Sean O'Grady: The euro answered a question we didn't ask

It is the great hypothetical of recent history; the most intriguing "counterfactual" of New Labour's time in office; the question that deserves more than the dusty dismissal it would have received even a few months ago: what if we'd joined the euro a decade ago?

Britain could have, relatively easily. Yesterday the European Central bank celebrated its first decade. If things had been just a little different it could have been a birthday party at which the Governor of the Bank of England, Mervyn King, would be humming along to Beethoven's Ninth, enjoying a slice of the blue and yellow-starred birthday cake and the sweet taste of success.

After all, it is the European Central Bank, rather than the United State Federal Reserve and the Bank of England, that has won the plaudits for its decisive conduct during the credit crunch. It is the ECB that has steered the euro, famously derided by foreign exchange traders as a "toilet currency" when it was launched, to the point now where it is casually talked about as the world's next reserve currency, confidently lifting the baton from an exhausted dollar.

With the success and prestige of the City behind it, Britain could have been a prominent, perhaps the pre-eminent member of the club. The offices might have been in Frankfurt, but much of the power might well have resided in London. Improbable?

Not really. Let us recall the scale of Tony Blair's 1997 general election victory. It was so great, and the trauma it inflicted on the Conservatives so grievous, that Blair could probably have won a ballot on slaughtering the first born, had he been minded to. He would have won a referendum on joining the single currency if he'd held one within the first six months of taking office. Instead, he and Brown bickered and we got the meaningless "five tests" instead.

At that point they botched their place in history. The margin in favour of abolishing the pound might have been narrow, and the resentment great. But we would have been in the eurozone, and for good. What on earth would it have been like?

On a superficial analysis, it might have been a disaster. Interest rates there are lower, at 4 per cent, and another 1 percentage point off the Bank rate would be a welcome relief for the property market – but it would threaten higher inflation. Grim as the prospects for the UK economy are, being in the eurozone as it stands would be scarcely an improvement. Inflation there is higher and growth has been slower than here, despite a recent upswing. Case against the euro proven?

Not really. It's a pretty static, naive view of things. Had we been in the eurozone all along, European interest rates, and much else, would not be as they have been, nor as they are today. To assume so is to neglect the powerful voice the UK would have commanded at the ECB and ministerial councils. It might well be that interest rates would have been still set too low to contain our runaway housing bubble. That probably was the fate of Spain and Ireland, the nearest test cases for the British.

Both those economies are undergoing a nasty post housing bubble hangover, in some ways worse than ours. But, as in those nations, interest rates might not have been set so disastrously badly to have made that much difference in the longer term.

The miracle is that fast growing larger economies such as Spain have been accommodated in the same single currency zone as the more sluggish, and dominant, German economy, where for much of the life of the euro the danger was of recession and deflation – prices falling rather than spiralling out of control.

At the outset the critics said the synthetic eurozone would be rent asunder by such strains. One interest rate policy could not possibly fit all: the lira would have to be reinvented to cope with Italy's endemic inflation; the Germans would stage a revolution to restore their respected Deutsche Mark; the Irish would go mad in a Zimbabwe-style hyperinflation. Thankfully, for the health of our biggest trading partners, the eurozone did not collapse, economically or politically.

The example of Spain and Ireland – like us, fast growing and with an overdependence on real-estate values to keep spending high – is instructive. They have found the benefits – the removal of exchange rate risk boosting investment, and the ease of doing business across a vast market – have massively outweighed the undoubted cost of having an interest rate set at slightly the wrong level.

Dynamically, in the longer term, the euro itself, like all single currencies, is a weapon that cures its own ills – because it forces economies to integrate. Simply by joining we would force the pace of harmonisation and slowly reduce the risks of the UK economy getting too out of line with our neighbours. Such a process could be long and painful, but ultimately worthwhile.

And examine an even more fascinating possibility. Most opponents of the euro rightly point to the eurozone's sclerotic labour markets, state monopolies, stodgy product markets, underdeveloped retail and banking sectors and bureaucratic, business-unfriendly ethos. Yet instead of the UK's more flexible economy being re-infected by such economic nasties, might the Anglo- Saxon model have found a more receptive audience if it had been arguing its case by example within the eurozone? Unlikely, perhaps, but as Angela Merkel, Nicolas Sarkozy and, marginally, Silvio Berlusconi try to nudge their economies in the direction of market reform, might we not, in return, have also learned a little more about the benefits of an economy not quite so cruelly exposed to the capricious world of international finance?

The euro has confounded its doubters, magnificently. But in the final analysis, the case for UK entry remains weak. The euro is, in truth, an answer to a question never asked: how can we make our economy as strong as Europe's?

In the 1960s and 1970s, our relative decline and their relative success propelled us, almost begging, into the European Union. The Commonwealth, cheap food, the fishing industry, the gallon and the yard – all sacrificed to the imperative need to join Europe and cure the British disease. In the 1980s we wanted more of these practical, economic benefits, so even Margaret Thatcher gave up the veto and embraced the single market, completed in 1992.

It was more than just sentiment that made us sceptical about the Delors plan for Economic and Monetary Union in the 1990s, and created the national consensus for John Major's famous "opt-out". It was the realisation, greatly strengthened in the years since, that we didn't need the euro to get richer. Do we need it now? No. Will we ever? Well, that's a bit hypothetical.

s.ogrady@independent.co.uk

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