Gloating over the euro's slide may well be premature

The euro's decline may reflect weakness, but the UK would be grateful for weakness like this
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WHAT A pity it is to destroy a wonderful theory by an excessive attention to the facts. But here goes.

The theory is that Continental Europe is mired in recession, with all hopes for improving its terrible economic situation now stymied by the creation of the single currency. Reflecting these poor economic conditions, the euro sets a record low virtually every day. The UK has had the luck or foresight to stay out of the first wave of members, and its economy will do all the better as a result. Militant Eurosceptics are jubilant, while the quiet, unconvinced majority are relieved that, if Britain does join the euro in future, it will be after these teething troubles are over.

There is some truth in this picture but it is a truth reflected in a fairground mirror, the fairground being British politics in the weeks ahead of this month's European elections. Certainly, the single currency has had a dismal first five months of life. It is languishing near its record low, just a few cents above one US dollar to the euro. This is not the launch the proud parents of the new currency had planned. And the euro's weakness does indeed reflect disappointing growth in the main Continental economies, especially those of Germany and Italy.

In addition, the handling of the markets by the European Central Bank has been incompetent. Naive remarks by its president, Wim Duisenberg, have helped send the euro lower on the foreign exchanges. Even worse is the lack of transparency in the ECB's decision-making, which leaves currency traders free to draw their own conclusions about what is going on in the Eurotower in Frankfurt.

Given that most traders are instinctive sceptics, they have assumed the worst, and have now decided they will try to drive the euro down towards parity with the dollar - just to see how the ECB will react. The bankers have had to drop heavy hints that they may spend reserves to prop up the currency in order to stem its fall.

And to cap it all, European politicians decided, after a tense, difficult finance ministers' meeting last week, to allow the Italian government to relax a little in its efforts to reduce its budget deficit. With a potentially catastrophic public sector pensions bill looming in the early decades of the 21st century, the unexpected decision confirmed the markets' worst fears of malign political interference in eurozone economic policies.

Nobody can pretend there is much good news here for the euro. But it is time for a reality check. First, those record low levels. As the currency is so new, all this really means is that it has fallen since January. But since its component currencies rose so much last year, the subsequent decline has only brought the euro back to the level it would have been at last summer, had it existed then. Currencies do go up and down, often by dramatic amounts in short periods. A half per cent, or even 1 per cent, rise or fall in a single day is not unusual, so an 11 per cent devaluation in five months is in fact quite a gentle decline.

Secondly, the euro's decline may reflect a certain economic weakness, but we in the UK would be grateful for weakness like the eurozone's. Half the member countries are enjoying stellar growth thanks to low interest rates - Ireland, remember, has caught up with the UK in average income per head. Even those core countries where growth is very sluggish - Germany and Italy - will expand up to twice as fast as the UK this year. In fact, Britain is likely to be just about the slowest-growing developed economy in the world in 1999.

Among the core Continental economies, Britain remains the laggard in levels of productivity and in incomes. The average citizen of the eurozone is better off than the average British subject. We have greater inequality, too. Our rich are richer and our poor poorer.

True, we have lower unemployment than many, a flexible workforce, a greater degree of entrepreneurship and a head start in some high-technology industries. The government's finances are sound and the Bank of England is a model for central banks elsewhere.

But we also have pockets of embedded poverty and exclusion to rival any French banlieue or east German estate. Our education system, from nursery schools to universities, is a disgrace; under-resourced for decades, it has been a constant political football at the expense of the skills and earning prospects of those Britons unfortunate enough to have been born since the mid-Seventies. The physical infrastructure of the UK is a dilapidated joke in comparison with those of our Continental neighbours - it takes only a couple of journeys on the Paris Metro to make any London commuter want to cry.

These hard-core failings of the British economy will come to the fore once again when the business cycle turns, as it always does, and the eurozone picks up. Then it will be the turn of the pound to fall sharply on the foreign exchanges. And then, too, the long-term advantages of the single currency will have started to become more apparent.

The most evident of these will be the ease with which consumers will be able to compare prices once national notes and coins are withdrawn from circulation in 2002. The price of goods will tend to fall towards the lowest in the euro area, boosting consumers' purchasing power.

Less obvious, but already under way, is the reshaping of European industry now that there is a genuine single market. It is the euro that has driven big bank mergers in France and telecoms in Italy. Such deals will raise European productivity levels; investors will get higher returns and workers will earn higher real wages. Fear of being left out of this process is why the UK's big employers' organisations - the Confederation of British Industry and the British Chambers of Commerce - along with much of the union movement, want to submerge the pound in the euro as early as possible. The CBI is pushing ahead with a controversial move to campaign for a specific entry date.

These benefits of the single currency form, of course, just one side of the balance sheet. On the other are the costs of mismatched interest rate cycles, concerns about eurozone tax policies, the incompetence of the ECB and the shambles that is the Brussels bureaucracy. When the Governor of the Bank of England said last week that UK membership would be an act of faith, he was right in the sense that it is impossible to be sure how the costs and benefits stack up unless and until we take the plunge. It is a matter of judgment and probabilities, not certainties.

Yet if the economic case for joining is uncertain, so is the case against. That case rests heavily on the passing whims of traders in the currency markets and the temporary conjuncture of different business cycles. But reality is subtler than the "weak Europe = weak euro; strong pound = strong UK" myth. Neither side in this debate has a monopoly on truth.