The strength of the Euro does not mean we should join it!

Now the Euro is strengthening against both the dollar and sterling some of the usual suspects are out and about suggesting that we should be part of such a “success” and reminding us it will be dear to go on holiday on the continent if the Euro keeps on going up.

Since the Euro was launched, it has had periods of weakness and strength. It will have more of both over the years ahead. The best economic argument against our joining the single currency is the volatility of the Euro against the pound. It has varied from 57p to 80p per Euro. This shows our economies are not coming together, and do need changes in currency rates to avoid more painful adjustments on jobs and activity levels. The idea of the Exchange Rate Mechanism was to give countries and currencies a period of years to try to bring their economies together. If they could do so, the changes of one currency against another narrowed and eventually petered out, showing the two nations were ready economically for a single currency, if they also wanted that politically. The UK’s rapid exit from the ERM showed we were not a similar economy to the continental one:the pound did not start to move in line with DM/Euro. More recent movements both ways of the pound against the Euro are a further warning, if one is still needed, not to venture into a currency arrangement or try to prepare for a single currency again.

Yes, it is true contiental holidays are becoming dearer. They need to, as they are one of many drains on our balance of payments, and we need to spend less abroad and spend more at home in substitution for imports – that includes holidays.
It is also true that the Uk is becoming more competitive as our prices overseas fall relative to Euro prices. That is one of the reasons why UK manufacturing is doing better at the moment ,despite the credit squeeze and the slowdown.

The strong Euro is the result of the better performance of German industry in recent months. It is causing problems to some of the peripheral countries of Euroland, who may still live to rue the day they entered a single currency before they had brought their own economies properly into line with Germany’s.

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17 Comments

  1. David Belchamber
    Posted April 11, 2008 at 8:45 am | Permalink

    The value of a country’s currency will reflect its intrinsic economic strength, adjusted by the confidence that other nations have in it. As you point out, the fluctuations in value between the euro and the pound have proved too great for convergence ever to be a real prospect.
    The idea that you can have one single interest rate for 25+ countries is also absurd; although we are now within 1% of the EU rate (4%), we have normally been well above it (despite what our beloved leader assures us).
    Would it be feasible to have two or even three interest rates for this country (we already have baserate and LIBOR)? One for manufacturing (below baserate), baserate and one above for other parts of the economy?

    Reply: There are and will be many rates, related to banks’ perceptions of risk amongst customers and reflecting how much money banks have to advance. It is not easy to have different rates by sectors, as how would you avoid leakage – mergers, mixed companies, definitions would all prove difficult.

  2. tim holden
    Posted April 11, 2008 at 9:20 am | Permalink

    The money, in terms of currency hedge, does not know where to go. The strengthening of the Euro is merely relative and temporary – a safe bet in the short term. The worrying thing is that the pound has been in exactly that position for most of the past decade, and has lost favour very swiftly since the beginning o this year.

    Ponderous public realisation of the deteriorating situation will occur when they go on holiday this year, and that will translate into further woe for the current government.

    It is unlikely that Labour has yet developed an escape strategy for their final period in office, and more unlikely that they will possess the credibility to achieve much. We cannot, however, discount the possibility of an attempt to bring down the pillars of the temple at the last moment.

  3. Freeborn John
    Posted April 11, 2008 at 10:29 am | Permalink

    The Euro is a dead issue with the public. Those in favour lost their window of opportunity when their dire predictions that the sky would fall in on the economy should we not join failed to materialise.

    The big question coming up remains what (if anything) the Conservatives might offer at the next election in terms of negotiating the return of powers. I know you have expressed the opinion that an incoming Conservative government should arrange a post-ratification referendum on the Lisbon treaty, followed by negotiations with the EU26, and then there should be another vote on the results of the negotiations. However I am wondering if the first such vote would be too constraining as it would only give a democratic mandate to the negotiators for issues specifically related to the Lisbon treaty. Since there are issues (e.g. social chapter, fisheries etc.) that are associated with earlier treaties on European Union would it not be better that the initial referendum is a wider one asking the British people if re-negotiation is desirable?

    Reply: I have said I would be happy with a renegotiation without a prior referendum, immediately after a Conservative election victory, followed by a refererendum so the people would decide whether the revised deal was sensible or not or if they would rather leave.

  4. Iain
    Posted April 11, 2008 at 10:48 am | Permalink

    "who may still live to rue the day they entered a single currency before they had brought their own economies properly into line with Germany’s."

    I would support your argument in saying the strength of a currency is irrelevant to whether you should join it or not, currency strength is too often touted as macho nonsense.

    But I would differ with your view that countries could somehow manipulate their economies in order that they march in step with the German economy and so be suitable to join the Euro, for that smacks of some autocratic manipulation of economies, which I just don't think is possible, ( right now Governments and Central banks are pushing at bits of string to sort out the credit crunch ) for if countries had wanted to make like the German economy they would have done it, in fact the whole world would have, but they haven't because they don't have the same culture and values of the German people to achieve an economy like the German economy. But I think it dangerous to even give the EU fanatics faint hope that they could get us to join the Euro if they could just manipulate our economy to march in step with the German economy, its not possible, and that hope should be snuffed out for good.

    Reply: That is exactly what I have been saying ever since they first dreamed it uup – I jhave consistently said the UK cannot converge to make it work economically. Holland/Belgium etc are rather different.

  5. Tony Makara
    Posted April 11, 2008 at 12:43 pm | Permalink

    A very timely piece John, thank you for writing it. The problems we face today are because Sterling has deliberately been kept overvalued in order to mask inflation as credit-fuelled consumer spending has gone on imports. This has been done to create a feelgood factor and further feed the myth that Gordon Brown has created a miracle economy. This has been paid for with higher interest rates to keep Sterling overvalued. Now, it seems a natural correction is taking place and we can expect the Pound to fall much further against the Euro. This will push up the price of EU food in the high street and lead to the voter-visible inflation that the Labour government claims to have eradicated. This is not a vindication for the pro-Euro lobby as you have pointed out. This has been a problem made by the Labour government and the politically deferential attitude of the MPC.

  6. Stuart Fairney
    Posted April 11, 2008 at 2:19 pm | Permalink

    Do you think Blair's one big regret is never taking us into the Euro?

    I agree with you, it would have been a disaster, but nonetheless, don't you sense he wanted that to be his one tangible "achievement"

  7. Rose
    Posted April 11, 2008 at 2:40 pm | Permalink

    I wondered how long it would be before people started to wobble. We should never forget what happened when we shadowed the Deutschmark in the 90s, and the terrible political price we are still paying.

  8. Jim Carr
    Posted April 11, 2008 at 7:14 pm | Permalink

    The Euro is strong as a result of the weak dollar, and is a temporary phenomenon.
    The Euro is fundamentally a soft currency, for the reasons you mention, and the truth will out eventually.
    The Euro's true value against the pound is near 50p.

  9. Matthew Reynolds
    Posted April 11, 2008 at 7:16 pm | Permalink

    The Euro is just a political project designed to ensure that Brussels can rule an entire Continent. As John rightly points out Euro- land economies have not aligned at all and the single currency is an unstable entity at the best of times. It is bad for democracy that 80% of our laws are made by Brussels and that things that impact on British voters can be made without their elected MP's being able to influence the decision making process. Past pro -European ideas have been bad as shadowing the DM made the Lawson boom even worse while the ERM made a recession even harsher. It is very bad that Labour won a general election in 2005 on a pledge that there would be a referendum on the EU constitution, all the Euro-land elite say that the treaty now signed in a bizzare way by Gordon Brown is the same as that constitution and yet there is to be no plebiscite on the said treaty aka constitution. There is no way that this can be justified & Labour do not deserve to win a general election having lost the moral right to stay in office. Just because a currency goes up & down that is no reason to join it- do the usual EU apologists all think that we are all stupid ?

  10. Matthew Reynolds
    Posted April 11, 2008 at 6:16 pm | Permalink

    The Euro is just a political project designed to ensure that Brussels can rule an entire Continent. As John rightly points out Euro- land economies have not aligned at all and the single currency is an unstable entity at the best of times. It is bad for democracy that 80% of our laws are made by Brussels and that things that impact on British voters can be made without their elected MP’s being able to influence the decision making process. Past pro -European ideas have been bad as shadowing the DM made the Lawson boom even worse while the ERM made a recession even harsher. It is very bad that Labour won a general election in 2005 on a pledge that there would be a referendum on the EU constitution, all the Euro-land elite say that the treaty now signed in a bizzare way by Gordon Brown is the same as that constitution and yet there is to be no plebiscite on the said treaty aka constitution. There is no way that this can be justified & Labour do not deserve to win a general election having lost the moral right to stay in office. Just because a currency goes up & down that is no reason to join it- do the usual EU apologists all think that we are all stupid ?

  11. Mike Stallard
    Posted April 12, 2008 at 1:39 am | Permalink

    May I remind you, John, of your excellent article a few weeks back when you said that the best future for all of us could be in EFTA?
    The Euro is strong because of the dollar/sterling weakness only. It consists of Germany and Holland,of course, but also of the southern countries who are, apparently, going through our own 1990 crisis at the moment.
    Soon all hell will break loose in Euroland.

  12. Freeborn John
    Posted April 12, 2008 at 10:36 am | Permalink

    Reply (from JR): ‘I have said I would be happy with a renegotiation without a prior referendum, immediately after a Conservative election victory, followed by a referendum so the people would decide whether the revised deal was sensible or not or if they would rather leave’.

    It sounds good. I only hope it will become Conservative party policy.

    There is a Leader in this morning’s Telegraph asking ‘where is the Margaret Thatcher for the 21st century?’ I wouldn’t be surprised if more people thought of your name than any other. Let’s hope the Blair/Brown era will in future be remembered as a pause for breathe between two great steps forward for the liberty and revitalisation of our country.

  13. Donitz
    Posted April 12, 2008 at 12:31 pm | Permalink

    I have always been very pro Federal Europe more akin to Ken C than John R in my view on the subject.

    This has always been for the advantages to our great countries trade as opposed to some misguided belief in social legislation. Personally, if I could enforce it I would ship all our socialists off to France.

    As our currency converges closer to the Euro it would appear to be an opportune time to join. You would think an Irish Horse Thief like myself would be overjoyed at the prospect?

    A rare occurrence has occurred. I have after much considered debate and even with reference to the many views on this excellent web site changed my mind.

    I am fast becoming a Eurosceptic!
    The arguments for are weakening rapidly.

  14. Lee Hegarty
    Posted April 13, 2008 at 5:12 pm | Permalink

    Your ( and many others) initial views and concerns on single currency are being vindicated. Skepticism towards its economic viabilty and the questionable motivation behind a single currency is definitely growing. Does that mean we can now look forward to a higher profile definitive stance on Europe and the single currency from the party. This is undoubtedly one of those issues which addressed correctly could revitalise the right wing and reengage the centre ground of British politics.
    Reply: As I understand it the party as a whole is against the Euro in principle and would never recommend entry.

  15. Lee Hegarty
    Posted April 13, 2008 at 7:42 pm | Permalink

    Sorry, my question was misleading. I am aware of the party line on the Euro but what I had intended to request was higher profile definitive stances on Europe and referendums. I wholeheartedly endorse Mr Redwood's views on Europe and I feel it could be a popular vote winning stance. Europe is seen by many, especially in the left wing media to have destroyed Thatcher and Major and thus be a Tory weakness. This coupled with accusations of Mr Cameron being more about style than substance means to me it would be the perfect issue to rebuff those detractors with.

    Reply: I agree it was not so-called "Tory divisions on Europe" which put the Tories out of power, but too much European enthusiasm in the form of joining the ERM.
    I do favour explaining more which powers we wish to repatriate, and how we want a different kind of relationship with the continent, as we cannot volunteer for their political union.

  16. Freeborn John
    Posted April 15, 2008 at 9:36 pm | Permalink

    I’ve been reading your book ‘Stars and Strife’ and am rather disappointed with the list of reasons for why we cannot leave the EU. At the time of writing you hoped that the UK would be able to negotiate for the return of some powers and for a UK-NAFTA free trade agreement, in return for allowing other European states to integrate further. But surely the Lisbon treaty with its ‘passerelle’ clause puts paid to that negotiating position?

    The only re-negotiation likely to succeed is one based on the credible expectation that the UK will leave the EU if negotiations fail. Yet you dismiss the threat of EU withdrawal as ‘an act designed to anger France & Germany’. Well I am pretty angry that EU Federalists are attempting to take over the UK in incremental steps while denying their intentions and nobody in Westminster seems prepared to say boo to a goose about it.

    The impression from your book is that Conservatives just want to encourage EU-sceptics to vote Conservative only to find that once elected you enter half-hearted negotiations that will achieve little-to-nothing. If Conservatives are too timid to negotiate in earnest, or are not prepared to come out and argue the case for a democratic post-EU UK, then the party of Maastricht simply deserves more time in opposition to contemplate the consequences of remaining in the emerging super-state.

    Reply: The book was written before Labour gave away substantial additional power. I have set out my thoughts on what we do now on this website. It revolves around a Conservative government negotiating the best deal it can and then the people deciding in a referendum whether they think it's good enough or not.

  17. Freeborn John
    Posted April 16, 2008 at 12:37 pm | Permalink

    p.s. I agreed with 99% of the book, so apologies are in order as my previous post was rather harsh in focusing exclusively on the 1% where I might differ. The fact that this book was written a few years ago and the events foretold have largely come to pass merely underlines its authority regarding the general drift; it is hardly your fault the Labour government has signed away some of your bargaining chips at Nice and Lisbon. Even if those treaties undermine a future negotiating position, the aims you set out for a re-negotiation still remain very valid. Indeed for me that was the most interesting section of the book.

    Hayek said that so long as conservatism is merely ‘opposition to change’ it can delay but not change the direction that other political forces wish to travel in, resulting in conservatives being dragged along a path not of their own choosing. It seems to me that you succeeded in this book in articulating a more appealing alternative to the federalist vision that could change the direction of Britain’s relationship with the EU and the wider world. I do not believe anyone else has succeeded in doing that.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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