The UK is the Eurozone’s Dumping Ground

Abstract

The European Union is dumping its goods on world markets, especially in the UK, because the euro is a structurally undervalued currency. First, the euro is an ‘incomplete’ currency. Unlike every other currency, there is no single sovereign standing behind it. Each member state of the Eurozone is ‘sub-sovereign’, since it stands behind the euro only to a certain percentage and, collectively, the member states do not share joint-and-several liability. Second, the euro is an artificially ‘constructed’ currency, as a consequence of the fixed rates used when it was introduced in 1999 to convert the domestic currencies of EZ members into euros. This affected not only the internal ex-change rates between the EZ members, but also the international value of the euro. The net result has been a down-ward bias in the international trading value of the euro, with the inefficient southern member states dragging down the value of the euro relative to what it would be if all member states were as efficient as Germany and the Netherlands.

The euro is undervalued against sterling on a purchasing power parity (PPP) basis by between 15.2% and 20%. As a consequence, the UK has almost always run a trade deficit with the EU over the period after the introduction of the euro. In 2019, the UK ratio of exports to imports with the EU was only 79%. While the UK maintains the close eco-nomic ties with the EU that the EU wants, the UK will remain a captive market for EZ member goods. Had the euro been correctly valued, then EZ exports to the UK in 2018 would have been lower by between £67.2bn and £88.4bn. The UK would therefore be entitled to impose an annual anti-dumping duty on the EZ in the range £67.2bn – £88.4bn.

Ursula von der Leyen says the EU is ‘ready to design a new partnership with zero tariffs, zero quotas, zero dumping’ with the UK. It is quite remarkable that the new German president of the European Commission calls for zero dumping, when her own country is one of the world’s biggest dumpers of goods onto world markets.

The EU is following a classic 'beggar thy neighbour' strategy with its trading partners, in particular the UK, by exploiting the euro’s structural undervaluation.

Keywords: Euro, Purchasing Power Parity, Dumping

JEL Classification: F31, F33, F51