Tuesday, 17 May 2011
Eurozone; in or out?
So, with the latest data from the ONS suggesting that the CPI in the UK has increased to 4.5% having fallen back to 4.0% in the previous month, some observers are beginning to wonder whether we would be better off 'in' the Eurozone rather than 'out' at this stage. With some observing wryly that the biggest advantage of staying out of the zone is the maintenance of monetary independence, many are beginning to ask whether the price of this independence is worth paying or whether the independence is over-rated anyway. Indeed, I would suggest that there is little point in having monetary independence unless we are prepared to put it to good use. When was the last time the MPC raised interest rates in response to increased inflationary pressure? Earlier in the term many in the upper sixth argued against joining the Euro on the basis of ECB policy being too much of a 'one size fits all' policy. I wonder if they would say the same today? What are your thoughts?
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(I deleted my previous comment to correct spelling errors)
ReplyDeleteI still think that the one size fits all policy is not specific enough to target each country's individual economic issues. I believe that it is time the Monetary Policy Committee takes action and increase interest rates in an attempt to increase the incentive to save. This will obviously reduce consumption and therefore aggregate demand. As a result the price level will fall.
There are a couple of concerns associated with this course of action. One of which is the issue that the level of inflation could decrease too far, bypassing the desired target of 2.0. The second would be a possible double-dip, as currently I don’t think we’re in the clear, in terms of this threat. So a significant reduction AD could be the last thing we need.
These could be the reasons why the MPC is yet to act. However i agree that if they don't, there is little to no point having the independence that we seem to desire.