UK STERLING INDEX OF MACROECONOMIC INTEGRATION

The United Kingdom is a currency union of England, Scotland, Wales, and Northern Ireland, with all nations using the Pound Sterling (£) as their currency. Although the UK monetary union is smaller than that of the Eurozone (analysis on the Eurozone can be found here), each nation and the regions within England also show offer a wide range of asymmetry in terms of macroeconomic performance. We have collated an overall index of monetary integration by comparing four fundamental categories (cycle synchronicity, competitiveness, public finances, and monetary dispersion) to assess patterns of dispersion or convergence within the UK’s monetary union. This exercise takes into account all the above mentioned four nations but further divides England into nine regions. The analysis looks at each area from the years 1999-2018 (the latest year for which regional data is available). This time frame is used because it allows for comparison with the Eurozone index, which also starts in 1999, and thus to assess convergence or divergence patterns in the aftermath of the Global Financial Crisis. A breakdown each category can be read in the table below:

The overall index of macreconomic dispersion for the UK before the crisis has mostly been below 100, thus the UK national and English regions seem to have been fairly integrated up until 2007. This is in sharp contrast with the Eurozone, where the index of dispersion more than doubled from 1999 to 2007. However, the UK was not immune to the impacts of the Global financial Crisis: the overall dispersion index rose from 98.99 in 2007 to 136.5 in 2009. The UK monetary union seems to have tackled the overall dispersion well, as the dispersion value stood at 75.8 in 2018. According to the macroeconomic indicators used in our research, the UK appears to be more integrated in 2018 than it was in 1999. There is a remarkable difference in the level of dispersions in the UK and Eurozone.

 

Sources: Office for National Statistics (GDP, GDP per capita, Public Debt Interest Payments, Net Fiscal Balance, AWE, Inflation, Real Exchange Rate), HM Revenue and Customs (Trade Balance), UK Finance (Household loans and SME lending).

Note: A higher value on the vertical axis means greater dispersion or less integration.

Convergence trends are further shown when analyzing we look into dispersion in different categories:

1) Monetary dispersion was quite stable during the pre-crisis years and shows an increase during the crisis years, reaching a peak in 2010 (to the value of 140.19). However, since 2014, there has been a decrease in dispersion and a return to pre-crisis levels.

(2) When analysing the competitiveness index and (3) business cycle dispersion, the trends are rather similar to the monetary dispersion index commented above: stability in the pre-crisis years,  an increase in dispersion in the crisis years followed by a return to pre-crisis levels (if not lower) from 2014 onwards. In any case, these levels of dispersion in the business cycle are not that large, especially in comparison to those in the Eurozone. However, like the Eurozone, the dispersion in the business cycle now in the UK is less than that in 1999 although in sharp contrast with the Eurozone, the dispersion in competitiveness is also less in the UK now than that in 1999.

(4) The remaining category, public finance, shows higher levels of dispersion during the crisis years, with an especially  sharp increase in dispersion in 2007 that eventually reached a peak in 2009 (191.65). But again, as with the other categories of dispersion, there is a return to pre-crisis levels following recovery after 2010, where the dispersion begins to fall. In 2018, it was 68.58.

 

Note: A higher value on the vertical axis means greater dispersion or less integration.

Acknowledgments: We would like to thank the IIMR research assistants for their contribution to the update of the datasets needed to build up our indices; in particular, Shivani Pradhan, Ibrahim Hakim and Alessandro Venieri.

Authorship and how to quote: This is an IIMR project coordinated by Dr Juan Castaneda and based on his research with Professor Pedro Schwartz on this topic:

  • ‘How Functional is the Eurozone? An Index of European Economic Integration Through the Single Currency’. October 2017. Economic Affairs 37 (3).
  • ‘An optimality index of the single currency: internal asymmetries within the eurozone since 1999’. In Castaneda, Roselli and Wood (eds.): The Economics of Monetary Unions. Past Experiences and the Eurozone. Chapter 7. 2020. Routledge.