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What if we had joined the Euro? - 3 June 2008

This week is seeing celebrations across the continent as business and political leaders gather to celebrate the ten-year anniversary of the agreement to join the Euro single currency. Britain, having had the opportunity to join the European single currency on several occasions in the lead-up to this historic agreement – and arguably since then – decided not to throw its lot in with the rest of our European partners.

But with the current credit crunch affecting global markets, and the state of the UK housing industry increasingly a cause for concern, would we be in a better situation had we taken the plunge into the Eurozone? This question has today been posed by the Independent commentator Sean O’Grady, and it raises some interesting issues not only for the UK economy, it also gives some clues as to the future of the overseas property market in our sister countries who have adopted the Euro.

Firstly, we could easily have been part of the Eurozone, despite the strength of the pro-Sterling lobby. The landslide general election victory of Blair’s New Labour in 1997 provided such a mandate and destroyed the effective opposition so completely that any referendum called by the new prime minister in the first six months of his term of office would have been ratified. Even given the sentimental strength of the Eurosceptic lobby, presenting a convincing argument and a united front with Gordon Brown would more than likely have swayed the electorate. As O’Grady points out, all we got was disagreement between Blair and Brown and the limp ‘five tests’.

As for the economic position of the Euro countries, it would be hard to say that we would be in much of a better situation than we are today had we been part of the ‘club’. One of the consequences of joining a single currency is that with a ‘one size fits all’ interest rate, it is unlikely that the currency-wide rate would be at the right level for each individual economy. Interest rates in Europe are currently lower than in the UK, which would have the effect of prolonging the housing boom beyond a sustainable level, and risk runaway inflation. While the majority of homeowners would welcome a lower interest rate at the moment, the risk of higher inflation would outweigh any benefit that would bring almost immediately.

Both Ireland and Spain have the lower interest rate of the Eurozone to thank at least in part for the huge property boom they have both enjoyed in the past few years, but they are also now seeing the downside of the boom in overheated markets that are ill-prepared for the harder times. The UK is in a similar position with the state of the housing market, but it could be argued is not in such a good position to climb back out of the slump as the level of personal debt here is far higher than in the rest of Europe.

Being part of a single currency affords a certain insulation from the biggest caprices of the international financial markets, but it would also probably have prevented the rapid spread of such easy credit in the UK, one of the causes of the current banking crisis. Being part of a central economic system would have curbed some of the US-style excessive lending in risky situations. The counter argument is that being part of the bigger European picture may also have prevented the growth of the banking sector in the City to become one of the powerhouses of the global economy.

The arguments continue to circle around each other for joining or staying out of the European single currency, while in some ways it is possible that the rest of the members of the club would find it hard to accept the UK joining now or in the near future. Were the country and the government decide that we wanted to become part of the Eurozone, it would surely be on the condition that we would be one of the biggest partners with considerable influence over policy, and there is no guarantee that other members would accept that. For all of the promises that the UK would be able to come into the Euro at a later date, it is entirely possible that the decision over our future economic direction is out of our hands, resting either with other countries, or in the decisions made a decade ago.

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