Fear of Floating

Writing about web page http://www.ft.com/cms/s/0/77b0362c-5cf1-11df-bd7e-00144feab49a,dwp_uuid=79cadde4-5c1b-11df-95f9-00144feab49a.html

It was intriguing to read in the FT (May 11) about Eurozone resentment at Britain's lack of participation in the Greek bailout. In fact, it goes beyond that:

Charles Grant, director of the Centre for European Reform, said there was increasing anti-British feeling across the EU, fuelled by the belief that Britain had allowed its currency to depreciate to gain a competitive advantage.

I wondered what to think about this. It's true that sterling has depreciated quite substantially since the beginning of the crisis. Without that, the UK economy would be in much worse shape today, with still higher unemployment and a bigger budget deficit. So, it is true that the eurozone has been feeling some of our pain.

On the other hand, the reason Britain didn't join the euro in the first place, rightly or wrongly, was to retain the some insulating flexibility in the sterling-euro exchange rate if things went wrong. It wasn't compulsory for us to join the Euro, any more than Greece or Portugal were forced into it. They chose to and we didn't. Now this choice has proved correct, it's hard to understand why we shouldn't be permitted to benefit from it.

Some Europeans believe, apparently, that to benefit from a currency depreciation is morally wrong. In that case, what about the euro itself? The euro has a flexible exchange rate vis à vis the rest of the world. If the euro depreciates against the dollar or the yuan, then the entire eurozone will gain a competitive advantage over American and Chinese producers. In fact, in the last month the euro has depreciated by about 10 per cent against the dollar.

If it's right to avoid competitive depreciation, I expect to see the ECB intervening in the markets to sell euro denominated bonds and drive the value of the euro back up again. But actually ... Oh! I think they're doing the opposite-- on an unprecedented scale.

That's probably a good thing, at least in the short term, for Europe as a whole, even if it will do little for the long term solvency and prospects of the countries that are hurting most -- Greece, in particular.

As Barry Eichengreen and Doug Irwin have shown, in the Great Depression the countries that came off the Gold Standard earlier recovered quicker; those that prioritized exchange rate stability found little alternative to the policies of protectionism and regional autarky that eventually destroyed the global economy.

Mark Harrison : 17 May 2010 11:11 |  Tags: Economics Recession |  Comments (0) |  Report a problem