Ted W. Hall. “Dollarize the UK”. Wall Street Journal Op-Ed. April 11, 2006 – “The U.K. loses monetary-policy control whether it adopts the euro or the dollar. The euro’s very existence shows that even old Europe does not dispute that a unified, larger capital market is more advantageous than domestically controlled monetary policy. Moreover, the adage “when America sneezes, Europe catches a cold” is even truer of the U.K. Formalizing the existing U.S.-U.K. synchronization will only increase both governments’ ability to act in tandem to manage cyclicality. And lower labor mobility across the U.S.-U.K. border relative to that within Europe is unlikely to be a major issue because sparking across the economic power grid only occurs if the voltages on the two ends are very different (think U.S.-Mexico).
There is much at stake in the U.K.’s choice. Adoption of the dollar would eliminate exchange rate risk, improving risk-adjusted returns for all asset classes. More venture capital would stay in the U.K. (and flow to it from the U.S.), stemming brain drain and fostering a more innovation-friendly environment in the U.K. The cost disadvantage and illiquidity premium associated with participating in a $40 trillion pool (euro zone plus the U.K.) will be significant compared to participating in a 40% larger $56 trillion pool (U.S. plus the U.K.). This is especially true because the U.S. already has thriving primary and secondary markets in the broadest range of financial instruments, especially longer tenure debt and niche products. The bad news is that both sides of the Atlantic have been nonchalant to date about which way the U.K. goes. The good news is that it isn’t too late.
Like competition among computer operating systems, very few regimes will emerge as successful. Advantages from absolute scale and increasing returns created as additional participants join will define the winners. In this battle for scale, the U.K. has the enviable position of casting the $8-trillion swing vote. The euro needs it desperately. But for the U.K., the dollar may be more attractive, not least because of regulatory, legal, accounting, cultural and linguistic commonalities. The U.K. will likely find it easier to fashion a coordinated monetary policy with one compatible counterparty than with 15 countries with whom it agrees on wine but not on beef or Iraq.”
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