Would Britain have been better off with the euro?
Philip Stephens had a piece in yesterday鈥檚 FT arguing that , contrary to what most people believe. I鈥檓 no fan of the euro, and I鈥檓 not sorry Britain stayed out, but I think he has a point. The idea that Britain dodged a bullet by staying out, I think, is wrong. Central banks, by their nature, lack the knowledge to be able to set interest rates capably, and it鈥檚 a mistake to think that one or another would be 鈥榖etter鈥�, except in hindsight.
Yes, the euro was a bad idea 鈥� a case of hoping that water would run uphill if its designers wanted it to. And the mistake of imposing interest rates set to meet Franco-German needs onto fast-growing economies like Ireland and Spain is now being witnessed (if not learned). But would Britain have followed Ireland into apocalypse, had it been in the euro? I think it鈥檚 unlikely. Britain avoided Ireland鈥檚 fate because it was already much more economically developed than Ireland was during the Celtic Tiger years.
The euro鈥檚 lower interest rates would probably have inflated bubbles in Britain a bit more than the Bank of England鈥檚 rates did, but don鈥檛 know if there would have been a huge difference. Maybe having the pound was better than being in the euro, but probably only marginally so. Stephens is right to highlight this.
He鈥檚 on much shakier ground when he says that the UK would have mirrored Germany鈥檚 decent economic performance by being in the euro. Stephens fails to acknowledge the strength of developed non-eurozone European economies. Sweden, which also stayed out of the eurozone, , more than Germany鈥檚 3.6% and a lot more than the overall eurozone鈥檚 1.7%. I鈥檓 skeptical about the value of direct comparisons between countries, but the case is inconclusive in either direction.
The point worth taking from Stephens鈥� piece is that the Bank of England wasn鈥檛 especially competent during the 2000s, and we shouldn鈥檛 thank it for helping the UK avoid an Irish-style crisis (, thanks to government overspending). Central banks are naked in the dark when it comes to interest rates, and we shouldn鈥檛 be applauding our own 鈥� or envying others 鈥� when dumb luck avoids catastrophe.
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