Join the euro – the last resort

As I’ve posted over at NI Crunchtalk – A 16% fall in sterling in less than a year, a 25% fall in Barclay’s shares in a single hour last Friday, the scene is set for a new mega- banking insurance scheme bailout. Inside the turmoil of events come faint stirrings for the UK to join the euro which NI business will want to keep a close eye on. To the esteemed Observer columnist Will Hutton, “Britain is on the edge -” just behind Ireland.

“The joke across the Irish sea is that the only difference between Ireland and Iceland is one letter and six months…. After what happened to the world’s banks last week – and to Barclays Bank in particular, whose share price collapsed 25% in an hour on Friday – it’s clear that Britain is at risk of being next in line…. There is a budget deficit next year of £118bn, which may have to increase again – with another big Obama-style fiscal stimulus – if the recession deepens. My view is that the financial markets will accept actual spending only if Britain pre-announces that after financial stabilisation has worked, it intends to join the euro – otherwise we will find ourselves in the same position as Iceland.”

More intellectual underpinning for a move to the euro has come from economists and business leaders led by Peter Sutherland, former Attorney General of Ireland, former WTO chief and EU commissioner and now chairman of BP and Goldman Sachs.
Sutherland and co-authors of a book of essays presented at the London School of Economics recently foresee a time when an independent sterling is a weak and peripheral currency compared to the reserve currencies of the dollar and euro. I thought we were pretty much there already; perhaps these gurus are only being polite.

The strongly Euro-sceptic Times grandly dissents from this.

In adopting the euro, these countries have given up the ability to use the exchange rate to offset an economic shock, and are subject to a single interest rate that may not be suitable for their particular stage of the business cycle. The main macroeconomic question for the UK is whether the benefit would justify that cost. It would not.

Political opinion is officially closed. Last month, Downing St denied any shift in current euro policy. For the Conservatives, William Hague goes so far as to break the old rule of politics never to say “never.”

But with world wide turbulence showing no sign of abating, who’s to know what will happen in even a few week’s time? The focus may shift from flexibility of response to seeking a broader, deeper shelter if forthcoming measures fail to deliver.

Former BBC journalist and manager in Belfast, Manchester and London, Editor Spolight; Political Editor BBC NI; Current Affairs Commissioning editor BBC Radio 4; Editor Political and Parliamentary Programmes, BBC Westminster; former London Editor Belfast Telegraph. Hon Senior Research Fellow, The Constitution Unit, Univ Coll. London

  • kathleen

    Liam Halligan questions the long term survival of the euro zone in the Telegraph :

    … Last week, any remaining hope the eurozone had escaped the worst of this crisis was blown out of the water. Economic sentiment is now at a post-war low. Even the European Central Bank, admirably restrained until now, could resist the political pressure no longer and cut its interest rate to 2pc. This column has long questioned the eurozone’s long-term survival. Now global markets are doing the same. At the start of last year, the average 10-year government bond yield among the weaker member states (Portugal, Greece, Spain, Ireland and Italy) was just 25 basis points above the comparable number in Germany. That spread is now six times bigger.

    Credit default swaps (the cost of insuring against a government default) among the most feckless eurozone members have reached Latin American levels. Would French and German taxpayers bail out another eurozone member? The longer this crisis goes on, the larger that incendiary question looms.

    Jumping in there may not make much difference either way…

  • Greenflag

    Brian Walker,

    ‘There is a budget deficit next year of £118bn, which may have to increase again – with another big Obama-style fiscal stimulus – if the recession deepens.’

    It will deepen no question so expect a bigger budget deficit.

    ‘The focus may shift from flexibility of response to seeking a broader, deeper shelter if forthcoming measures fail to deliver. ‘

    Here we can compare Britain and Florida the former an ‘independent sovereign state with it’s own currency ‘ and the latter a State within the Dollar Union .

    Florida is expected to have a state budget deficit of 146 billion dollars in 2010 and the same is true for may other States . Unlike Britain the Floridians cannot change interest rates or print money and run huge deficits like the USA Federal Government for Florida state is by it’s own Constitution bound to balance it’s budget by law within certin limits . What this means is that Mr Obama’s spending stimulus which will hopefully be used to kick start the economy will be accompanied by the States cutting back on expenditure -reducing services ,numbers of employees etc etc etc . The opening of one door achieving the closing of another .

    For Britain with no ‘constitutional ‘ brakes on the size of it’s borrowing or printing money as for the USA the trick will be to perform the latter two policy options while ‘pretending ‘ the currency won’t be devalued .

    Overall it’s a tricky situation for the Brits .But I suspect that Sutherland is right and that Britain’s continuing hold on to it’s ‘peripheral ‘ currency will only encourage further devaluations until such time that Sterling becomes the ‘new ‘ lira of Europe.

    Having been told for decades by the anti EU media and the right wing xenophobes that the EU is the anti christ and the source of all Britain’s problems it will be a difficult move to achieve politically for either Labour or Conservatives .

    Heseltine was right after all then ?

  • Greenflag


    ‘Economic sentiment is now at a post-war low.’

    The same is true the world over . When push comes to shove though the world can’t afford for the dollar to collapse to Weimar German Republic ‘mark ‘ levels . Also not the Euro or the Yen . But Sterling ? If one Hungarian investor guru George Soros can tell the British Government in the early 1990’s to devalue and they don’t and they eventually have to- minus of course the’ billion pound in lost pride costs ‘ how much more can the same happen today in 2009 ?

    ‘Jumping in there may not make much difference either way.

    When the plane has lost it’s engines at 10,000 feet and there are no parachutes and the choice is certain death or jumping with a slim chance of survival most people will opt for the latter . Human nature .

    Wonder if that Liam Halligan is anything to Peter Halligan the former Irish Labour party anti EU activist of former days and IIRC one time contender for the party leadership ?

  • Dewi

    GF – Florida deficit of $146bn in one year? Can’t be right.

  • Peter Sutherland could and would have written the exact same thing about UK joining the Euro seven years ago and people would have laughed at him. He is not an unbiased opinion.

    What about seven years from now? What about seven months, when after the dollar in 2007 and sterling in 2008 the euro gets its turn under the cosh in 2009?

    He could be right – but perhaps the best course for the moment is “no bloody panico, pro bono publico”

  • @dewi/gf – the Miami Herald lists the entire FL state budget to be 65 billion for 2009, 1.2bn down on 2008.

  • Greenflag

    Dewi ,

    My apologies you are of course correct . I was reading on line and saw state instead of states and a comparison seemed worth making .Attacked by the dyslexians 🙁

    Here’s the article anyway .

    ‘As Congress readies an $850 billion economic-stimulus package, state legislatures, bound by balanced-budget mandates, are slashing billions in state spending.

    It’s a paradox that economists say leaves millions of recession-weary Floridians stuck in the middle. And it raises the question: If federal spending can help cure a recession, can state budget cuts make one worse?

    “There’s no question that when they cut state spending, it hurts the economy,” said Mark Vitner, a senior economist at Wachovia. “But they really don’t have any choice.”

    The numbers are daunting.

    The Center on Budget and Policy Priorities in Washington, D.C., predicts that the states will face $145 billion in combined budget shortfalls next year and $180 billion in 2011.

    As legislatures struggle to meet their constitutional mandates for a balanced budget — the federal government has none — and keep up with plunging tax collections, all eyes are on Congress and President-elect Barack Obama’s rescue plan.

    In the meantime the cutting, and pain, continue.

    “At a minimum, there is a risk that state budget cuts will work in the opposite direction of recovery. Eventually, you’re going to have to cut spending and raise taxes,” said Donald Boyd, a senior fellow at the Rockefeller Institute of Government, part of the State University of New York. “That’s why the speed (of a federal stimulus plan) is so important

    From the above it seems that the UK is in relatively speaking a worse state than the USA given the population difference . On the other hand the UK has at least a decent social safety net . Americans in the final resort have over 50 million weapons 🙁

    Mark Dowling – thanks also for the correct info 😉

  • Harry Flashman

    A link to an article I posted in another thread:

    Monetary union has left half of Europe trapped in depression.

  • Does that chap even know what a depression is?

  • Harry Flashman

    “Does that chap even know what a depression is?”

    I have no idea but I get the distinct feeling that by the end of this year we will all know what a depression is.

  • Elvis parker

    ‘The strongly Euro-sceptic Times grandly dissents’ as does the Telegraph and – in the Daily Mail William Rees Mogg.
    My money is with the sceptics.
    Perhaps it is time for the Republic to re-join Sterling. This would certainly help the Republic’s exports.

  • The funniest part of British euro-skepticism is that if it was called the pound and the ECB was in London, they’d think it was a good idea.The UK media so shockingly, irrationally euro-skeptic (largely because of the whim of an Australian), that the Euro stands little chance there unless there is an economic collapse.

  • kathleen

    I think we’re in for major bad news if the banks do come clean, as urged by Gordon Brown. Trust won’t come until the markets and the public know how bad things really are. When that news comes, which I believe it will, then we’re in for some rocky times….

    Yes I think the buzz word now should be depression in and out of the euro zone.

  • Dave

    Kathleen, and that is the point that you discover that your government has thrown tens of billions at resolving a problem that was the wrong problem. 😉

  • kensei


    Excellent response to your article:

    I view the widening of the sovereign risk spreads inside the eurozone as a welcome development. With the revised Stability and Growth Pact effectively emasculated as a fiscal discipline device, it is essential for national fiscal discipline in the euro area, that the market believes (1) that national sovereign debt is indeed just national, not joint and several among all eurozone member states, and (2) that the ECB will not bail out ex-ante or ex-post a eurozone member state that gets itself into fiscal problems. The very low sovereign risk premium differentials in the early years of the eurozone were worrying to me, because it seemed to indicate that the markets believed that a fiscally incontinent government would be bailed out by the other eurozone national governments or by the ECB. The new larger and healthier sovereign risk premium differentials indicate that the markets may be able to provide more fiscal discipline than suggested by the early years of the common currency. That is good news indeed.

  • Dave

    Personally, I find it delightful that rabid Europhiles like Willem Buiter have suddenly been converted into stern advocates of national sovereignty. Indeed, the EU integration project is truly dead, now we only need to make them follow their own seperatist logic and accept its demise.

  • Scaramoosh

    From October 2007 (and prescient);

    “The proportion of outstanding residential mortgages that are classified as buy-to-let and principal-dwelling house, was at 26.1 per cent and 72.8 per cent respectively, at the end of Q2 2007. This compares with the UK housing market, where buy-to-let mortgage lending represents only 9% of the value of all mortgage balances in the country.

    As the buy-to-let speculative bubble has built up, some Banks became more than willing to offer multi-million pound loans to people on modest salaries. In April 2007, for example, the Bank of Ireland lifted its ceiling on the amount of loans it would advance to any one landlord from £2.5m to £20m.

    In the context of the broader mortgage market, in July 2005, First Active, a division of the Royal Bank of Scotland became the first Irish based financial institution to offer 100% mortgages in the Republic of Ireland. The bank previously offered 100% financing to professionals in finance and medicine, but it took the decision to extend the offer to anybody who could afford to meet the repayments.

    Personal-sector credit in Ireland has expanded by 11 per cent over the year. Inclusive of securitisations, personal-sector credit increased by 17.8 per cent, while residential mortgage lending increased by 19 per cent. Four-fifths of personal credit is secured on property; compared with a euro-zone average of two-thirds. Taking personal credit to GDP ratios as a measure of personal indebtedness, Ireland lies in second place in the Euro zone. Substituted GNP for GDP, and it now has now has the highest personal indebtedness ratio in the Euro zone.

    A recent article in the Irish Independent calculated the Irish banks’ deposit-to-loan ratios. Anglo Irish Bank was reported as having a deposit-to-loan ratio of 78.2 per cent, whilst the Bank of Ireland’s was 57.7 per cent. AIB and Irish Nationwide were reported to have deposit-to-loan ratios of 65.8 and 63.2 per cent respectively. As of the end of June 2007, it was reported that Irish Life /Permanent TSB had a loan-to-deposit ratio of just 39.2 per cent.

    As regards their reliance on wholesale funding for their lending book, for AIB the figure is believed to be around 44 per cent, Bank of Ireland 46 per cent and Anglo Irish Bank 36 per cent. Irish Life & Permanent is again out of step, with an estimated 67% of its loan book funded by wholesale lending.

    A double digit decline in house prices, would have an economic cost several times greater than the current meltdown in the subprime mortgage market; not least, because residential property represents the single largest component of the wealth of most Irish households. On some estimates a 10 pc fall in house prices, could knock 40 pc off the land values which underpin valuations in the sector, and wipe out 1,000bn of household wealth.”

    The whole that they will have to dig themselves out off, is much larger than many currently anticipate.

  • fair_deal

    Additional article how being part of the euro is helping to shaft the Irish economy.

  • kensei


    I had read that Irish debt – gdp ratio could jump to 805 by the end of this. This is by no means the worst it has been in its history:

    Such imbalances can be tackled over the long term as was done previously. 25% is a very low ratio in any case, it need not have to back taht far. Rather than talking about default or leaving the Euro, the Republic should be looking at how to restructure the economy and publci spending to become more competitive and productive over the medium to long term. Talk of leaving the Euro and default smacks of short termism and panic.

    The article int he FT Mick posted in his round shows the speed of the change. It truly is frightening.

  • Mack

    While I enjoy reading Ambrose Evans-Pritchard (indeed read his column’s religously) he is strongly Eurosceptic. With a strong focus on keeping Britain out of the Euro.

    He has not performed any serious analyses on the Irish economy. He’s quoting David McWilliams largely out of context. Although McWilliams has hinted at Ireland leaving the Euro (in a recent article and suggesting it might be considered in the future in the Generation Game) I’m not convinced he believes it in Ireland’s best interest.

    Sterling has collapsed – and that is a problem for all of us – but it is no reason for the currency used in Ireland to do likewise. Importantly, the US Dollar has strengthened against the Euro improving the economics for US multinals in Ireland, and also Irish exporters to the USA. At the same time import prices are rising in the UK, CPI in Ireland is falling currently at over 1% deflation per month.

    The Euro did not cause our problems, leaving it wouldn’t fix them. Aside from the exchange rates,
    Euro interest rates are at 2% and falling. I can’t see any cause for complaint there.

    The sheer scale of the property bubble, and the gombeens who that they’d discovered the alchemy of finance are the cause of our woes.

    Money is a store of value, why are people so keen on debasing the value of their money?

    Do not forget the dangers of moral hazard.

    The British are now learning that they can be themselves whatever nominal value they like, as if it turns out to be too much their government will debase their currency to correct the imbalance (thereby reducing their savings, decimating their pensions, c’est la vie).

    The Irish are learning the hard way that you can’t just pay yourself what you like. That prudence is a virtue that requires hard thinking and decisions in good times.

    Who do you think will display better fiscal responsibility in future?

  • Mack

    Typo –

    Money is a store of value, why are people so keen on debasing the value of their money?

    Do not forget the dangers of moral hazard.

    The British are now learning that they can pay themselves whatever nominal value they like. If it turns out to be too much their government will debase their currency, “correcting” the imbalance (thereby reducing their savings, decimating their pensions, c’est la vie).

    The Irish are learning the hard way that you can’t just pay yourself what you like. That prudence is a virtue that requires hard thinking and hard decisions in good times.

    Who do you think will display better fiscal responsibility in future?