The Euro: the case against

A single currency sounds a great idea. If we all shared the same currency, then we wouldn’t have to change in and out of Pounds every time we went on holiday, with the banks taking a commission both ways. We wouldn't have lots of loose change left over afterwards that was of no use any more unless we went back to the same country for another holiday. With just one currency it should be also much cheaper and simpler to run a business trading within Europe: it also would be easier for companies to plan longer term investments if the uncertainty of different exchange rates were removed. What could possibly be the problem?

There is actually a very big problem, certainly for the UK which I shall describe in a moment. There may even be a problem building up for the 12 countries of Euroland, as they grapple with the challenges of not just a fixed exchange rate but the single interest rate that goes with it. The financial markets are clearly worried already: in the two years since European currencies locked together in preparation for conversion, the value of the Euro has gone steadily down. The idea of a one-size fits-all currency has not impressed the money-men so far.

We must all hope that the Euro is ultimately a success for those countries involved. It would not help the UK economy to see a major trading partner struggle. Having said that, the Euroland countries are helped by the fact that some 90% of their trade is with each other. Their economies are already substantially interlocked. That is the big difference with the UK, and therein lies the problem.

Last year 21% of our exports were in Euros (or the equivalent European currencies). 29% were in dollars. We trade far more than the rest of the EU with the USA, the Commonwealth, and indeed the rest of the world. As a global trading nation our currency needs to flex, rather than fix against one trading bloc.

Less than 10 years ago we fixed to other European currencies via the Exchange Rate Mechanism (ERM). What seemed a good idea at the time soon became wrong. Unlike our EU partners, the UK economy went into recession. The currency couldn’t flex and take the strain because it was fixed. Jobs took the strain instead: UK companies went bust and unemployment rose. Thousands lost their homes. In the end we had to come out of the ERM. The pound immediately dropped once the currency was freed from its straitjacket, and jobs and the economy took off. Now the Pound is back higher than it was when we were inside the ERM: this just shows the extent of the flexing our currency needs. The good news with the ERM was at least we were free to leave: with the Euro there would be no way out.

The Governor of the Central Bank, Sir Eddie George, says that the UK can choose between having an unstable (i.e. a variable) currency with a stable economy, or a stable currency with an unstable economy. I know which I would rather choose.

The Single Currency is a massive experiment. Throughout history such experiments have never worked without being part of a Single Economy, i.e. with taxes as well as interest rates set centrally. That is not a vision which appeals.

Being outside a single European currency may create problems. Being inside can create bigger problems still. Being stuck inside with no escape is worse. I would not take such a gamble with my country.