British EMU Membership Would Create Instability and Destroy Employment

Gordon Brown has declared that, ‘The decision on a single currency must be determined by a hard-headed assessment of Britain’s economic interests’.1 This chapter argues that there are fundamental economic obstacles to British membership of EMU which will need to be taken into account, even if convergence with the European economies is apparently achieved. In particular, it demonstrates: The UK economy is, and will remain, far more sensitive to interest rate fluctuations than the economies of continental Europe. In addition, the UK will often require different interest rates. The UK economy has a very different structure of production from continental Europe. UK exchange rates therefore need to be at rates which are sensitive to fluctuations in the dollar and the yen as well as the Euro. Despite widespread apprehension to the contrary, the supremacy of the City of London as the financial centre of Europe will not be damaged if the UK stays out of EMU: its comparative international efficiency will ensure that it will prosper at least to the same degree as Switzerland whether or not the UK continues to maintain an independent currency. The Euro will be especially vulnerable to financial strains during the transition period. International markets will be able to buy and sell bills and bonds denominated in national currencies (where the responsibility for them is unambiguously tied to their issuer). Interest rate differentials will widen if any country is evidently finding its membership uncomfortable, imposing additional costs on its government.