UK has lost more than it gained from spurning the euro

Published: February 17 2011 02:52 | Last updated: February 17 2011 02:52

From Mr Tom Brown.

Sir, Philip Stephens (Comment, February 15) is to be congratulated on saying what to foreigners appears a reflection of reality, but which in the UK is a taboo: that by rejecting the euro in 1999, the UK has ended up with high inflation and lost purchasing power in addition to the problems of growth and debt. All the alleged advantages of staying outside “the one-size fits all” monetary policy of the European Central Bank have been blown out of the water by the UK asset and credit bubble.

What Mr Stephens does not mention is the damage that a volatile exchange rate inflicted particularly on the manufacturing industry, which the government now claims to want to revive; nor the damaging risk premium that foreign investors will now demand on any inward investment to compensate for devaluation risk. Retention of sterling likely reinforced the north-south economic divide.

Of the three stumbling blocks – economic, political and psychological – to joining the euro, the economic was the easiest to deal with: in 2003 the Treasury published an assessment of Ed Balls’ “five tests” of convergence required to join the euro, in which the model simulation of lower euro interest rates showed that a strong offsetting fiscal tightening to maintain balance would be required. Ironically, this is now what George Osborne and his (anti-euro) government now reproach the Treasury team under Gordon Brown for not having done in the run-up to the credit crunch.

The framework of economic governance in the UK is high enough to conclude that the euro would have forced policy changes earlier, which could have reduced the worst excesses of the credit bubble and consequently reduced the size of the public deficit. Alas, politicians prefer nationalist talk to a pragmatic securing of the value of the currency and the maximum economic benefit.

To be fair, however, the retention of sterling has left the UK with one advantage: in an economy with an ageing population and huge private pension system and insatiable demand for fixed-income securities, the exchequer has de facto a protected market for the issue of gilts to finance the deficit.

When Geoffrey Howe abolished UK exchange controls in 1979, it was in the interests of forcing the UK to compete for capital, but 30 years later in the age of the euro, UK governments still hide behind the protectionist wall of sterling.

Tom Brown,

Senior Credit Executive,

Norddeutsche Landesbank,

London EC4, UK