World Crisis Online

I keep hearing how lucky we British have been. True, the economic skies could be brighter. What was that Mervyn King said the other day? Something about the most sustained fall in living standards since the Great Depression. Never mind. Imagine how bad things would be had that europhile Tony Blair handed over the pound for the euro.

This observation transcends traditional divides at Westminster. Ed Balls, erstwhile adviser to Gordon Brown and now Labour’s shadow chancellor, is as proud of his role in thwarting Mr Blair as is George Osborne of the Tories’ consistent opposition to the single currency.

The once pro-European Liberal Democrats now whisper that perhaps they were a little overenthusiastic about the euro. For his part, Mr King always knew that the Bank of England would do a much better job of running monetary policy than a bunch of continental central bankers living in Frankfurt.

Last year’s sovereign debt crisis in the eurozone and this year’s Franco-German plan to create a European economic government are widely seen as final proof of Britain’s wisdom in staying on the sidelines.

All this, of course, is predicated on the obvious assumption that Britain has outperformed its European neighbours. While the euro economies have been lashed to the mast of a single monetary policy, Britain’s free-floating currency and flexible interest rates have allowed it to weather the global storms.

Well, not quite. Here, sadly, the save-the-pound brigade hit something of a snag. The economic indicators tell a rather different story. Since the financial crash, Germany and France have fared better in the single currency than has Britain outside.

The two big eurozone countries have suffered a smaller drop in output since the hurricane hit in 2007. Britain has ended up with a fiscal deficit three times that of Germany and 50 per cent above that of France. As for prices, it is the Bank that has lost the plot. Britain’s 2 per cent inflation target has been all but abandoned. Prices in Britain are rising twice as fast as in the eurozone.

Ah, but wait, I hear Messrs Balls, Osborne and King riposte in unison. Britain has at least been free to devalue sterling. The value of the pound has dropped a hefty 20 per cent during the past few years. That would be impossible were Britain trapped in the euro straitjacket.

Perhaps I am alone in thinking it odd that a central bank should be so eager to debauch its own currency. The politicians, I can understand. Like Harold Wilson in 1967 they forever cling to the deceit that sterling’s depreciation has no effect on the pounds in voters’ pockets.

Devaluation has been an addiction of the politicians and professional policymakers in charge of Britain’s boom-and-bust economy for the past 60-odd years. Back in, say, 1960, one pound would buy about 12 Deutschmarks. If Germany had kept its currency, today’s figure would be about two D-Marks. Funny how German exporters still so easily outsell the British.

One or two countries in the eurozone have indeed fared worse than Britain since 2007. Ireland and Greece are the notable examples. But this raises another problem. Have Mr Balls and Mr Osborne so lowered their ambitions for Britain as to see Europe’s two smallest economies as the most useful comparator?

The uncomfortable reality is that eurozone countries against which Britain more naturally measures its performance have suffered less as a consequence of the crash. If one goes back further – say, to the creation of the euro in 1999 – the growth performance of the three economies has been pretty much of a muchness.

I concede that the case that Britain would have been better off in the euro is not conclusive. Even if Germany and France are now in better financial shape, these counterfactual exercises are tricky. All sorts of imponderables have to be taken into account. Mr King has been heard to argue that had Britain been in the eurozone, interest rates would have been lower. The credit boom and subsequent bust would have been correspondingly worse.

The obvious counter is that had the government joined the euro it would have run a tighter fiscal policy and imposed credit controls to offset lower interest rates. But it is just possible, I suppose, that the Treasury and Bank would have proved even more hopeless in formulating policy within the single currency than they did outside it.

In truth, the real lesson from all this is a more prosaic one. Those charged with steering the economy should show a touch of humility. The thread linking the multiple mistakes in British economic policymaking in recent decades has been the righteous certainty of those making the wrong decisions.

It is visible again now at the Treasury and Bank as the senior officials so complicit in Mr Brown’s boom tell Mr Osborne the only course is the ferocious fiscal squeeze on which he has now embarked. They may, of course, be right this time. But the record hardly leaves one brimming with confidence.