Pounds vs. Euros: A Rose By Any Other Name

December 7, 2001

Sacramento - We've written quite a bit over the last year about the problems the British pound sterling is causing automakers with manufacturing operations in the U.K., and we have reported at length about operations that have been shutdown and new plants that have been threatened because of the high value of the pound against the euro. As is usually the case, there may be another side to this story.

A study carried out by Marcel Asloos at Belgium's University of Liege and Kristinka Ivanova of Penn State University indicates that the pound is a euro in all but name.

The two measured fluctuations between the euro and the pound since the euro was established on January 1, 1999 and they even went beyond that comparing fluctuations with the "false euro" using a weighted sum of the exchange rates of 11 European countries going back to January 1993. The pair of researchers found that despite daily changes in their respective exchange rates and different interest rates, the euro and the pound have been behaving in exactly the same way. The study, they claim, shows the pound is already part of the euro, admitting that it confounds conventional wisdom that says the pound sterling is more closely linked with the dollar.

Interestingly, their findings are similar to a report on the British economy recently released by the OECD (Organization for Economic Cooperation and Development). That report concluded that the pound traded more in line with the euro than the dollar.

What all of this means, or could mean, is that the bantering going on about Britain being forced to join the euro may be just that, bantering. Ausloos and Ivanova say the fluctuations in the pound-euro rate show that market traders already treat the currencies and their respective economies as indistinguishable.

The full research report will be published in Saturday's issue of the New Scientist, a British weekly.