We all know what has brought Ireland to its knees. An economy growing much too fast on the back of an unsustainable property boom. A government powerless to raise interest rates to calm the economy. Banks lending irresponsibly to borrowers against the crazy value of their properties. But all that and much more would have happened in Britain, too, had our politicians taken us into the euro. And we would be not so much on our knees now as flat out on the floor.
Imagine if Tony Blair had had the nerve to hold a referendum on euro entry soon after his victory in 1997. Despite voters' scepticism, he might well have won. The opponents were the Tories, who had just been trounced in a general election. The supporters were young, liberal, modern, forward-looking and overwhelmingly popular.
We would have heard lots of guff about the euro being the future and the pound being the past. We would have been told that if we were pro-European, we should be pro-euro, too. And, more prosaically, Blair would have pointed to lower interest rates in the rest of Europe and the prospect of cheaper mortgages all round.
Which, of course, was what got Ireland into the current mess. So just think how much worse it would have been here. Had we joined the euro in 1999 after a victory in the referendum, we would have had more than a decade of interest rates too low for our own good. Like the Irish, we would have been splurging on property: trading up, buying to let, speculating on Bulgarian apartments and Spanish villas.
As it was, we went into the credit crunch and the recession with an economy too dependent on inflated house prices and with a banking sector overexposed to property lending. Had we been in the euro, the imbalance would have been far, far worse. And our banks now – like the Irish – would be struggling even harder to cope with the toxic debts they had accumulated.
Our economy was also distorted by the disproportionate strength of our financial sector. That, too, could have been worse inside the euro. When Britain failed to join the euro, some business that might have come to London probably went to Frankfurt or Paris instead. Had we been in the eurozone, this would have beefed up the City still more. Not only would we have entered the recession in an even ropier state; the past two years would have been close to unbearable. And, like Ireland, we would now be close to national humiliation and financial meltdown.
It's not as if Ireland's government has been irresponsible. On the contrary, it had a budget surplus as recently as 2007, and brought its government debt down from 95 per cent of GDP in the early 1990s to 25 per cent by 2007. Now it is close to insolvency. And the reason why it now has to abase itself to accept a rescue package from the IMF, the EU and the European Central Bank is that it no longer has the mechanisms that Britain still possesses to sort out its own problems.
Our Government isn't threatened by insolvency or an inability to borrow, even though our deficit and debt are similar to Ireland's, because our own Bank of England is our buyer of last resort. If international investors don't want our government bonds or "gilts", the Bank of England can simply print the money and do so itself. The Bank has bought about £200bn of gilts through quantitative easing since February 2009, which adds up to the whole of our government deficit.
And in that time, interest rates on gilts have actually fallen, which makes it cheaper for us to finance our debt. In Ireland, they have rocketed. Our Government doesn't have to worry about whether it will have the money to pay public-sector workers next year. Ireland, without a central bank, does.
Nor are we hostage to the bond markets in the same way. Even if foreign investors were to take fright, all that would happen would be that the pound would fall. And a lower exchange rate boosts exports and our manufacturing sector. Ireland – indeed any other country in the eurozone – has no such stabilising mechanism.
There's another benign effect. When the pound falls, British assets look attractive to foreigners. They pile in and buy our property and businesses. That's why house prices are still rising in Kensington and Chelsea.
So our banking sector has been much less badly hit by falling property prices. After Lehman Brothers collapsed in 2008, pundits said that our commercial property, like Ireland's, was overvalued and needed to fall by 40-50 per cent. In Ireland, it did – which trashed the banks' balance sheets, since their lending was secured against property worth far less than the value of the loan. In Britain, property fell by just 20 per cent in sterling terms but because the pound fell another 25 per cent, the total fall of 45 per cent made Britain look attractive to foreigners again. The market stabilised, the pound started to rise again because of the influx of foreign money, and the banks survived because they only took a 20 per cent hit. Now our government looks likely to make tens of billions of pounds of profit on its investment in our banks. Ireland's has nearly gone bust.
If we were now in the euro, the consequences don't bear thinking about. We would probably be suffering a run on our banks, too, but ours is too large an economy to be easily bailed out by our EU neighbours. Already, eurozone members are worrying about Spain being the next victim of the markets, and being too big to rescue. Our economy is nearly twice the size of Spain's, and our financial sector perhaps five times bigger.
We wouldn't have had the benefits of our quantitative easing or the fiscal stimulus which staved off catastrophe in 2008-09. The European Commission would have insisted on more fiscal tightening far earlier, which would have been disastrous for the economy. We would now be faced, like Ireland, with banks no one trusted, an economy shrinking so fast that even huge public spending cuts would make no dent, and the shame of begging international institutions to help us avoid bankruptcy. We would also be forced to sign up for the political union without which a currency union can't work.
If you thought our situation was bad enough outside the euro, thank Blair's hesitancy – and Gordon Brown's obduracy – for it not being a whole lot worse. Not that Blair is likely to apologise for his euro-enthusiasm. Opponents warned him again and again that losing control over interest rates and exchange rates could prove disastrous for Britain. He just ignored them and refused to acknowledge the dangers.
And who was this, writing in Prospect in 2001? "If we remain outside the euro, we will simply continue to subside into a position of relative poverty and inefficiency compared to our more prosperous European neighbours... [How can] such relative decline be a price worth paying for the sentimental satisfaction of retaining increasingly meaningless 'control' over our own interest rates?"
Step forward Nick Clegg. I do hope he feels chastened now.Reuse content