Paul Podolsky, chief foreign exchange strategist for Fleet Boston Financial in the US, says that joining the euro wouldn’t bring the UK any identifiable benefits. “The UK is outperforming Germany and has a 3% unemployment rate compared to the 9% European average,” he says.
Podolsky also believes the UK’s currency is immaterial to securing inward investment. “Currency is not the compelling reason for a company to go into a country. Investors won’t be scared off by the fact that the UK is not with the euro. This is the weakest argument on Tony Blair’s part,” he says.
According to the New York-based British Trade Office, many of the 5,600 US companies with operations in the UK have their European headquarters in the UK. One such is US services giant EDS. Jean-Louis Bravard, MD for financial services in EMEA, says EDS has many reasons to keep its headquarters in the UK – but that if the UK joined the euro club it would help the company.
“It’s easier for cross-border services because we don’t need to engineer large transactions or do hedging if there is a single currency,” says Bravard. “We’ll always deal with more than one currency but instead of dealing with ten we’re now dealing with three. It is a lot easier to look at the budget. But, whether or not the UK joins, industry is definitely positioning itself to be compatible.”
Matt Higgins, a senior international economist for Merrill Lynch in the US, says that, at a recent lunch in London, he found that for every person in favour of euro adoption, there were eight people in the room who wanted to keep the pound. Yet the same majority were convinced the UK will drop the pound.
“International companies don’t think the fact the UK hasn’t joined is an impediment,” he says. “Where you locate has bigger considerations than the currency of the country. Manufacturers are hit by a strong pound and if the euro weakens it will drag down the IBMs of this world but this is not front-page news here.”
Higgins also feels the euro is weaker than the pound and the UK has been performing better than the euro countries. “On the day the world thinks the UK will definitely join, the reaction will create a stronger euro and a weaker pound,” he says.
Using the international options market as a yardstick, Rebecca Patterson, US-based VP of foreign exchange strategies at JPMorgan Chase, forecasts Sweden and Denmark will join the euro before the UK. Unless the UK is heavily influenced by them, she predicts it will still have the pound in 2005.
“The price of an option depends on whether investors are betting if a currency is stable or volatile and in which direction it will go,” she says. “If the UK were to join, sterling would depreciate so investors would bet downwards in long-dated options.” But this is not happening.
Patterson also notes that, although on paper the UK will base its decision on five economic tests, “in practice, we believe these tests will be subjective and the decision will be political as much as economic”.
The UK’s gross domestic product is expected to grow 2.2% in 2002, compared to an estimated 0.8% GDP growth in the eurozone. “As long as UK growth outpaces Europe why should UK voters want to give up sterling?” asks Patterson.
Since 1998 the level of sterling-dollar trading has increased, while trading of the euro against the dollar has decreased slightly. Patterson says: “The UK doesn’t want to be marginalised. This has not happened and it is unlikely to happen because investors want to diversify.”
Lisa Finstrom, a US-based currency analyst for Salomon Smith Barney, says: “The US looks to the UK with admiration because it has emerged well from the downturn. The eurozone is not as flexible as the UK or the US, and flexibility is needed most in difficult times.” However she argues that the euro’s “credibility problem” is a question of who’s talking.
“The eurozone has had some success in curbing inflation. Now the world is waiting for a sign of successful integration of policies. It’s still early days,” she says.
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