It's been over ten years since the UK failed Gordon Brown's five economic tests for adopting the Euro and the whole idea lost momentum. Now when politicians talk of the EU it's about whether the country will remain a part of it or withdraw. If the Tories win outright come May, we'll have a referendum on our hands. But were we right to pass on joining the single currency?
We should look to the biggest economic of recent events to find our answer. The 2008 crash and following recession is still shaping the economic situation across Europe. The Euro is struggling against the sterling, so does that mean we made the right choice?
The big issue with joining the single currency isn't just that we'll no longer have the pound, but that we lose control over own on fiscal policy. This isn't unusual of course, it's essentially what happens on a country to country basis. Kent and Yorkshire share the same currency and that's controlled by Westminster. Joining the Euro would just mean a larger scale version of this.
Of course, if you were to look at the differing economic situations between the north and south of England, we can start to see a problem. Regions do not all perform in the same way, while their industries can vary wildly. Meanwhile, London tries to choose policies that benefit the country as a whole, but which can disproportionately damage or help on a regional level. This problem could only be exacerbated when applied across a whole continent.
One of the major things we'd lose control over would be our ability to set our own interest rates. Having flexibility over this means you can better fend off unexpected events, like a recession for example. Had we joined the Euro, this decision would have been out of our hands which would have been a disaster.
It's true that the EU is growing again, so you might think that we would have enjoyed that success, but the recovery is unbalanced. It goes back to the previous point about regions not being all the same. As we can see in the graph below, the economic fortunes of European countries has been a mixed bag.
Germany and France have been the only countries to significantly recover and improve past their 2008 peaks. Portugal, Italy and Spain are about where they started, while Ireland and especially Greece aren't even close. The UK has just about passed their 2008 levels.
What does this tell us? It tells us that Europe saw mixed fortunes and that while Germany may have done well, Greece has not. You might point out that the UK has only just done better than Spain or Portugal, but there is another side to this picture.
The economic strife that hit Spain and Portugal was much worse than in the UK. For example, at one point Spain saw over 26% of its population unemployed. The highest it got in the UK was 8.4%. Our recovery may have not been much faster than our Iberian friends, but the ride was much smoother.
Of course you could point to Germany and suggest that's what would have happened to us, but that would have unlikely been the case.
Why? Because the UK economy was, and arguably still is, heavily reliant on the financial and housing markets, both of which crashed dramatically - just like in Spain and Greece. That means we would have seen a situation much more similar to theirs, and that would have led to us knocking on the doors of the IMF and ECB for loans as they did.
Had we received these loans we would have seen the UK committing to austerity far beyond what we've experienced under the Coalition government along with even less financial sovereignty. By being able to keep our interest rates low and the sterling's value with it, we were able to keep our manufacturing sector competitive and help alleviate some of our financial burden.
In the end, joining the Euro way back when, might not have been so bad an idea overall. But with hindsight, but it's clear the right choice was made. For the time being, we can be sure that while our recovery has been tough, it could have been far, far worse. It might not have even happened yet.Suggest a correction