The Euro and the 'jam jar' test

So the rumours go, we will have an appraisal by the end of June on whether Britain has passed the famous 'five tests' set by the Chancellor of the Exchequer as a prerequisite for entry into the Euro. I would imagine that most people have quite forgotten, if they ever knew, what these five requirements are. For the record, they are in summary: whether the pound and the Euro have converged making entry safe: whether the UK economy has sufficient flexibility to deal with unexpected events once in the zone: whether entry creates better long term investment opportunities and business climate, what impact membership would have on the UK financial services industry, and whether joining would be good for employment.

These are inevitably somewhat subjective. But on most indications, Britain has passed, or is close to passing these tests. The Euro is strengthening, and the pound is much more realistically priced against it. The strength of the UK economy and its demonstrable flexibility to withstand a difficult period for the world economy gives it a robust entry platform.

But there is a test much closer to home that you or I can run. This is the 'Euros in a jar' test. Last year I went to Greece for two weeks. I've been to France twice since, and I will go to Greece again this summer. My daughter recently went to Ireland. On each occasion we have used the 'Euros in a jar' to provide currency - the same Euros. It cost us something to exchange them in the first place, but the commission on changing them back - some 1.5% - means that we simply keep them in the jar. We are, as a family, effectively trading in Euros.

Now gross that up for businesses in the UK. They face the same choice. Do they keep changing money and lose much of their trading margin in transaction costs? Increasingly they don't. They agree prices, and settle accounts in Euros. If they don't they lose out. But even if they do, they may lose out in the long term. Eventually, companies wanting to place an order will prefer the reliability of a known forward cost to their trading. In a single market, with no customs dues, that's important. The single market in Europe means that you should be able, in principle, to purchase and take delivery in Paris of a widget made in Portugal and transported across Spain, as if you had purchased it in Le Havre. Of course you can do that in France, Spain Germany or elsewhere.

But not in the UK. You don't know whether the cost of your purchase will remain the same in six months time as it is now, because exchange rates might change, let alone that you might face currency transaction costs. Eventually, if you are a prospective purchaser of UK widgets, you will decide, all other things being equal that a widget from Germany is a better prospect than one from Birmingham.

So - UK business will either settle in Euros, or we will slowly but surely, lose out. For the fact is that the Euro - despite all its critics - is a success. It is used, saved, traded and speculated in with few hitches. It is fast becoming a major world reserve currency. The fact that we are part of the single market means that our interest rates, in reality, have to stay close to the European norm and are increasingly doing so.

Being out in the cold long term seems to be a very high price to pay for the supposed 'sovereignty' of the pound, which, as I have shown, is not real now anyway. Oh, and there's the question of the Queens head on coins. The Euros in my jar have Greek, Irish French and one or two Spanish motifs on one side. The Euro value is on the other. So the Queens head would be on the British Euro.

There will no doubt be much chewing over of the 'five tests'. It is right there should be. But at heart it's a simple test - we are where we are. Do we want to be left out in the long term? Of course there are some who want to take the disastrous step of leaving the EU altogether. That is what much of their opposition to the Euro is really about. But it is the logical eventual position. In or out - which is it to be? In the rather ugly but apt US English phrase, to me, it's a 'no brainer'!

What do you think about this - email me and let me know