All entries for Monday 17 May 2010

May 17, 2010

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.


I am a professor in the Department of Economics at the University of Warwick. I am also a research associate of Warwick’s Centre on Competitive Advantage in the Global Economy, and of the Centre for Russian, European, and Eurasian Studies at the University of Birmingham. My research is on Russian and international economic history; I am interested in economic aspects of bureaucracy, dictatorship, defence, and warfare. My most recent book is One Day We Will Live Without Fear: Everyday Lives Under the Soviet Police State (Hoover Institution Press, 2016).



Economics Blogs - BlogCatalog Blog Directory

Mark talks about why and how he blogs on Warwick’s Knowledge Centre.

Search this blog

Blog archive

Loading…

Tags

Most recent comments

  • Great article on coronavirus Keep sharing your knowledge with us Educational and technology blog by Amrit on this entry
  • Thanks! Trying to work this out—as far as I knew, Joan Littlewood had the author down as "unknown." … by Mark Harrison on this entry
  • Powerful stuff, Mark. I look forward to reading the memoir. The lyric to "and when they ask us" was … by Robert Zara on this entry
  • Great history lesson. Something that was never taught in school, nor hinted about to egg your on to … by Julian Fernander on this entry
  • Thanks Tony! by Mark Harrison on this entry
Not signed in
Sign in

Powered by BlogBuilder
© MMXXIV