There has been much crowing amongst the Anti-Euro brigade in the UK over the past year. The structural problems of the single currency were said to be terminal, and there was much self-congratulation that the UK had managed to avoid such troubles by maintaining the independence of the Pound.
Now, however, the swagger has gone out of the Euro sceptics. The reason is not hard to find: British economic performance and monetary management on almost any conceivable measure has turned out far worse than our real comparable states in Europe. For all the gloating over the travails of Greece, Ireland or Iberia, the fact is that Germany, France and even Italy have weathered the economic down turn far better than the UK.
In Britain our inflation rate is peaking above 4%, and the direction of travel would be the same, even without the increase in VAT. Meanwhile unemployment is also rising strongly. Despite the recovery on manufacturing, the evaporation of large parts of the British banking system continues to have strongly negative effects. Meanwhile the huge increase in public sector debt has necessitated a severe programme of public sector cuts. So on inflation, growth, unemployment and on the deficit, the UK stands at the bottom of the class of the larger EU member states.
The whole point of maintaining an independent currency was so that interest rates could be adjusted to suit British economic circumstances. The problem is that the failure to intervene when the going was good has left the Bank of England with no room for manoeuvre in the downswing. The result is that despite the fact that inflation now rising strongly (now above 4%), the base rate remains at 0.5%- a record low. The fact is that with negative interest rates of -3.5% the Bank of England is debauching the currency and destroying the savings that will be necessary to pay for retirement. Instead of being a model of monetary probity, to off set the fiscal incompetence of Labour, they chose in the past to collude in the policy mistakes of Brown and Balls. Now, the fear is that any move upwards in rates would lead to a meltdown in UK growth. Yet despite this, growth is slowing sharply anyway.
The result is that Sterling has devalued by about 30% over two and a half years. Yet despite this boost, the country does not have the productive capacity to take advantage of export lead growth. So the fall in the currency is actually also feeding inflation because the UK imports so much. Meanwhile, even a rise in rates may not diffuse the housing bubble, while so many are forecasting that prices should rise again. The stage is set for a thoroughly poisonous mixture of low or negative growth, high inflation and increasing unemployment.
Meanwhile in the Euro zone, the structural changes that are also needed in the UK will now come through, even in the weakest five Euro states. At a time when the media and voters of Britain still seem inclined to listen to the siren songs of Labour promises of growth funded on the never never, it is worth noting that some countries, including even Greece, have begun to tackle the structural problems. We seem to be throwing away the breathing space that devaluation might have brought us.
The question then is: when does the UK stop devaluing?
At this point, it is not inconceivable that the Pound falls close to or even below parity with the Euro within a few months.
If that happens, then that will be the day that I will be asking those Anti Europeans who have been so quick to ridicule both me and indeed the very idea of the single currency for something of an apology. You had a chance to use the flexibility of a floating currency to address the structural problems of the UK: so far you have failed. When do you recognize the problem is not the currency, it is a fundamental failure of the economic structure of the UK ?