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

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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.


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