Sean O'Grady: Why I'm glad we are not in the euro

How much more painful it would be without the flexibility of a floating pound

Related Topics

Every month I receive a mortgage statement from the Alliance & Leicester, and every month I am gobsmacked. Gobsmacked, that is, because, like most people, I expect my bank to treat me unfairly at every possible opportunity – and yet they haven't. I have a tracker mortgage, and I fully anticipated some clause hidden away in the loan agreement to deprive me of the, now monthly, mortgage reductions the Bank of England is cheerfully delivering. (Another large one tomorrow please, Mervyn.)

These downward ratchets on tracker mortgages are called "collars", but nooses would be a better description. The Nationwide is the latest institution to declare that they won't be relenting on them. So I am grateful my mortgage rate is collarless and pitched about 0.3 per cent below the Bank rate, opening the intriguing possibility that, if rates go really low, the Alliance & Leicester will be paying me interest for the privilege of their lending me money. That would be a good feeling.

In fact, most of us will have felt some benefit from the cuts in the Bank rate over the past year, despite the much-publicised unwillingness of some banks and building societies to pass the rate cuts on in full. Last January, the Bank rate stood at 5.5 per cent; by noon tomorrow, it may be down to 1 per cent. Even mortgage customers on fixed rates, so far deprived of this little bonanza, will get a welcome bonus when they come to re-mortgage. Which is all to the good.

For understandable reasons, the Bank may have been a little too slow to cut rates during the autumn, but they are making up for that now. The Government too is taking necessary risks with public borrowing. Speed is of the essence. Why? The words "do it now", spoken in a polite but insistent Japanese accent, are the answer.

Apparently, at every international forum the Japanese delegation offers the same advice, based on their own unhappy experience of an unbroken 20-year slump. Don't, they plead, dither and allow your economies to slide into deflation and stagnation. At the IMF, the G7 summits and the gatherings of central bankers, the Japanese are unusually outspoken: Do whatever is necessary without delay to avert that situation. Slash interest rates, cut taxes, borrow, spend, recapitalise the banks – whatever you do, do something, and do it now.

The Japanese did all those things to revive their economy, but failed because their timing was wrong. They took action only after deflation set in, and by then it was too late. Every intended boost to spending was saved by a fearful public, and the Japanese economic miracle was history.

Whatever their past hesitations, Mervyn King and Gordon Brown are turning into proper little action men in their bustling encouragements to get us to go out and spend. The last thing on their minds should be the fate of savers, as David Cameron eccentrically suggests, or sterling, which has already seen one of the sharpest depreciations in its history. For we will never achieve an economic recovery without an extraordinary boost from exports.

Of course, such is the state of demand in major markets such as the US and Germany that the response so far has been disappointing. But think how tough life would be if the pound was still worth $2 and €1.50. True, it makes that skiing trip to Davos or shopping excursion to New York that bit pricier, but that is the point. We need to rebalance our economy and, in international terms, live within our means. The usual problem with a depreciating currency is that you tend to import inflation, but there is little risk of that with world commodity prices plummeting and little room for retailers to pass on price rises.

Unlikely as it may seem for a nation addicted to imported German cars and gigantic South Korean tellies, most of our economic recoveries since the Second World War have been greatly speeded by a collapse in sterling, notwithstanding the screeching headlines. The first post-war devaluation, in 1949, was a corker; from $4.03 to £1 down to $2.80. That helped us out of austerity and towards affluence; the "pound in your pocket" episode of 1967 (down to $2.40) put an end, for a short time, to stop-go; the brief resurgence of the UK economy in the late 1970s followed the humbling of sterling in 1976 ($1.50 by then); the 1980s boom followed the pound hitting $1 in 1985.

The most hopeful precedent from the current slump in sterling, however, is the way the economy embarked on a 16-year uninterrupted expansion after sterling was ejected from the European Exchange Rate Mechanism (ERM) in 1992. We should be especially mindful of this because of the news of the death of Sir Alan Walters, who, as Margaret Thatcher's adviser, was bitterly opposed to linking sterling to Europe (in those days, the Deutschemark). Walters' semi-public opposition on the issue led to the resignation of the then Chancellor, Nigel Lawson. We wound up joining the ERM anyway, but it crucified our economy, with interest rates far too high for domestic conditions.

Membership of the ERM was, as has been pointed out, like being in a building ablaze, but it did have a fire exit. The euro, it hardly needs saying, has been designed without an emergency door. True, our credit boom might not have got quite so out of control if we'd been in the single currency, and with our voice at the table at the European Central Bank in Frankfurt, interest rates would be set closer to British needs. But it is uncomfortable to imagine how much more painful this recession would be without the flexibility of a floating exchange rate.

Sir Alan was right to warn about the dangers of fixing sterling in the ERM, and I am sure he would be right about the euro now. As a fellow, but far less distinguished, son of Leicester, I hope you won't mind me paying that small tribute to Sir Alan's wisdom. But I also cannot but wonder what this staunch monetarist would say to those Japanese.


React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

KS1 Primary Teacher in Bradford

£21000 - £30000 per annum: Randstad Education Leeds: KS1 Primary Teacher in Br...

Year 3 Primary Teacher in Keighley

£21000 - £30000 per annum: Randstad Education Leeds: Year 3 Primary Teacher in...

Primary Teacher

£100 - £130 per day + Excellent rates of pay, Free CPD : Randstad Education So...

Credit Controller (Sales Ledger, SAGE)- London, Old Street

£12 per hour: Ashdown Group: Credit Controller - London, Old Street A well es...

Day In a Page

Read Next

In Sickness and in Health: It’s been lonely in bed without my sleep soulmate

Rebecca Armstrong
A man shoots at targets depicting a portrait of Russian President Vladimir Putin, in a shooting range in the center of the western Ukrainian city of Lviv  

Why do we stand by and watch Putin?

Ian Birrell
Alexander Fury: The designer names to look for at fashion week this season

The big names to look for this fashion week

This week, designers begin to show their spring 2015 collections in New York
Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

'I like Orwell's writing as much as the next talented mediocrity'

Will Self takes aim at Orwell's rules for writing plain English
Meet Afghanistan's middle-class paint-ballers

Meet Afghanistan's middle-class paint-ballers

Toy guns proving a popular diversion in a country flooded with the real thing
Al Pacino wows Venice

Al Pacino wows Venice

Ham among the brilliance as actor premieres two films at festival
Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

Neil Lawson Baker interview

‘I’ve gained so much from art. It’s only right to give something back’.
The other Mugabe who is lining up for the Zimbabwean presidency

The other Mugabe who is lining up for the Zimbabwean presidency

Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

The model for a gadget launch

Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
Alice Roberts: She's done pretty well, for a boffin without a beard

She's done pretty well, for a boffin without a beard

Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
Get well soon, Joan Rivers - an inspiration, whether she likes it or not

Get well soon, Joan Rivers

She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

A fresh take on an old foe

Doctor Who Into the Dalek more than compensated for last week's nonsensical offering
Fashion walks away from the celebrity runway show

Fashion walks away from the celebrity runway show

As the collections start, fashion editor Alexander Fury finds video and the internet are proving more attractive
Meet the stars of TV's Wolf Hall... and it's not the cast of the Tudor trilogy

Meet the stars of TV's Wolf Hall...

... and it's not the cast of the Tudor trilogy
Weekend at the Asylum: Europe's biggest steampunk convention heads to Lincoln

Europe's biggest steampunk convention

Jake Wallis Simons discovers how Victorian ray guns and the martial art of biscuit dunking are precisely what the 21st century needs
Don't swallow the tripe – a user's guide to weasel words

Don't swallow the tripe – a user's guide to weasel words

Lying is dangerous and unnecessary. A new book explains the strategies needed to avoid it. John Rentoul on the art of 'uncommunication'
Daddy, who was Richard Attenborough? Was the beloved thespian the last of the cross-generation stars?

Daddy, who was Richard Attenborough?

The atomisation of culture means that few of those we regard as stars are universally loved any more, says DJ Taylor