Don’t rule out Britain joining the euro in a few years
Britain entering the currency union with German encouragement would have huge benefits for Ireland
“The ‘euro’ though has become almost a toxic issue of debate in certain quarters in Britain.”
‘In der Ruhe liegt die Kraft’ is reputed to be one of the favourite mottos of the recently re-elected German chancellor. Pilloried by many in the British and Irish media for her calm, pragmatic approach to the euro crisis, Frau Merkel is now lauded even by titles such as the Economist for her belief that “strength lies in calmness”.
She was hailed recently by that paper as “the world’s most politically gifted democrat”. As the reputation of others like Cameron and Obama have “soared and dipped” she has remained steadfast and trusted. And as Philip Stephens also pointed out in the Financial Times recently, one should not underestimate her achievement in holding Europe together.
What many forget is that what is economically desirable is not always possible politically, at least not in the short term. Besides, new waters were and are being charted in dealing with the euro zone crisis and it has, in effect, been a process of learning by doing. Merkel has said repeatedly she wants to build a stronger financial union, push more liberal policies and complete the single market. She wants also, and of particular interest to Ireland, to keep Britain in the “club”, though not at any price. All of this will require calmness and a keen political sense.
Summer travels vividly reminded me once again of the origins of the European project. Visits to Germany made me realise how recent in fact is the second World War, when a European conflict led to the loss of 20 million European lives.
A visit to Slovenia brought back how very recent were the Balkan Wars and how fragile the situation still is in that region.
Events during the euro crisis reminded us also that dangerous stereotyping relating back to these conflicts is not far from the surface today in many European countries.
Just because peace has been achieved in most of Europe for almost 70 years does not mean that the maintenance of peace, through extensive co-operation and mutual understanding, does not remain the over-riding policy objective by far of the EU.
This is the essential political background to the European project and in turn the euro.
Recall that the single currency came into being largely because of a desire by others to tie irrevocably a united Germany to a unified Europe. Its demise could have unimaginably damaging political and social consequences. There were also good economic as well as political reasons for a single currency. A currency union, properly constituted, has potentially many advantages: such as exchange rate stability, certainty, greatly reduced transactions costs, increased competition and greater opportunities for economies of scale in production. This applies in particular in the case of a very small economy like that of Ireland. But it also applies to larger countries like Britain. The “euro” though has become almost a toxic issue of debate in certain quarters in Britain, and to a lesser extent in Ireland. It is one thing to decide to remain out of a currency union, quite another to wish its demise, especially in its most severe moments of crisis.
Very often in some British media and political circles every bit of bad news from the euro zone was highlighted, sometimes with barely concealed satisfaction, while good news was relegated to footnote status. Moreover, the fact that France and Germany in particular, both in the euro zone, have regained pre-crisis GDP levels, whereas Britain, outside the euro zone, has still some way to go was conveniently ignored.
There are, though, many hugely supportive elements in Britain, perhaps not of the euro but certainly of the EU project. But British involvement even in the EU has now been put in jeopardy and how post-election Germany responds to this will have a huge bearing on the outcome. Far from being threats to the British state’s freedom of action and economic prosperity, international agreements can often be understood as instruments that greatly strengthen them, the EU being perhaps the apotheosis of this.
This reality is one that is beginning to be realised by many in Britain. The referendum question in the UK, if one is to be put at all in 2017, really might perhaps be whether or not Britain should consider joining the euro zone, not exiting the EU.
Significant steps have been made already to eventually ensure a properly constituted currency union. Joint mutual budgetary oversight is in place, tentative steps towards a banking union have been taken and some form of fiscal union will eventually emerge.
A key question for Britain is that if such an integrated currency and fiscal union does emerge, would the latter continue to have its predominant financial centre outside the union. The Irish position on the above needs to be unambiguous: it is in Ireland’s clear interest not only that Britain remains part of the EU but in fact that it joins the euro zone.
Only then will the full advantages from an Irish perspective of the single currency be realised. In some respects from an Irish angle though, the more fateful decision was made over two decades ago when Britain decided not to join the euro and Ireland did.
With the German elections out of the way, the next steps in ensuring no re-occurrence of the currency crisis takes place will soon come back centre stage again. Ireland should be clear in reiterating strongly the choice it made over 20 years ago, namely to tie to the euro and not sterling. Better still for Ireland is that with German encouragement Britain commits to joining the euro zone. In a few years time that possibility might not seem so remote.
John O’Hagan is Professor of Economics at Trinity College Dublin