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Why we should be glad that Britain never joined the euro

Julia Kollewe
Feb 15th 2010 at 4:00AM

Filed under: Financial Crisis

If the UK had joined the euro, unemployment today could be 15% and the recession of the last 1 1/2 years would have been much worse.

Whatever his other failings, Gordon Brown deserves credit for keeping us out, says the Centre for Economics and Business Research.

Given the widespread debt problems in southern Europe - the controversially named PIGS economies - Portugal, Italy, Greece and Spain - the eurozone could break up before 2015, the think tank believes.

The euro has been hammered in recent weeks as the Greek debt crisis deepened. It fell to a nine-month low against the dollar on Friday and against the pound, it traded at around £1.15.

While the UK barely grew in the final three months of last year, the eurozone's economic recovery also nearly ground to a halt. Germany, the continent's industrial powerhouse, saw its economy unexpectedly slump back and failed to grow at all between October and December. Of the other large economies, Italy went into reverse and Spain remained mired in recession. The figures sparked concern that Europe could slip back into recession as government stimulus measures such as car scrappage schemes peter out.

The CEBR has done a simulation for what might have happened if Tony Blair had succeeded in taking the UK into the euro in early 1998. It calculates that growth in Britain would have been very slightly higher between 1998 and 2006, but with inflation 0.6% higher, post 2006 the slump would have been much worse. This means that GDP might have fallen by 7% last year instead of 5% and unemployment now would be around 15%.

For those European countries that have a propensity to borrow, a single interest rate, kept low by frugal Germany, was a step too far and they overborrowed, the think tank argues. Ireland and Spain are the most spectacular examples, but Portugal and Greece also had interest rates that were far too low for their economic circumstances and they went on borrowing sprees.

Greece has piled up so much debt that it now needs to be bailed out by its European friends. EU leaders have said in principle that they stand ready to ride to the rescue, although in practice there is no clarity on what form any aid would take. Germany has already ruled out any blank cheques and in any case Greece hasn't asked for a cash handout. The worry is that other countries like Portugal and Spain may also need help.

It is not inconceivable that the eurozone could break up in coming years. The Latin Monetary Union between Switzerland, France, Italy and Belgium in the mid-19th century essentially failed within 30 years. But things move much faster in the modern world and we could see a breakup before 2015, the CEBR says.

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