With the pound ending 2008 hovering around parity with the euro there are renewed calls for Britain to join the single currency. Peter Hargreaves, chief executive of financial services company Hargreaves Lansdown, looks at the arguments.
Until recently the sabre rattling of the Europhiles had been comprehensively quashed as the British people enjoyed touring the world like princes on the strength of the pound.
The previous strength of the pound can be traced back to the event in September 1992 which damaged the Conservative Party’s reputation as managers of the economy. I refer to Black Wednesday.
Consecutive chancellors pumped money into sterling to shadow the deutschmark resulting in the pound being artificially overvalued. John Major’s mistake was to defend the pound when international currency speculators were hell-bent on driving its value down. It is reputed he spent £10 billion protecting sterling. The economy then wasn’t good thanks to the overvalued pound.
The resulting devaluation made our imports expensive (and therefore curbed imports) but it made our exports cheaper and encouraged firms which had previously not exported.
It has been proven throughout the world that currencies find their true value if allowed to float without government interference.
Of course in a sterling decline, economically illiterate advocates of the euro will extol the euro’s illusionary virtues.
There has never been harmony in the euro area. After its formation the Germans rued the loss of the deutschmark. They felt financially strong and wealthy when they had the deutschmark.
If you had asked the average German on the street five years ago whether they would have liked to have had the deutschmark back and dump the euro you would have found unanimity in their responses. Fast forward to 2008 you might care to go and ask the average Italian or Spaniard and I dare say the Portuguese would also concur. In the case of Italy, the strength of the euro is destroying the country’s industry, while in Spain and Portugal they are dreading the huge loss of British tourists next year.
All those three countries would jump at the opportunity to exit from the euro. Indeed I would not be surprised to see Italy capitulating. I extend those comments to Greece, which has a strong currency which the drachma never was, but is just completely uncompetitive within the euro area. It is said that if Greece came out of the euro their currency could as much as halve in value. At least it would give the Brits somewhere they could go on holiday next year. A common currency only works where there is mobility of labour. In America if you lose your job in Detroit you can get in your Oldsmobile and drive down to Phoenix, Arizona and find work. People in Phoenix speak English. If you lose your job in Turin and drive to Berlin you would find it difficult to find a job speaking Italian.
The euro area consists of a bunch of disparate economies with different languages, different cultures and for that matter different work ethics. If we joined the euro the benefit would all be in one direction to the advantage of the existing members.
Embracing the euro would also remove our ability to set our own interest rates. We have already seen problems in Europe whereby Italy probably needs higher interest rates to curb inflation whereas the engineering companies in Germany could probably do with lower interest rates than those prevailing currently in the euro area.
In the UK we have until recently always needed higher interest rates than other northern European economies.
Sterling has fallen around 18 per cent against the euro this year and more alarmingly 28 per cent since the beginning of 2007. The parity of your currency is the first and most important indicator of the strength and efficiency of your economy.
Quite simply the UK economy has been exceptionally badly run and managed for the last decade. International currency dealers’ speculation against the pound is concrete evidence. Were our economy in as good a state as the government try to convince us, sterling would have remained the strong currency that we had come to love.
We would still be princes in the tourist resorts of the Mediterranean. We would still be clambering aboard planes in the New Year to enjoy the sales in New York. Quite simply sterling’s value reflects a bloated, over-borrowed economy – its lower valuation has made the citizens of this country poorer but the suffering would be far greater if it were held at an artificially high level by being part of the euro.
Should we join the euro? Only at our great peril.