Pound foolishness

A British Broadcasting Corporation report in mid-May said the country’s chancellor of the exchequer, Gordon Brown, had decided the United Kingdom was “not ready” to accept the euro as its national currency.

The British government has been tight-lipped since that leak, but it appears Prime Minister Tony Blair — generally thought to be an advocate of switching to the euro — has accepted the advice of the chancellor, who is known to be skeptical about the single European currency.

Brown, in turn, is said to have accepted advice from the top Treasury economists that the “five economic tests” the government had set out as conditions to enter the single currency had not been met.

That decision — and particularly the prime minister’s acquiescence in it — marks a victory for economics over ideology. European-ness, in present-day Britain, has very nearly become a test of one’s social acceptability. If, in the bad old days of My Fair Lady, it was possible to write “An Englishman’s way of speaking immediately classifies him/The moment he speaks, he makes some other Englishman despise him,” then today, in Cool Britannia, to be skeptical about the European project is a certain mark of antediluvianism.

This attitude has always got under the skin of Blairite “New Labour” and the more Continentalist tendency in the Conservative party, for both of whom progressivism is an end and not a means. But to have hard-nosed numbers on the disadvantages the country would put itself to if it joined the single currency puts quite another complexion on Euro-skepticism.

Brown — uncharacteristically for a New Labour man — has been the one to set the burden of proof on the case for the euro, and not the case against it. And he is probably in the right.

The economists have apparently concluded that the British economy, which has a record of having a more volatile business cycle than economies on the Continent, is not yet flexible enough to succeed if a one-size-fits-all monetary policy is imposed on it. They may also have concluded that there would be a drop-off in foreign investment and a loss of jobs.

In other words, the U.K. may just be a good deal better off controlling its own monetary policy. A glance at the relative success of the largest European economies probably makes that case as clearly as it can be made.

What does this mean for the Canadian economy? When the U.S. dollar began its recent cyclical slide, the calls for a single North American currency — or put more accurately, for the adoption of the U.S. dollar as the currency here — went silent pretty quickly. Yet falling currencies are what help a country’s competitiveness.

The fact was probably that it was a bad idea then and is a bad idea still. We have mentioned before that production costs in the resource industries were pushed down by the falling currency (and the resource industries are far from being the only industries to have benefited from the weakness of the loonie over the past five years). There are benefits to be gained by a stronger currency too — not least the ability to spend money on capital improvements in any number of industrial sectors.

The important advantage lies in tailoring the country’s monetary policy to the health of the domestic economy rather than cutting the coat to suit someone else’s cloth.

Currencies are a measurement of value, not a cure for economic ills. To pretend that adopting another currency will change economic structures all for the better falls into the same class as incantations and magic wands.