Walker's World: Britain and the euro

By MARTIN WALKER, UPI Editor Emeritus  |  Dec. 10, 2008 at 9:40 AM
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WASHINGTON, Dec. 10 (UPI) -- As the British economy slides deeper into recession, the pound has dropped from $2 in the summer to less than $1.50 today, and the relative strength of the euro means that just 1.14 euros will buy a pound. It comes as no surprise, therefore, to see renewed speculation about the British joining the European single currency and exchanging their pounds for euros.

Despite the speculation, fed by European Commission President Jose Barroso's claim that "the people who count in Britain" have floated the prospect with him, this is not going to happen in the foreseeable future.

There are a number of reasons for this, of which the most obvious is that the decline of the overvalued pound is a useful development for the British, making their exports cheaper and thus making their recovery more likely.

It is widely believed that the British official whom Barroso had most prominently in mind was Peter Mandelson, until recently the EU trade commissioner and now ennobled to the House of Lords and appointed Britain's minister for business. Equipped with great political skills and a feline cast of mind, Mandelson is a known enthusiast for Europe and for the euro. But he is also the likely choreographer and chief strategist for the re-election of Prime Minister Gordon Brown's government. Any speech or leak from him in what is becoming Britain's pre-election period therefore should be weighed with great care.

The fuss over Britain joining the euro is, in the light of the pound's weakness, just plausible enough to be possible. It therefore has excited the opposition Conservative Party, whose chief economic spokesman, George Osborne, had denounced Labor's "eurofanatics" and for the first time given a solemn promise that the Conservatives will never take Britain into the single currency.

"We will not join the euro -- in the present or the future," Osborne declared, breaking the first rule of politics, which is never to say "Never."

"It didn't take long for the eurofanatics in the Labor Party to seize on our economic difficulties for their own political ends," Osborne went on. "Our deteriorating economic performance is not a good reason to join the euro. The euro has never been primarily an economic project, it's a political one. Once you share a currency and a central bank, the pressures for closer political union become ever more powerful. Monetary union will only increase the pressure for closer political union. That's not what the British people want, and under a Conservative government they can be confident that it's not what they'll get."

Osborne's argument makes sense, as far as it goes. The British people repeatedly tell opinion pollsters that they want neither to join the euro nor to be part of a single European superstate. But those who put these issues at the top of their political priorities (a relatively small minority of voters) are already voting Conservative, or for the fringe U.K. Independence Party or the far-right British National Party.

Majority opinion in Britain wants to leave matters unchanged, to keep the pound, but also to keep their membership in the European Union, which now accounts for 60 percent of British trade. And they want, sensibly, to keep their options open. If the economic situation worsens to the point that the euro appears a safe port in a storm, they might well take it.

So far, the evidence suggests that the euro has neither hurt British trade nor damaged Britain's position as the financial center of Europe. Indeed, the euro does not appear to have done much for Europe. The orthodox view that the single currency would double or even triple the trade in goods between its members has been undermined by Harvard Professor Jeffrey Frankel, who finds that trade within the eurozone grew by just 10 percent to 20 percent during the first four years of the currency, and then the growth stopped.

"The most surprising finding of this study was the absence of any evidence that the effects of the euro on bilateral trade have continued to rise during the second half of the eight-year history of the euro," says Frankel's report, published by the non-profit National Bureau of Economic Research.

This is the more striking in that Frankel is something of an intellectual hero to advocates of the euro, after another report he published earlier this year suggested the euro could overtake the dollar as the world's leading currency by the year 2015. It may match it by then, but on the whole, the world's markets and bankers and investors tend to think that currencies backed up by unrivaled military might and technological prowess are likely to be more reliable than those that aren't.

But there will be at least two British general elections before the year 2015, and the wily Mandelson is focusing on the next one, which must take place by May 2010 and may well take place next year. The Conservatives are now locked into their "no euro" pledge, which is unlikely to do them any good save with their euroskeptic faithful, and may do them harm with that pragmatic majority of the British public that prefers to keep its options open.

Indeed, this week they witnessed something close to a love-in on the steps of Downing Street between Prime Minister Brown, French President Nicolas Sarkozy and European Commission President Barroso, all urging a concerted European stimulus package to match that announced by U.S. President-elect Barack Obama. In the midst of the worst recession most Britons can remember, that was a smart move, tying together the economic strength of Europe with the huge popularity of Obama.

It left Brown looking like a world statesman and the Conservatives like so many Little Englanders. Mandelson, in short, set a trap, and the Conservatives have walked into it.

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