. Most people dont leave the "shrunken house" so the initial consequence of devaluation is far less than a cut in income.

The Irish beef scenario goes some way to prove that the price of imports is not certain to rise as globalisation has opened up markets abroad and the UK economy, despite its woes, is more able to take a hit although this is partly due to the smaller manufacturing base that we have now as opposed to the 1970s.

British ex-pats know the risk when retiring abroad and this is something that they should take into account. If we lock into the Euro at todays rate then they are that much poorer for ever. If we lock in at an anticipated higher rate then that surely demonstrates that a short term devaluation, for the UK, is the right option.


I too am sure that prices will rise in the future but I dont believe that this will be entirely down to the exchange rate as I expect higher prices worldwide. However the pound in your pocket still buys you what it did 12 months ago.

Granted, it's not such bad news if you're a borrower, and our exports will do rather better - but imports are more expensive, which is particularly worrying given that we've been a net importer of energy since 2004. We all know what happened to energy prices in early 2008. Is there a connection there? We may have to face the very real possibility that fluctuating exchange rates will have more of a direct impact on household expenditure than ever before - and that the potential problems of a less flexible currency are outweighed by the benefits of having a relatively stable one. And given that the long-term picture in the case of the Pound has been one of barely interrupted decline since 1945, there is an argument that while shackling ourselves to the euro may be sub-optimal, and may - shock, horror! - force us to face up to the systemic defects in our economy, the alternative could well be worse.

I would say that the decline of the pound has been evident since WW1 but we have to factor in our unique situation in the early 1900s and how that was affected by bearing the cost of both world wars. The pound was always going to be under pressure as other economies flourished.

The UKs future energy needs are a concern however we have the Langeland pipeline in place from Norway. It is also anticipated that liquid gas, imported from Qatar is a future option. The Qatar currency is pegged to the dollar (US) which is under as much pressure as the pound so the fact that we are not in the Euro is unlikely to affect these supplies although a steep fluctuation in the currency could help or hinder us depending which way it goes.

In 1993 we were in a rather different situation - interest rates had been kept high for a while in order to shadow the DM, we went in at a historically high rate of DM2,95 to the pound, and we also went in at a time when Germany was experiencing the pain of reunification. Further, the Bundesbank - unlike the ECB - set its rates only for Germany, not for the whole of the Eurozone. The ECB, by contrast, would have to take the state of the UK's economy into account in setting its rates as it's one of the 'big three'. And if we had joined ERM II in 2004, the Pound would have been gone by 2007 - and until May 2007 the Pound/Euro exchange rate was relatively stable so there was little chance of a repeat of the ignominious exit from the ERM that happened last time.

All European central banks were supposed to set their rates to maintain exchange rates within the set bands and to buy and sell foreign currency as necessary. As the ERM was the the second stage of EMU then the fact that a "single currency" didnt work in theory would be a case for it not working in practice rather than charging ahead with the Euro simply because rates had been stable for a few years. The stability of the £ / Euro exchange rate on the back of a relatively benign economic backdrop is no real surprise.

What impact that would have had on our economy since 2004 is invariably going to involve some assumptions, because there would probably be some impact on fiscal policy. Granted, we would be under some pressure now, and the Treasury would have to get more creative with its budget - but we wouldn't be in the same position as Ireland is now with respect to 'shopping tourism' for the simple reason that it's just not that easy for Joe Consumer in the UK to get their weekly shopping elsewhere - logistics play a large factor in that - and in addition, Ireland wouldn't be in the position that shopping tourists were flocking to the North either.

With a greater proportion of our economy reliant on the financial service industry than any other EU country then the effect of a "credit cruch" and banking crisis is going to be felt in the UK much more than any other EU country. I dont really see how adopting the Euro would help us. Even in this troubled time for sterling the UK is still one of the largest direct investors abroad and also the recipient of more direct investment than any other European country.

We have had shopping tourist before going from the UK to France and a mini internet shopping boom when the £ bought $2, although not on this scale. However the current situation directly benefits a UK region, odd given that the Euro was supposed to offer stability and protection to smaller members.

And that's an interesting point: would Ireland be in as much difficulty now, if it didn't have the destabilising factor of a UK outside the Euro but in the Single Market and right on its doorstep?

Again Irelands problem. £1 is currently worth the equivalent of 1.20 , historically high, nothing to do with the economic situation in Ireland as this small country bears the brunt of the crisis, unable to set its own interest rates. The politically impossible but most sensible step for Ireland would be for it to join the £ as the UK is its most important trading partner. It would currently be benefiting from low interest rates, higher exports, no cross border shopping, no squeezing of profit margins on exports to the UK and a greater influence on fiscal policy in its own country.

So Irish businesses will have to cut costs and prices in order to stay competitive. But at least its savers won't be robbed in the process. So why is devaluation better?

[/QUOTE]

But will its people be able to save if they dont have a wage?
Wouldnt those savers now be better off switching to sterling accounts?
Are we not cutting costs and prices in the UK?
Are prices not going to rise in Ireland the same as they inevitably will in the UK?

moniker_2

vaporate wrote: »

I'm British by blood, not paper, as Hitler would put it lol However, although I voted for the unification of the Euro, I still don't like the idea of basically giving all powers to the ECB.

I doubt the Uk will ever want to lose control of its financies.

But you embrace the idea of the Bank of England having all the powers? The BoE is, like the Fed in the US, made up of unelected individuals who can set the UK interest rate for their own purposes. Actually, we would have more control over the ECB rates than we currently have over the BoE rates as we would have a seat at the ECB which we currently lack.

moniker_2

MrTomato wrote: »

London is a major centre of financial trade, and banks their trade in sterling, dollars, yen and euros. If the UK were to adopt the euro, there would be more incentive for them to move out to a cheaper european contry as long as they had the staff to do so, and would be disastrous for the UK. The 1 hour time benefit they have in London would probably be a decent trade off if it meant saving millions in rent or mortgages every year. Investment would be less appealing for companies looking towards the EU.

Banks has already started to move out from the UK, more specifically to Switzerland and to the euro country Luxembourg, starting with hedge funds. It seems like the UK adopting the euro (or not) is not a big factor in this. But yes, it will be disastrous for the UK.