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Slump in sterling means we should think again about joining the euro
Roland Rudd14.11.08
In the run-up to the 1997 general election, Tony Blair and Gordon Brown were asked at a meeting of business leaders whether they would make the Bank of England independent and whether Britain would join the euro. Tony Blair replied that a Labour Government would do one or the other. Gordon Brown added that they might do both.
More than a decade later, with sterling falling to a 12-year low against a basket of currencies, some are beginning to ask whether the Prime Minister might finally do the "unthinkable" and join the euro? On Wednesday against the backdrop of the Bank of England's dark analysis of the economy, the pound plummeted to a new low - making one euro worth 83.56p.
There are some powerful arguments in favour of the return of the euro to the agenda. First, events of recent weeks have emphasised the schism between the UK and the eurozone which continues to hobble the ability of both to deal with the financial crisis. There are extensive investment and capital flows between the UK and the eurozone; not just that over half of the UK's trade is with other EU member states but also the deep links across almost every sector of the economy, including financial services. As many as a quarter of banks in London are from eurozone countries.
France's Nicolas Sarkozy, as the current holder of the EU presidency, has been leading the eurozone, but Gordon Brown has also been showing leadership by providing the template for Europe's bailout package. The relationship between the two is key, but clearly it would be easier for both if they shared the same currency.
The response to the financial crisis would be faster and more effective if we did not have two separate central banks (the Bank of England and the European Central Bank) and instead had a single head of the eurozone.
The increasing ascendancy of the euro over sterling highlights a growing argument for the euro. The Chancellor is rightly looking at a fiscal stimulus package to boost the flagging economy. Tax cuts may mitigate against the recession turning into a slump, but will ironically have the effect of further weakening sterling.
One newspaper magnate privately conceded recently that if sterling continues to fall, we might begin to see the benefits of the euro.
Gordon Brown is reluctant to put the politically sensitive subject of the euro back on the agenda. But if a slump occurs, he might go back to the future and be tempted to do what he hinted at a decade ago and join the euro.
Then there is also the potential domino effect. With Denmark giving serious consideration to adopting the euro, it would be conceivable for other Scandinavian countries to follow suit. This would amplify calls for the UK to consider joining the euro, presently the official currency of 15 member states.
Throughout this crisis, the EU has been arguing for greater coordination. Initially this was ignored by the unilateral action of some member states guaranteeing a minimum level of deposit for savers. Yet Europe has gradually got its act together and it would certainly benefit from greater co-ordination. Some have been arguing for banking bailouts to involve a standard minimum level of interest. It is set at different levels of interest in different countries, and in particular Germany should be held to account for its action towards Commerzbank.
The UK economy has been suffering, along with the global economy. While the banking sector has sneezed, the rest of the economy has caught a cold which could develop into something much more serious. There are predictions of job losses, with one recent report predicting London will lose 194,000 jobs.
Companies are freezing recruitment and announcing downbeat results. World trade has fallen in the second half of 2008, and is likely to continue to drop. The IMF predicts that the world economy, which grew at 3.7% last year, will slow down to 2.7% this year, and continue to fall to 1.9% next year.
As the largest market in the world, Europe finds itself in the thick of the credit crunch. Calls for the euro will increase in some quarters but are only likely to reach fever pitch if there is a collapse in sterling.
While at present the political risks of putting the euro back on the agenda outweigh the possible economic benefits, if the fall in sterling not only continues but leads to a slump then the Prime Minister may find the euro being considered as it was in the run-up to 1997.
Roland Rudd is chairman of Business for New Europe and senior partner at Finsbury.
Reader views (10)
Bring on the Euro!!
First and foremost we are human beings. Our first allegiance should be towards unity and the common goals of humanity, instead of the petty things that divide us! Joining the Euro will be a great step towards a united Europe and ultimately a united humanity. We need to stop being so damned selfish and introspective, and look toward a better future for all of humanity. This would benefit both us and the rest of Europe, especially in the current financial climate. We need to let go of our misguided notions of superiority, and humbly accept that we as people should be working towards a united future.
- Steve, West Sussex
Iceland looking to join the EU and Euro
Slovakia joins the Euro next tear
Denmark who already has its currency pegged to the Euro looks like joining.
Sweden would follow
Poland has the plan to adopt the currency in 2012
Latvia Lithuania, Estonia and Bulgaria all have their currencies pegged to the euro
Its all going one way
- Keith, irealnd
Take your pick - are we foul or fear weather "friends?"
- James, Leicester
Joining the Euro seems to be counter indicated.
Abandoning sterling and joining Euro would be like abandoning the lifeboat and climbing aboard a sinking ship. Euroland is not a federation, it does not have a common defense (or attack) policy. Soon, externalities could force each individual country or groups of countries therein to go their separate ways rather than starve and die of thirst like Buridan`s ass which is what would happen if the faceless unaccountable bureaucrats are allowed to decide the destiny of Europe.
Secondly, this would not happen if this country had an identifiable owner. No owner would exchange independence and running free for a place in the team which pulls a heavy coach full of lame ducks and white elephants.
Thirdly, and arising from the point above, the USA which comes closest to the definition of the owner of this country would never allow their special relationship platform foothold in Europe to be lost in the quicksands of the Euroland swamp. The Europhiles realise this and are raising this issue while the Republicans are packing up and there seems to be a vacuum at the top. But Obama has a good head on his shoulders and he would be strongly advised by his own policy advisors against allowing such a move by the British.
- Cevdet Suner, London
As a part time Eurozone ex pat, the attractiveness of adopting the Euro is almost, but not quite, overwhelming. With my 'Blighty' hat on my view, unfortunately, is that adopting the Euro would be a disaster. Prices would rise significantly and our economic flexibility would be seriously compromised.
- Colin Brightwell, Woking, Surrey
We need to get out of EU it is a club we cannot afford to be in, it costs the British taxpayer too much and we have given too many powers to EU as it is. We need to get back our law and our borders.
- Maggie, London
The eurozone has higher interest rates than Britain, which we would have to adopt if we joined. The idea that what British homeowners need right now is a rise in their mortgage bills is economic madness.
Also, the fall in sterling has made the products of Britain's exporters cheaper to eurozone buyers, helping them sell more in these tough times.
This is the benefit of a floating exchange rate, and manufacturers would be in a much worse state now if we had already fixed it by joining the euro.
In principle it must surely be better in a crisis to keep as much economic control as possible. Not hand it away to people beyond our democratic influence who have to make policy to suit the entire diverse eurozone - which will very likely not be what Britain needs.
In this context one has to wonder whether Mr Rudd's first priority is really getting Britain out of recession. Or whether he is simply jumping on the financial crisis bandwagon to push his outdated agenda of ever more outdated EU political centralisation.
- Mike Hanlon, London, UK
It might be Gordon Brown’s plan to get him personally off the hook, but it is a seriously dumb idea for any nation.
- Ian, Reading, England
It's not the euro "destroying" Italy and Spain's economies but the uncompetitive nature of those economies, particularly Italy. It's fiscal and structural changes that'll do the trick.
Do we think Slovakia "mad" to join the eurozone in January and the other countries that will follow? Britain may well join sometime within the next ten years. Sharing a single currency however will never be a panacea for all economic problems but the advantages of being in the eurozone outweigh any potential disadvantages. Ask George Soros - he'll tell you.
- Collis Gretton, Nottingham - UK
Are you quite mad? The lessons are never learnt! The Euro will solve nothing for Britain, being tied to a Franco German currency has destroyed Spain and Italy but lemming like some idiot thinks this is the solution for the UK?
- James Ritchie, New Malden, Surrey
