The Ranting Kraut

19.3.2006 – 27.9.2010

Barroso: UK may join Euro soon

Posted by rantingkraut on December 1, 2008

The BBC featured an article on its front page this morning -although it didn’t stay there for long- in which Barroso was quoted as saying that senior UK politicians were warming towards Euro membership. The article contained the following priceless quote:
I know that the majority in Britain are still opposed, but there is a period of consideration under way and the people who matter in Britain are currently thinking about it,” (Source)

That is one way of saying that the majority are no longer the people who matter in Britain. Barroso also commented on the case of Denmark: “During the interview, Mr Barroso highlighted the situation in Denmark – an EU state which voted against joining the eurozone in 2000, but is now considering holding a new referendum on the single currency.” (Source)

This should be one reason to look at the exchange rates of both, Denmark and the UK. Look at figure 1 below for index values of daily rates for both the Danish Krona and Pound Sterling (the Krona exchange rate is shown in blue, the Pound in red). Clearly the Krona is a lot more stable against the euro than the Pound.

euro1

Figure 2 uses data from the Penn World Tables for the long term (average annual) rates from 1999-2004. Again, the picture is similar.

euro2

The bottom line is this: if the exchange rate does not adjust in response to international dis-equilibria something else must take the burden of adjustment. Central bank rates can no longer do this under a currency union so repercussions on variables like wage, employment and -to some extent- prices should be expected. The Danish exchange rate needed to adjust a lot less than the Pound over the last couple of years, which is why euro membership looks a lot less crazy for Denmark.

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