How and why Britain might join the single currency: The role of policy failure

ABSTRACT

Why has Britain declined to adopt the single currency? The conventional view holds that there are multiple political and economic barriers to British entry into monetary union–large fractions of public opinion, business leaders, and the Conservative party oppose entry; Britain's economic cycle is not synchronized with that of the euro-zone; adoption of the single currency would harm foreign trade and investment; British political institutions make it difficult to muster support for such a move, and so on. I argue that policy failure is a more important influence on British economic policy. Major changes occur when extant policy fails and there exists an alternative policy idea that both explains this failure persuasively and prescribes a new and more effective way forward. A British government might advocate euro membership if the current framework for policy in Britain—central bank independence with a floating exchange rate—fails, and policies pursued by the European Central Bank address the source of this failure. This combination would also lead many politicians, business leaders, and voters to see the advantages of euro membership.

KEYWORDS:

• Policy failure
• Policy change
• Euro
• Monetary policy

Notes

1. The key early papers are Kyland and Prescott (1977) and Barro and Gordon (1983).

2. The scholarly literature on each of these alternatives is enormous. A good introduction is (Bernhard et al., 2002).

3. McNamara (1998) and Moravcsik (1998) both reach this conclusion, which is consistent with the focus on things such as partisanship, government cohesion, and electoral timing much of the comparative research on the determinants of macroeconomic policy. Others, such as Hall (1993) and Henning (1994), argue that the interests and influence of narrower interest groups depends largely on the institutional context. In the case considered here, this institutional context tends to minimize the importance of producer groups and other interest groups for the determination of macroeconomic policy for the reasons mentioned in the text.

4. Keegan (1989: 157), Riddell (1991: 18–22), Smith (1987: 90), and interviews with former minister and former director of the Bank of England.