Few British cheers for euro amid crisis

By Paul Taylor
December 1, 2008

paul-taylorPaul Taylor is a Reuters columnist. The opinions expressed are his own.

The financial crisis has rallied support for euro adoption in many European countries outside the currency bloc, yet in Britain the discussion is so far confined to a few voices among the policy elite.

The politics of the issue remain as fraught as ever, and Britons appear no more willing to lose monetary sovereignty in a recession than they were in the boom years.

For most of the last decade, as the flexible, finance-driven British economy was roaring ahead of its sluggish continental cousins, the economic and political case for joining the single European currency was hard to make.

A Eurosceptical tabloid press helped scare former Prime Minister Tony Blair out of his initial intention to lead Britain into the euro. The 2003 Iraq war drained the political capital he would have needed to win public support.

But now that Britain faces the deepest recession of any major economy next year, arguments for keeping the pound have become harder to defend.

“The crisis has taken the hubris out of the debate. It’s now possible to mention the euro again in British politics without getting a complete ‘No’,” said Lord Wallace of Saltire, European affairs spokesman of the pro-EU Liberal Democrats.

The City of London financial district has been humbled by bank crashes, government bail-outs and a vicious credit squeeze. The housing market is collapsing and the pound has fallen 21 percent against a basket of currencies in 15 months.

“PRAGMATIC SELF-INTEREST”

The establishment think-tank Chatham House was first to call for a rethink in a September report entitled: “A British agenda for Europe; designing our own future.”

A panel of policy wonks stopped short of urging London to join the currency but said: “The extension of euro membership to the vast majority of EU member states in future years will mean Britain is excluded in practice from deeper intra-EU economic consultation and coordination, including in areas of significant national interest such as financial market regulation.”

While London should not join just to avoid losing influence in Europe, “under future national or global economic conditions, the government may need to appeal to the pragmatic self-interest of the British electorate over giving up the pound”, it said.

Denmark, which voted against the euro in 2000, is feeling the political and economic cost of having opted out and weighing a referendum on joining. If it does, Sweden may well follow.

Central European governments led by Poland were quick to conclude they could no longer afford to question the merits of euro adoption, and are now racing to meet the criteria for joining the currency bloc as soon as possible.

The euro zone may not be perfect, but it’s warmer inside.

Will Hutton, director of the left-leaning Work Foundation, argued this month that Britain now resembles a gigantic hedge fund and sterling’s sharp fall could turn into a rout.

“Suddenly membership of the euro — politically toxic — is beginning to look a very attractive escape route,” he wrote in the Observer newspaper.

Joining the euro at the current devalued exchange rate would make British exports competitive, enable reindustrialisation and underwrite the City’s huge borrowing needs, Hutton argued.

COMPETITIVE DEVALUATION

Opponents of euro membership say a floating currency has enabled Britain to avoid painful adjustments in wage costs by depreciation, first when sterling was ejected from the European Exchange Rate Mechanism in 1992 and again this year.

“What is the point of enduring the years of economic weakness needed to achieve the 15 per cent improvement in competitiveness against the euro zone secured, painlessly, in the past year?” economic columnist Martin Wolf asked in the Financial Times.

Yet the idea that Britain can get away with a competitive devaluation every 15 years to wipe the slate clean from the excesses of its bubble economy sits uncomfortably with traditional notions of fiscal rectitude.

It also suggests that British membership might be more of a threat to the stability of the euro zone than joining the euro would be to Britain’s monetary sovereignty.

Prime Minister Gordon Brown, who faces a general election within 18 months, has sought to avoid a public debate on the euro. As finance minister for a decade, he had a hand in blocking Blair’s ambition for euro membership by devising five economic tests that were never met to his satisfaction.

Opposition foreign affairs spokesman William Hague said in an interview that the national sovereignty argument against the single currency remained stronger than any short-term expediency case for joining in a crisis.

Things may have to get still worse before the British conclude they would be better sharing monetary sovereignty with France and Germany than risking the fate of Iceland or Hungary.

6 comments

Comments are closed.