I am a Euroscpetic. I admire the political will of Europe’s grand designers in creating the Euro, but I have always felt that harmonisation would be a painful process fraught with tension – especially during economic downturns. And so it is today.
As the Euro celebrates its tenth anniversary, the pains that Eurosceptics like myself feared are fully evident in the differing monetary regimes available to the three European bubble economies of the UK, Ireland and Spain. Ireland and Spain were never at the core of Europe and never hoped to be the driving engine for interest rate policy in the Eurozone. Yet, they both joined the Eurozone because their politicians believed the benefits of integration outweighed the economic costs. Ultimately, they believed that harmonisation would eventually bring their economies into line with the core of Europe, France, Germany, Benelux, and Italy.
However, now we are at crossroads. Spain and Ireland, having produced bubble economies due to strong growth, are in need of monetary flexibility at a time when core Europe needs monetary hawkishness. Spain and Ireland have economies that will certainly be dragged under by their housing bubbles, while core Europe needs to keep a watchful eye on inflation. Jean Claude Trichet, the head of the European Central Bank has signaled as much. Over the coming months, this monetary straitjacket will be very painful for those two countries’ politicians to endure.
Contrast this with the UK. An article in today’s Telegraph makes a very compelling case for the benefits of the UK not having joined the Eurozone.
Ten years on, does the UK need to re-visit its decision not to join the single currency. Emphatically not! Just remember 1992, and the trauma of the exchange rate mechanism. Back then, a recession-strapped Britain couldn’t cut rates because – even under ERM – they were effectively set in Frankfurt. For all the pain of Black Wednesday, crashing out of that system was a blessing in disguise.
And just think what would have happened had we listened to the pro-euro crowd and been part of monetary union since the late 1990s. During 2004 and 2005, while UK rates moved between 4.25 and 4.5 per cent, eurozone rates were held down at 2 per cent – in a bid to kick-start Germany’s then-moribund economy.
Since then, the UK economy has become over-heated. And, of course, the value of property and other assets is only now painfully crashing back to earth.
Yet how gargantuan would that bubble have been, and how enormous the crash when it burst, had UK rates been kept at 2 per cent since early 2006? It’s scary even to think about it. But that’s what would have happened had we joined the euro.
–The Telegraph, 8 Jan 2008
Two or three years from now, Ireland and Spain might look with envy at the UK’s decision to stay put and reject the Euro. For now, the UK should be quite satisfied at being master of its own destiny.