Euro decision: a guide to the jobs test

With the Treasuryís assessment of its five tests for possible UK membership of the single European currency due to be published on June 9th, HR professionals are particularly interested in what the Governmentís decision on joining or standing aside from the euro will mean for jobs.

To aid interpretation of the published economic assessment, and the debate that will inevitably follow the Governmentís political decision on whether to hold a euro referendum, John Philpott, Chief Economist at the Chartered Institute of Personnel and Development (CIPD) has today issued an eight point guide to the euro jobs test:

1. Long-run effect on jobs: joining the euro would affect the way in which aggregate level demand is managed in the UK economy in order to maintain stability and keep inflation in check. Whilst this can have important short-run effects on jobs, there is no long-run trade-off between inflation and the number of jobs the economy can sustain, which depends on the workings of the labour market and the wider supply side of the economy. Membership of the euro is thus unlikely to have any long-run effect on UK jobs.

2. Key considerations: jobs nonetheless enter the euro assessment in a number of important ways. These relate to: (1) economic convergence between the UK and the eurozone economies (2) whether there is sufficient flexibility in the UK and EU economies and/or adequate fiscal policy adjustment mechanisms to cope with economic shocks (3) the value of the pound on entry to the euro (4) the conduct of monetary policy by the European Central Bank (5) the impact of failure to join the euro on inward investment (6) and possible indirect effects of euro membership on UK jobs as a result of increased ëred tapeí from Brussels.

3. Convergence: cyclical divergence between the UK and the rest of the eurozone raises the possibility that the ECB would set interest rates either too high or too low at any particular point in the economic cycle - increasing the risk of unstable periods of ëboom and bustí. Linking the issue of convergence to that of jobs suggests a potential risk to UK job stability from entry to the euro, although it is likely that entry would itself promote sustainable convergence over time.

4. Shocks and flexibility: of crucial importance to job stability is whether, having joined the euro, the UK economy could deal effectively with isolated shocks to the system (i.e. shocks that affect the UK but not other eurozone economies). However, a proper assessment of this aspect of euro membership requires not only evidence on whether the UK labour market is flexible enough to respond to isolated shocks - which forms the basis of one of the Treasuryís five tests - but also on whether such shocks are likely to prove a greater threat to UK job stability than the exchange rate volatility which affects the UK outside the eurozone.

What is clear is that joining the euro would raise important questions about the role of domestic fiscal policy as a tool of macroeconomic management, as well as about the adequacy of cross-border fiscal transfers within the eurozone. With regard to fiscal adjustment it is obvious that the Stability and Growth pact should be more responsive to the state of the economic cycle as experienced by individual euro members, which explains why reform is on the agenda. Entering the euro with the pact in its current form would pose a potential risk to job stability in the UK, though failure to join seriously limits the scope for the UK to influence the reform agenda.

5. Strength of pound: Although not strictly part of the Treasuryís five tests, the relative strength of the pound on entry to the euro would be a major determinant of how easily the UK could adjust to life in the eurozone, with evident implications for job stability. Recent currency movements have seen the pound/euro parity fall to within the comfort zone for easy adjustment. However, this in itself only provides a case for early membership of the euro if the convergence and flexibility criteria also support safe entry.

6. ECB monetary policy :aside from the issue of whether the ECB would be able to set an interest rate suitable for the UK viz-a-viz other eurozone members, is that of the ECBís overall conduct of monetary policy. This could prove detrimental to UK job stability if the ECB conducts policy that is too deflationary for the eurozone as a whole. There are at present serious question marks hanging over the ECB on this score. A favourable assessment of the euro jobs test would thus have to assume reform of the ECB, requiring it to both adopt a sensible symmetrical inflation target and operate in as accountable a manner as possible, perhaps akin to the UKís Monetary Policy Committee.

7. Failure to join and inward investment: fears that failure to join the euro will hurt jobs by curtailing inward investment need to be assessed with care. There are already signs that inward investment to the UK has been falling since the birth of the euro and looks set to fall further the longer the UK remains outside the eurozone. However, the impact of this will ultimately show up in lower productivity and living standards than would otherwise be enjoyed, rather than jobs. The labour market will over time adjust to any loss of jobs resulting from lower inward investment, with alternative jobs being created. But the economy overall will suffer because inward investment generally introduces state-of-the art plant and machinery, up-to-date management techniques, and higher skilled, higher wage jobs.

8. Employment regulation: it is sometimes suggested that entry to the euro would have an indirect effect on UK jobs by encouraging moves toward tougher EU-wide employment regulation. This fear seems exaggerated. Having signed the Social Chapter, the UK is affected by EU employment regulation inside or outside the eurozone. Moreover, the effect on jobs of such regulation is anyway less clear-cut than often suggested, while the political momentum within the EU is gradually moving in the direction of reform designed to cut high rates of structural unemployment. UK membership of the euro is therefore unlikely to result in an increased flow of ëBrussels red tapeí, and might in fact strengthen the efforts of the UK to promote reform through the ongoing Lisbon process.

In issuing the guide, Dr Philpott commented:
ìThe long-run consequences of the UKís decision to either join or stand aside from the euro will mainly show up in productivity and living standards, rather than jobs. The Treasuryís ëjobs testí is therefore really a test of whether euro membership will make UK growth and employment more or less stable.

ìThe Governmentís decision on a euro referendum will be based as much, if not more, on political rather than economic considerations. In practice, however, it is difficult to separate the economics from the politics on this important issue since euro membership will clearly affect the UKís relationships with its EU partners. Perhaps the ultimate jobs test facing the Government is that of whether efforts to promote a prosperous full employment UK, and a full employment Europe, are likely to prove more successful inside or outside the eurozone. ì