Something at the ASI. Before (if ever) we join the euro we’ll need to change the mortgage market.
Timmy Elsewhere
6 responses
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Tim – this is hardly a new argument. Gordon Brown mentioned it in his original 1997 statement on the euro, and commissioned a study which found that it was an issue, and suggested reforms.
http://news.bbc.co.uk/1/hi/business/2976252.stm -
It might be a misplaced too, as the euro lending rate has hardly been volatile.
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Fixed rate re-financeable morgages and the bonds that fund them are the key to american consumer stability (as well as helping solve the pension funding problems).The UK boom bust is largely down to our floating rate system and cutting rates was the real driver behind Brown’s first term economic success – interest rates acted like tax cuts. MOnetary policy is also at least a part of the “secret” of the growth in Spain and Irealnd, the general public can borrow at negative real rates.
Unfortunately Brown’s study was de-railed by the vested interests in UK mortgage lending (effectively our currnt system leaves us rather than the banks with the volatility risk). -
Curiously, according to this Guardian report from September 1999, a whole phalanx of trade union barons were scrambling for the rostrum to urge Blair’s government to sign us up to join the Euro asap:
http://www.guardian.co.uk/tuc/Story/0,,202055,00.html
“Of the big unions, none opposed joining the euro in principle and only Unison and the Transport and General Workers’ Union expressed doubts about accelerating the convergence process – effectively voicing the government’s own arguments, and those of the chancellor, Gordon Brown, in particular.”
Evidently, most trade union leaders weren’t too impressed by any previous HMT reservations that joining the Euro would create turmoil in Britain’s housing market. As I recall it from those times, John Monks and John Edmonds were running round giving interviews saying mortgage payers would benefit from the convergence with the lower interest rates in the Eurozone – without going on to consider on what that would do for house prices in Britain.
“House prices across the UK rose by an average of 9.9% in the course of 2006, according to the Halifax bank.”
http://news.bbc.co.uk/1/hi/business/6233339.stm
“In 1995 the average UK house price was £50,930. By the end of 2005 they had more than trebled to a staggering £158,745. That’s an increase of 211%. During this time average wages have failed to keep pace rising only 54% leaving house prices more unaffordable than they have ever been.”
http://www.bbc.co.uk/dna/actionnetwork/A13023190
Walter Eltis, sometime chief economic adviser in the DTI to Michael Heseltine in the early 1990s, is very clear in his book about the inhibiting factors for Britain to consider joining the Eurozone: Britain, Europe and EMU (Palgrave, 2000) chp.9. The huge problem is divergent rates of convergence among the economies of EU countries which means that loss of national autonomy in setting monetary policy instruments, such as interest rates, to address national conditions – an inevitable consequence of joining a monetary union – could make it politically painful to maintain national economic stability. Quoting Eltis:
“An independant committee . . reported in May 1997 that: ‘Simulations on macroeconomic models run by national central banks suggest that, for the UK, the impact of an interest rate change on domestic demand after two years is four times the EU average.’” [p.186] -
62% of UK mortgages are fixed rate these days.
Tim adds: Very good D2. For what, 2 years? Five? None for 25 or 30 though, eh? -
Several reports in the news suggest that the European Central Bank (ECB) is inclining to revert to monetarist tendencies. For example:
“Broad money supply growth M3 – a mix of cash, short-term bank deposits and money market instruments – which is an indicator that is more closely watched by the ECB than other central banks, and last Friday, it was reported that the annual rate of growth of M3 increased to 9.3% in November 2006, from 8.5% in October 2006. The three-month average of the annual growth rates of M3 over the period September 2006 – November 2006 rose to 8.8%, from 8.4% in the period August 2006 – October 2006.”
Seems the French are going through a phase of scepticism about the single currency and are now mourning their loss of national monetary autonomy with reports of a poll showing a majority of French respondents as regretting joining the Eurozone. And I really enjoyed these latest interventions from leading French politicians:
“In December France’s Prime Minister Dominique de Villepin urged Europe’s politicians to reassert control over their national economies and to restrict the powers of the ECB. Ségolène Royal, socialist candidate for the [French] presidential elections in May, has gone even further, accusing ECB president Jean-Claude Trichet of usurping democratic authority. ‘It’s not for Mr Trichet to dictate the future of our economies: it’s a matter for our leaders chosen by the people. We must completely change the charter of the central bank,’ she said.”
http://www.finfacts.com/irelandbusinessnews/publish/article_10008531.shtml
A European Central Bank running the monetary policy of the Eurozone according to political diktats? What will Gordon Brown say about that after setting the Bank of England free of political interference and charging it to target the inflation rate?
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