EUphobic myths destroyed with data

Archbishop Cranmer, although a dab hand at being burned alive, is a relative newcomer to UK blogging. He must be good, as he’s been namechecked in the Sharpener’s New Blood Roundup – although he’s perhaps a little extremist and religious for my taste.

However, one Cranmer post is so monumentally weird I felt the need to tackle it head-on, not for its ideological slant (arguing against faith-based positions is among the most futile tasks known to humanity) but for its relationship with fact – and also because it gave me a chance to use economic data to address a couple of bizarre EUphobic myths.

Cranmer’s post is titled As Sterling soars, is the Euro the root of all evil?; you can get a flavour of it here:

It seems that much of the world is finding once again a confidence in Sterling, even as Her Majesty’s Government reiterates its intention to ditch the currency and adopt the Euro as soon as it can engineer a referendum victory. Other countries have been buying Pounds at the expense of the Euro, proving utterly wrong those who predicted that if Britain did not join the Euro that the consequences would be disastrous – economically and politically.

This isn’t quite right. Below is a chart showing sterling’s performance against the Euro since January 2002, when the paper currency was first introduced (I could have gone back further: the Euro has effectively been in use in the Eurozone since January 1999 when paper money in local currency became equivalent to Euro money instead of convertible. However, this wouldn’t have added anything useful or relevant):

The chart shows how many Euros you can buy using a pound – so higher values mean the pound is “doing well” and lower values mean the pound is “doing badly” (in very crude terms, which are often inaccurate or meaningless). As you can see, there is no clear trend for anyone to buy pounds at the expense of the Euro.

In the long term, the trend runs the other way – partly reflecting the fact that many pontificators at the time of the currency’s launch thought it would rapidly fail (amusingly, many of the same pontificators still maintain this, despite total lack of evidence – “they have suffered huge rises in just about everything and now face the prospect of ‘when’ not ‘if’ the Euro will fail”, says one such pontificator in the Archbishop’s comment section).

In the shorter term, there is no clear trend either way – the rate has remained remarkably static since the end of 2004. There is a slight spike in July to early August 2006, but it’s immediately followed by a dip; it would be grossly irresponsible for anyone to interpret this data as suggesting a continuing upward trend in the exchange rate. Especially as the spike has an obvious explanation in fiscal policy rather than economic performance: UK interest rates rose on August 3, increasing the relative return on investments held in pounds – and this kicked off the biggest growth spurt (the pound rose from 1.46 Euros on August 2 to 1.48 Euros on August 6).

Overall, there is no justification for the belief that people are choosing to hold pounds rather than Euros. There is no evidence whatsoever that the Euro is going to fall apart, or even that any countries are likely to pull out of the currency union: instead, Slovenia will join in January 2007, with Lithuania and Estonia not far behind.

There is some evidence that the loss of monetary flexibility in mainland Europe (meaning that the Irish can’t dampen their economy by raising interest rates if they fear inflation, and the Germans can’t stimulate their economy by cutting interest rates if they fear unemployment) has exacerbated economic problems.

Even this is far from clear-cut, given the lack of consensus among mainstream economists on whether monetary policy is even effective, and even if the effect could be demonstrated it would not necessarily outweigh the reduction in transaction costs brought about by the Euro’s introduction.

As a side note, there is also next to no evidence of rising prices in Eurozone countries following Euro introduction. In Germany, the largest Eurozone economy, inflation was lower in 2002 than in previous years at just 1.3%. The scare stories are just that: the chart below shows that every Eurozone country except Spain and France actually saw falling inflation in 2002, and the Spanish and French rises were both small:

Feel free to oppose Britain’s entry into the Euro because you think it will tie us even more tightly into the evil EU, or because you think it will erode our national identity, or because you don’t like the idea of having to rebuild your intuitive sense of “that’s reasonable” when thinking about prices, or because you think the lack of monetary flexibility will have significant negative effects on the economy. But please base your decision on these, rather than on spurious nonsense.