The UK versus the Eurozone
Article Date: Jun 10 2009
Mahamed Djeddour, senior fellow at Manchester Business School
Mahamed Djeddour, senior fellow in strategy and international business at Manchester Business School, looks at the UK’s competitive positioning within Europe.
The depreciation in the pound against the euro (and to a greater extent against the dollar) is actually a long-term correction in exchange rates. Previously, there was a perception in the market that the UK’s economy had extra potential due to its specialism in the financial services sector – a belief that has clearly been shaken.
As an economy, the UK is very reliant on borrowing, which is one of the reasons behind the pound’s volatility. Around 98 per cent of our GDP is spent on consumption and investment, while for the rest of Europe the average is about 85 per cent.
The crisis has affected European countries in different ways, but the UK economy has been hit more severely than the European average (though not as badly as Germany).
In terms of whether we should join the single currency, we’re probably better out than in because it allows us to set our own monetary policy. If interest rates change by a couple of per cent in France or Germany it tends to affect corporations, but not the household sector so much, as people tend to have mortgages on 15-year fixed rates. In the UK, rate changes have more effect on people’s disposable income, thus affecting the general economy.
If economic theory is correct, then we will come out of the recession sooner than the rest of Europe because of the stimulus packages we have received. But in the long term, we probably won’t return to the levels of growth that we’ve seen for the last 15 years because so much of it relied on the financial services sector.
