Not Regretting the Pound
It has been interesting to watch the pendulum of opinion on the benefits of eurozone membership swing back and forth during the financial crisis and recession. For every country who ends up wishing they were on the euro (Iceland), there are a few who probably wish they weren't. For a time, it looked like the crisis might push Britain toward adoption of the euro, but now that outcome isn't at all clear. As Paul Krugman writes today, the 1.9% quarter-on-quarter decline in British output in the first quarter of 2009 is bad, especially since the government seems to have determined that it's done all the fiscal stimulating it can do. Luckily, Britain still has an independent monetary policy:
Britain has, despite worries about its budget, managed to cut rates significantly vis-a-vis the core eurozone countries (0.6 percent on long term rates is fairly big.) In addition, the fall in the pound has made British products a lot more competitive.
I think the Spanish comparison is instructive. Like Britain, it's had a major housing bust. But Spain has basically had nothing happen to offset that shock.
So I'm actually fairly hopeful about Britain; right now, the fact that it's not on the euro is serving it well.
Unfortunately for Spain, Jean-Claude Trichet has his finger on the monetary policy trigger, and he's a well behind Britain, America, and indeed most everyone else on the monetary expansion curve. But at least his decisions are appropriate for the state of the German economy, right?
Germany's economy will shrink by 6% this year and continue to contract in 2010 according to a forecast from the country's leading economic think tanks.
The estimates, compiled by eight institutes for the German Economy Ministry, also predicts that the rate of unemployment will hit 10% next year.
And of course, Germany has the budget room to do more in the way of fiscal stimulus, but has proven extremely reluctant to follow such a course. If only there were a German econoblogosphere to apply pressure on policymakers!Related Links
Sign of a Bottom?
Worst of Times
When Monetary Policy Is Fiscal Policy