Are EUR and GBP different words for the same currency?

The British Pound (GBP ) is not part of the Euro (EUR) monetary system. In order to find out arguments on whether GBP should join the EUR or not correlations are calculated between GBP exchange rates with respect to various currencies: USD, JPY , CHF , DKK, the currencies forming EUR and a reconstructed EUR for the time interval from 1993 till June 30, 2000. The distribution of fluctuations of the exchange rates is Gaussian for the central part of the distribution, but has fat tails for the large size fluctuations. Within the Detrended Fluctuation Analysis (DFA) statistical method the power law behavior describing the root-mean-square deviation from a linear trend of the exchange rate fluctuations is obtained as a function of time for the time interval of interest. The time-dependent exponent evolution of the exchange rate fluctuations is given. Statistical considerations imply that the GBP is already behaving as a true EUR. PACS. 05.45.Tp Time series analysis – 05.45.Gg Control of chaos, applications of chaos – 74.40.+k Fluctuations (noise, chaos, nonequilibrium superconductivity, localization, etc.) – 95.10.Fh Chaotic dynamics 1 Historical introduction This paper, even though it can be considered as somewhat politically motivated and only timely pertinent, is essentially a practical study in econophysics. It develops previous considerations [1,2], and subsequent comments [3,4]. It is based on questions on e.g. how inspired marketing may be needed to get the British to accept the Euro [5]. The British public seems hostile. Between a Mori poll a couple of years ago, and one in November 2000, the no’s climbed from 56% to 71%. Thus pedestrian considerations, like when these authors travel from country to country exchanging currencies for registering at meetings, or buying books are in order. The paper is also timely because the Prime Minister T. Blair in early February 2001 said that he would call for a referendum on joining the Euro within two years of a Labour party election victory. The conditions are well known [6]. The big problem for the Euro camp is the emotional argument (abolishing the sterling). It is very difficult to sell advantages through rational arguments. It seems that the people are shouting for a football team, and the business elite wish to surrender sovereignty, says Mr. Byrne, chief executive of Weber Shandwick Public Affairs, as quoted by Tomkins [5]. To argue in favor of the Euro might be a hard task, but it is simply true that the Britons will use the Euro, whatever their taste, in 2005, whether they a e-mail: [email protected] like it or not. Mr. Draper, as quoted by Tomkins in reference [5] considers that it has to be emphasized that it makes no difference if all pounds turned into Euro [5]. It is just another name for money. This paper shows just that from a currency exchange point of view. The paper does not contain any analysis nor criticism of rational or not arguments toward a possible growth policy, whatever that means, nor about how to make Britain more productive [7], because of exchange rate control [8]. Of course, from a financial and monetary policy, one can wonder what governments should do. In 1961 Mundell [10] asked whether it is advantageous to relinquish monetary sovereignty in favor of a common currency? For fixed exchange rates, the central banks must intervene on the currency market in order to satisfy the public demand for foreign currency at this exchange rate. As a result, the central banks loose some control of the money supply which adjusts itself to the domestic liquidity. To implement independent national monetary policy by means of so-called open market operations becomes rather futile [8]: neither the interest rate nor the exchange rate can be affected. The more so when the Central Bank is independent, e.g. as wished [7] by the New Labour when it came to power in 1997 and when instituting a new long term monetary and fiscal discipline. Sometimes it is thought that UK is more vulnerable inside euro [9]. A currency union as early as 1960 with fixed exchange rates existed within the so-called Bretton Woods System. International capital movements were highly curtailed, in 240 The European Physical Journal B particular by extensive capital and exchange rate controls. It was noticed that due to high capital mobility in the world economy, such regimes with a temporarily fixed, but adjustable, exchange rate were not robust. Whence several governments have some fear about joining a system like EUR. Often psychological or demagogic arguments are more relevant to the public than real economic ones, – see the case of Denmark. The Blair Government supports the principle of joining the single currency, if that is in the national economic interest but considers not to be ready yet. Can the exchange rates serve as arguments? We have searched for statistical correlations between various currencies, e.g. USD, JPY , CHF , DKK, EUR and GBP exchange rate fluctuations, in order to obtain some at least numerical argument. Hereby one of the questions raised is how the GBP has fluctuated with respect to a false EUR, made of an equally weighted linear superposition of the 11 currencies forming EUR, and how GBP/EUR, GBP/USD, etc. fluctuates since Jan. 01, 1999. Essentially it has been first searched whether the fluctuations did change after the formal introduction of EUR. Next it has been observed whether there is an a posteriori mathematical evidence for fluctuation correlations between GBP , EUR and the still presently national currencies. The considered time interval is Jan. 01, 1993 to June 30, 2000. The Detrended Fluctuation Analysis (DFA) is used [11]. The α exponent characterizing the power law over the longest possible scaling range pertaining to this study is obtained. The analysis differs from that of Brooks and Hinich [12] who used a nonlinear Granger causality test for the GBP exchange rates over 20 years (1974–1994). The technique can, as shown by Renault et al. [13], sometimes lead to spurious causalities. Thus we use a time dependent DFA [14], in order to obtain a so-called correlation matrix when eliminating the time as a series parameter. The data is summarized through the mean, the variance and the median of the local α exponents. Some financial policy statement and other considerations arising from our observations serve as conclusions. 2 Experimental data The conversion rates of the EUR participating countries were fixed [6] by political agreement based on the bilateral market rates of December 31, 1998. Using these rates [15], one Euro (EUR) can be represented [16–18] as a weighted sum of the eleven currencies Ci, i = 1, 10: