LONDON — These are dark times, especially for Britain: The pound sterling is dropping like a stone; the huge British financial sector, a major part of the British economy, has shrunk dramatically; unemployment is rising; and the stock market is looking sicker by the day. Britain is now officially in recession (meaning that economic growth has fallen for two consecutive quarters).
Some can be heard urging that the pound should join the euro. That at least, so it is argued, would put some sort of floor underneath the British currency, as it heads down toward the humiliating rate of £1 per 1 euro and, some say, as low as £1 per $1, an exchange rate last seen 24 years ago. It was £1 per $2 as recently as a year ago.
Others argue that euro membership would be fatal. It would remove the flexibility to alter interest rates — in this case rapidly downward to almost Japanese levels in an attempt to shorten the recession — and it would remove the freedom to devalue, which ought in theory to help exporters and attract inward investors into cheap British assets and property, as well as tourists looking for an inexpensive U.K. holiday.
These benefits will clearly take several months to materialize, especially since exports, however cheaply priced in sterling, need customers worldwide, and these are fast disappearing.
Meanwhile, the currency goes on sinking, the cost of imports rises, and even the benefit of cheap oil — priced in dollars — is offset to some extent. Hence the longings of some to be part of the euro block. These views are of course reinforced by those “europhiles” who want Britain to be much more committed to the building of a political Europe and believe that joining the euro would be the best way of showing that.
However attractive this sounds at the moment, there are some much deeper snags that won’t let it happen. The most obvious of these is that the euro-zone itself is in a far from healthy condition. The economies of EU member states are also shrinking, and the fact that the euro remains quite strong against both the dollar and even more against the pound means that the prospect ahead for EU exports is miserable.
It is often forgotten that Britain is the largest market for the rest of the European Union and for the euro-zone countries, and right now this market has practically dried up.
Worse still, the euro-zone regime is having a devastating effect on several newer and weaker members. The very feature that some believe would underpin a sterling on the slide, namely a fixed exchange rate, is paralyzing such countries as Greece, Portugal, Italy, Slovakia, Ireland and Latvia. They all desperately need to devalue, at least a small amount, and to lower interest rates as fast as possible. But they cannot do so. No adjustments of this kind are possible within the euro straitjacket.
The full weight of recession therefore has to be born by their industries and services, which means soaring unemployment, reduced government budgets and growing social unrest. Already in Greece, and in little Latvia, this unrest has spilled into the streets. What this means is that either these countries must somehow leave the euro-zone or the richer and stronger euro-zone members, notably Germany, will be compelled to bail them out.
Needless to say, German taxpayers are not at all enthusiastic about being asked to help out their weaker and, so they believe, more profligate EU brethren. Yet, other alternatives are becoming blocked. Already countries such as Greece are finding that their borrowing costs through government bond sales are spreading way above the euro-zone average, and international lenders may soon refuse to support them, fearing that they might be forced out of the euro-zone and default on their loans.
Such a development would have unpredictable, but certainly severe, consequences on the whole euro structure. No country has ever left the zone before and there is little experience to guide how it might be done.
What this means is that even if the British decided to join the euro tomorrow, the system would be in poor shape to receive the pound, and in all probability the existing members, along with the European Central Bank, would simply refuse to have them on board.
What might seem attractive to some — namely, locking in sterling to the euro at a very reduced exchange rate — would look highly unattractive to the rest of the euro-zone, particularly when economic growth resumes and trade expands again.
So, in short, the pound is not about to join the euro, even in these times of crisis and financial chaos. And when the economy picks up again, as it will, the arguments will be even less compelling.
The British government may continue to say publicly that its very long term aim is to replace the pound with the euro “when the conditions are right.” But that moment never seems to come. Nor would it be a popular move; the latest opinion poll says that around two-thirds of the country are opposed, and so is the opposition Conservative Party
Indeed, if in a year or so Labour is replaced by the Conservatives, which appears fairly likely, the prospects of euro membership will fade completely and maybe for good.
David Howell is a former British Cabinet minister and former chairman of the Commons Foreign Affairs Committee. He is now a member of the House of Lords. E-mail: email@example.com Blog: www.lordhowell.com
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