British Monetary Policy vis--vis Euro-Zone Essay

British Monetary Policy vis--vis Euro-Zone - Essay Example In the 19th century peak British currency was actually defined in terms of gold. Giving up the precious metal link after 1945 relaxed the constraint on monetary policy and the floating sterling exchange rate that followed provided even less discipline. With the discarding of any precious metal support, dependence in sterling and monetary policy after the Second World War was reflected in the foreign exchange value, which fell from $4.03 to $1.70 by 1976, while inflation climaxed at an annual rate of 26.9%. Different tactics to create monetary stability have been tried since 1945, including shadow the Deutschmark and monetary targeting. Paradoxically one of the greater political dishonours for sterling, being forced out of the European Exchange Rate Mechanism in 1992, marked the beginning of the present union of the British economy to a stable non-inflationary growth path. The turn around in post war British economic policy began with Margaret Thatcher's government, elected in 1979. In addition to a series of monetary policy experiments, a variety of structural reforms in the economy were begun, including privatisation and steps to increase labour market flexibility. Inflation receded along with unemployment and economic development resumed. Election of the 'New Labour' government of 1997 saw no break in the principles of national economic management. It created an independent Monetary Policy Committee instructed to follow a uniform inflation rule and to report their deliberations. These arrangements eventually are usually judged to provide best practice monetary policy. For example synchronization between independent monetary and fiscal policies is far easier for Britain under the present arrangements than for Euro-zone with its many national taxing and spending policies. Not only is the monetary policy strategy and inflation target of the European Central Bank (ECB) censured for being poor and possibly damaging to the ECB's credibility. For the better management of the nation's finances the Chancellor of the Exchequer introduced the long belated distinction between capital and current account spending. Borrowing to improve the nation's useful capital was acceptable, as was temporary borrowing to stabilise the economy in the face of shocks. To ensure government debt increases were restricted to these two purposes, he accepted two obligations on government policy; that existing account spending should balance tax receipts over the cycle and that the government debt to national income ratio should not exceed 40 %. These improvements in the British macroeconomic management structure are important and definitely superior to the present equivalent institutions of the euro-zone, the European Central Bank and the Growth and Stability Pact. The government now needs to make comparable progress in the fields of the health service, education and transport, about which there is general displeasure among the electorate. In these services there is much to be learned from other European countries nevertheless joining the euro and possible resulting closer political integration with Europe do not guarantee to deal with British concerns. European Integration What Britain has in fact wanted from the rest of Europe is simply free trade, not imported institutions intended to manage continental problems.