The tackling of inflation is said to be one of the achievements of the single currency and the presumption is what Bundsbank had been doing could be repeated across the board. But such expectation might not be true simply because no one knows the kind of influence the German bankers will have in the new central bank since it will be made up of all the member states. If there is recession in several member states the central bank has no choice other than reducing interest rate lower than what is required to keep inflation in check.
The stipulation had been that the new European central bank should be free of political influence of member nations, although that will be difficult, as it cannot be isolated from its environment and would require some kind of a popular support for what it is doing. The literature further states that no nation for that matter should have excessive influence on the central bank that will include the Germans who are expected to introduce what worked for them into the working process of the central bank.
Because of that, the promised low inflation might not materialize. Britain would be better off if it stays with her own Bank of England that had been good in keeping down the inflation of the pound. Hence, what the literature suggests is it is much better for Britain if the monetary management and decision making stays in the hands of the nation’s experts. What the single currency brings to the fore is that the French and Germans would start managing the monetary affairs of Britain and from past experience they might give priority to their interest.
When it comes to the cost that will be involved, the literature says the most important one other than the transition and exchange rate adjustment mechanism could be the loss of independent monetary and fiscal policy. As discussed earlier this particular literature highlights also the problem that will be borne when there are both symmetric and asymmetric shocks. One interesting natural mechanism that will be lost is when there is a decline in demand for British export by the European countries and in a normal circumstance, what will ensue would be the pound would depreciate and would discourage import that would become expensive.
That kind of advantage that could create demand for homemade products would disappear when there is a single currency. Also, since that would affect the wages of those in the export sectors, this could bring about searching other goods to produce, with the assumption they might stimulate demand, but that could also be lost with the single currency, because the government cannot come up with any kind of stimulant, as the process has to be carried out by the private sector. Because of that, it is not difficult to some of the anomalies that would surface.
For countries to link their currencies there has to be certain criteria met such as labour mobility that should not be restricted, wages should not be sticky, and the countries should not suffer from similar shocks. When taking what is taking place in the case of Britain none of the above are applicable. Especially since shocks affect Britain differently from other countries, the ability of the pound to adjust to these shocks by its own will be lost and that would affect the nation inadvertently.
Monetary and Fiscal policy that use interest rate to introduce required corrections will be lost when one single currency is adopted. There is a shadow of doubt over the ability of the new central bank to keep interest rate high enough to put a check on inflation. The literature further stipulates, in the case of Britain the loss of controlling interest rate is going to be a cost to be accrued for joining the single currency. Another area highlighted is the sensitive nature of interest rate where when interest rate is high since it will cost more to borrow money it will stifle spending.
The case in Britain is different from other European nations simply because the people seem to be more indebted, whether it is in the form of overdraft or mortgage loans. If for reasons such as checking inflation the central bank decides to raise interest rate, it will affect the borrowers in Britain more than in the other Europeans countries. What this means is even if the interest rate policy applied by the central bank could control inflation Europe-wide, because of the debt structure it could be devastating for British Economy.
Another similar point touched on earlier this particular literature raise is the fiscal policy where there is going to be uniformity in government spending and taxation. At the same time the mechanism of dealing with what the literature calls shocked or depressed regions would be problematic, as there will be a need to shift resources to these regions that could create dependencies and as mentioned earlier taxpayers’ dissatisfaction. What this would lead to might be centralizing taxation and government spending, and it is difficult to say what would ensue when that takes place.
One assumption highlighted is the kind of burden the aging population would create; where Britain had privately funded schemes to deal with retirement in place, whereas most European countries are planning to finance it through current taxation. That could lead British taxpayers to subsidize French and German pension into the future. Another point raised is the tax rate that is at 34 per cent in Britain, whereas in the other countries that includes Sweden and Denmark it is more than 50 per cent.
That has contributed considerably to the private sector initiative that is the main engine of the British economy. If, for some reason, raising it higher require in order to conform to some kind of a central bank requirement surfaces, it will be devastating for the economy simply because it will kill the private sector initiative. Similarly, Britain could lose her lowest unemployment status because of measure that will force raising the tax level. As a result, as it is, the assumption is there will not be any economic gain for Britain in joining the single currency.
What it could mean, in fact, is surrendering a good portion government power to a central bank the does not guarantee it will work in the best interest of the nation. Therefore, the literature recommends saying “no” for the single currency with no vacillation or referendum that could biased or without leaving the decision open. There are also two myths that are worth looking at. One is the British refusal to join the EMU will affect trade and investment.
This seems to be the belief across the board in Britain. For this to happen the members nations would have to retaliate deliberately, which might not be the case. On the other hand looking at the trade deficit itself will tell they have more to lose than Britain, as they are selling more to B than they are buying. When it comes to the investment it is the return that attracts investors, which means the chance that anyone will give their back to a good return on investment could be non-existent.
The danger according to the literature could stem only if the nation becomes less attractive for trade and investment and that could only be instigated by joining the single currency regime. Myth number two is if the single currency adoption takes place by Europe without Britain, London’s financial sector will encounter a calamity. This could be true if the pound becomes insignificant when compared to the euro and that will affect the robust financial sector in London.
Arresting such fear is easy simply because the dominant currencies in the scene of the financial sectors are mostly foreign ones, other than pound. The attraction of the financial sectors is it is less regulated and taxed than anywhere else in Europe. In addition, joining the single currency will threaten these very advantages London has over the other member nations. Hence, the conclusion in not joining the single currency has an added advantage of even attracting the euro-denominated deals to London, enabling the sector to even thrive more.