British views of the euro

By Brendan Donnelly

Brendan Donnelly

The past two years have seen a definite softening in the traditionally sceptical view of the euro taken by British commentators and politicians. With every year that passes, it becomes clearer that the euro is a robust currency with an assured future. Its growing membership and increasing role as an international reserve currency are powerful contradictions of those who feared or hoped in 1999 that the euro could only play a marginal role in an enlarged European Union or on the international monetary stage. The recent decline in the pound’s value against the euro has been a painful reminder to British tourists and property-owners in continental Europe of the vagaries of currency markets, to which sterling is particularly exposed by the United Kingdom’s absence from the single European currency.

Domestic economic developments have reinforced this now somewhat more benign British view of the euro. When he was Chancellor of the Exchequer, the present Prime Minister, Mr Brown, lost no opportunity to contrast what he saw as the clearly superior economic performance of the United Kingdom with that of the supposedly inflexible and ill-managed continental economies. This arrogantly dismissive view of the economic policies pursued by the countries of the Eurozone, from a government allegedly well disposed to eventual British membership of the euro, was an important factor in creating and sustaining British suspicions of the European single currency. The recent economic difficulties of the United Kingdom, ironically coinciding with Mr Brown’s elevation to the British premiership, have now led to an altogether more modest rhetoric from the makers of British economic policy. British confidence in its own financial and economic model has been particularly severely shaken over the past year. The British electorate has seen over that period a virtual paralysis of its much-vaunted credit markets, symbolized above all by the scenes of worried depositors at the Northern Rock bank, queuing in something like panic to withdraw their savings, a phenomenon not seen in the United Kingdom since the nineteenth century. The condescension with which Mr Brown and his colleagues liked for ten years to regard the economies of the Eurozone is definitely a thing of the past in the United Kingdom.

Against this political and economic background, it might be expected that the question of British membership of the single European currency would now be returning to the centre of current domestic debate. The present exchange rate of the pound against the euro would be one favourable to British exporters, the Bank of England is generally regarded in specialist and other circles as having handled the financial turbulence of the last year less effectively than did the European Central Bank and it is increasingly believed in this country that the United Kingdom has been particularly vulnerable to the consequences of American financial mismanagement because of its all too faithful mimicry of American financial and economic structures. A former member of the Bank of England’s Monetary Policy Committee, Willem Buiter, attracted considerable attention when wrote in May of this year a controversial article in the Financial Times, calling for British membership of the euro as soon as possible, largely in order to bolster the stability of the British financial services sector. Comment on this article since has been predictably mixed, with the author receiving a degree of support from academic and other specialist commentators.

At the wider public and political level, however, the picture is a very different one. There, a less critical British view of the euro as monetary institution emphatically does not (yet?) translate into a more positive view of the possibility of British membership of the single currency. Opinion polls make clear that there is little or no public support for any such policy. There is no national political party currently calling for Britain to join the euro, nor even any significant body of opinion within a major national party calling for it to do so. Intriguingly, the Scottish Nationalists are committed to the policy of an independent Scotland’s joining the European single currency. Whether the Scottish Nationalists will ever be in a position to implement that policy must be more than questionable. If they are, the general question of Scotland’s role within the European Union will inevitably be one of the range of controversial issues which will fall to be negotiated between an independent government in Edinburgh and the government of the rest of the United Kingdom. Without, however, a major and spectacular currency crisis centred on the pound sterling, or a substantial period of demonstrably better economic performance from the Eurozone compared with the United Kingdom, British political leaders are highly unlikely in the foreseeable future to find themselves under any popular political pressure to join the euro. Both a currency crisis and a decade of economic underperformance by the United Kingdom are entirely possible hypotheses, but they are not (yet?) current realities for the British electorate.

Politically indeed, it can be argued the prospects of the United Kingdom’s joining the euro have recently taken a distinct turn for the worse. It now seems probable that the next government of the United Kingdom will be formed by the Conservative Party, which in recent years has become incomparably the most hostile to the European Union of the three principal British parties. It may be that the reality of governmental responsibility and the relative lack of personal interest in European questions attributed by many observers to the Conservative leader, David Cameron, will ensure that the more extreme demands of Conservative Eurosceptics to renegotiate the terms of British membership of the Union will gradually be abandoned or modified by an incoming Conservative government. It is however inconceivable that the next Conservative government would be prepared in any circumstances to present itself as an advocate of British membership of the European single currency. Mr Cameron has been careful to stress that the Conservative Party does not want the United Kingdom to leave the European Union, reflecting in this the clear majority of British public opinion. In his party’s absolute rejection of British membership of the single European currency, he is likely to have for some years to come at least the acquiescence, and more probably the definite support of British public opinion.

It is important that those concerned with the future development of the Eurozone should not be under any illusions about the likelihood of Britain’s joining the single currency in the near future. There are important unresolved issues about the future governance of the Eurozone, where radical differences of view exist between member states, in particular those which persist between France and Germany. France continues to advocate an “economic government” for the Eurozone, as it has since the Maastricht Treaty. Germany for its part is highly sceptical about the necessity or desirability of such a structure, as it has been since the Maastricht Treaty. In so far as the United Kingdom might have a view on this controversy, it could reasonably be expected to side with Germany. Its inability to influence the evolving structures of the Eurozone is, however, a natural consequence of the decision to stand aside from the single currency. It would be a particular irony for the United Kingdom to find itself wishing to join in ten years time a Eurozone system which was less congenial to British taste than it might have been if Britain had joined the single currency at an earlier date. It would not, however, be an irony unparalleled in Britain’s dealings with its European neighbours.

This article was written by Brendan Donnelly, chair of Federal Union, and first appeared in the Federalist Debate, October 2008. The opinions expressed are those of the author and not necessarily those of Federal Union.

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