Mary Dejevsky: Do you really think our economic way is best?

In a neat reversal, the euro is helping to shore up our sinking high street
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The Independent Online

A seductive little myth is gaining credence, according to which Ireland's rejection of the Lisbon Treaty can be explained by the supposed iniquities of the single currency. The straitjacket into which the Irish economy was forced by its euro membership, it is argued, left Ireland's government with too little room for manoeuvre, made the Irish feel poorer than they had in the early years of EU membership, and deterred them from signing up for more.

Now this may be one way of looking at it from that side of the water. As a view that confirms the beliefs of Eurosceptics, free-marketeers and those pro-Europeans who nonetheless drew the line at a single currency, it enjoys a certain resonance on this side, too. Britain's continuing semi-detachment from Europe is thus justified.

Yet there are two things very wrong with this argument. The first is the presumption that Britain, by avoiding the stagnation that has beset the euro-zone, is better off outside than in. As a hypothetical question, this has no answer. But try framing it slightly differently: how do you feel about Britain today, when – say – you look at our closest Continental neighbours? Do you still think our economic way is superior?

If you don't, this might be why. Our absence from the euro-zone gave the Chancellor an enviable degree of freedom and flexibility that, with hindsight, he might have been better off without. Yes, he gave us bragging rights on rates of GDP growth and unemployment. But he locked us into a low-wage, low-productivity, high-price economy, that, we increasingly learn, was built on cheap credit.

The pivotal role of house prices in fuelling Britain's boom is now increasingly seen for what it was; ditto the reliance for our national wealth on those gnomic "financial services". Over the past 10 years, our economy has come more and more to resemble the US model. Now, as house prices and easy credit unravel, so too does almost every other aspect of the economy.

The euro-zone was built on sounder money; bank-lending remained more circumspect and interest rates more realistic. While Britain has been battered by the US credit crisis, the euro-zone has been bruised only where individual banks found themselves hit by US sub-prime lending. The continuing strength of the euro and the de facto devaluation of sterling in recent months offer a study in comparative confidence. In a neat reversal, Continental Europeans are now coming here to hunt bargains; the euro is helping to shore up our sinking high street.

If the Irish feel under the weather, it is as much to do with the hangover from rapid economic growth and local sleaze as it is with the effects of being in the euro-zone. In fact, Ireland's combination of low taxes and the high euro suggests more solidity than the current British combination of a falling pound and dysfunctional credit system.

But it is not just Britain among those countries outside the euro-zone that is feeling the pinch. Which is the second reason why it is quite wrong to make the euro the scapegoat for Ireland's no-vote. Of the non-EU, non-euro countries, Norway is essentially a petro-economy; it is doing splendidly, thanks to high energy prices that it funnels through state structures every bit as restrictive as Russia's. Switzerland, with its banking sector, has always been a special case. Both can afford to remain outside the EU and the euro.

If you consider the non-euro countries in the EU, however, only Denmark is doing well. Sweden is not a happy economic ship, despite the reforms – made and promised – by its centre-right government. The rest are the former East and Central Europeans who joined the EU from 2004. They want to join the euro, but all, without exception, are finding it much more difficult to qualify for membership than they had expected. Even the Baltic States and Hungary, long favourites to speed to euro-membership, keep postponing the date.

This is partly because they want to keep the flexibility over interest and exchange rates that the euro would deny them. The reason they want to keep this flexibility, though, is that their economies have markedly slowed of late. The spectacularly high growth rates that their US and British fans hailed as vindication of their free-market theories – and, coincidentally, helped to pull up the average growth rate for non-euro states – now look more like a response to the sudden, post-Soviet freeing of the economy. These countries are now settling into slower, harder times.

They could draw a lesson from Ireland. But it would not be that the euro is to be avoided; rather that euro-membership can provide an enviable shelter from global economic storms. Oh yes, and that the euro encourages governments to act responsibly, sometimes even against their own electoral interests.

m.dejevsky@independent.co.uk

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