Friday, 10 December 2010

How Gordon Brown saved the Euro

Poor old Gordon Brown; six months ago he was Prime Minister and sometime saviour of the world. Today, he is reduced to writing op ed articles in the FT.

Sadly, there is no link to Gordon's thoughts. The FT operates an impenetrable pay-wall. However, his article can be summarized in two short sentences. First, he was against Britain's participation in the Euro. Second, it is in no one's interest if the euro should collapse.

His second point is certainly debatable. For example, Ireland may well be better off if the Euro were to disintegrate.

On the first point, Gordon is almost certainly telling the truth and he has the track record to prove it. More than anyone else, he deserves the credit for keeping the UK out of the single currency. 

In 1997, He cleverly created those "five economic tests", which provided a technocratic barrier that the Euro-capitulators could never overcome.  That Brown-inspired nonsense was sufficient to keep the UK from the clutches of the ECB and monetary disaster.

Consider, for a moment, the counterfactual. Suppose that Gordon had been unable to persuade Blair, Mandelson and the other Europhiles from bringing the Euro to these fair shores. Suppose Britain had adopted the Euro in 1999 - what would have then happened?

The first 10 years of the Euro were marked by unreasonably low interest rates, which generated massive housing bubbles in the eurozone periphery such as Ireland, Spain, Greece and Portugal. The UK would have suffered a similar fate, which would have made the bubble we did have, look like a minor blip. With exchange rate risk eliminated,  a tidal wave of capital inflows would have drowned our banks.

With cash pouring into the UK, and no independent central bank to hold back the flood, our  reckless and largely unsupervised banks would have gone mad.  They would have given out credits to anyone warm enough to hold a biro in their hand and sign a loan application. House prices would have hit the stratosphere and when it would have all ended, the UK banking system would have crashed as if it were the day before Armageddon.

Bailing out Ireland and Greece is one thing, but covering up the losses of a Euro-driven British housing bubble would have been impossible for EU.  An exit from the Euro would have been the only sensible thing to do. As soon as any sensible government were elected, they would have pulled out immediately. This would have provided the necessary cover for Greece, Ireland, Spain, Portugal, and Italy to leave as well.

By keeping the UK out of the Euro, Gordon gave the single currency a chance of survival.  Keeping the pound was definitely good for Britain and its capacity to absorb the shock of the financial crisis.  But it was also good for the Eurozone. 

Today, there is no one in the UK who would seriously argue that Britain should join the Euro.  Even those Euro-fanatical Lib-Dems have quietly dropped their support for the single currency.  If there were a referendum today, only Peter Mandelson and his Brazilian man-wife would vote yes to Euro membership.

So well done Gordon.  Good call. It is pity that the rest of your time in office wasn't marked by such wisdom and foresight.


Anonymous said...

The FT's paywall is far from impenetrable. Simply copy the URL into Google, search on it and click through to the link in the search results. Ta-da.

Secondly, why on earth do you think 3 is a more reasonable house price/income multiple than 4? Why not 2? I know you rent but you can't simply make things up with no factual basis just because you hope they were so.

Anonymous said...

'He cleverly created those "five economic tests"'
These tests could have been cooked up by a first year econ student armed with a copy of Mundell.

The five tests were a statement of the obvious, that the UK economy simply did not share enough with the other countries to merit joining a monetary union with them.

I'd give him credit for fighting others who were in the "Yes" camp. Although you wonder if he didn't want to join as signing up would have emasculated his power base at the Treasury.

Hoover said...

"our reckless and largely unsupervised banks would have gone mad"

Your counterfactual doesn't look very different from what actually happened.

Charles said...

So you're thesis is that things would have turned out just the same, but more so.

Inspiring... could I have that minute of my life back please?

Brian said...

I actually agree with this.

Alice Cook said...


I am not following you. Something can not be both "the same" and "more so". For example, take the number 2. If I add 1 to 2 it becomes 3. It isn't the same anymore.

And no, you can't have that minute of your life back. For me to give back to you, I would have invented time travel.

As far as I know, that too is not possible.


Anthony Z said...

But here's a counterfactual to your counterfactual: had we been in the Euro, no-one knows what the interest rates would have been. Adding a huge (by Eurozone standards) economy into the mix would have changed the decision making at the ECB, and the ECB would have had a British representative on the board, possibly making the case for higher rates to offset a boom.

Indeed, you could make the argument that low ECB rates set without regard to the UK's conditions created an atmosphere of low rates which influenced the track that the BoE followed. Not particularly credible, perhaps, but more credible than the idea that had we been in the Euro, rates would have been exactly the same.

Alice Cook said...


Do you think that if the UK were in the Euro and Britain found itself in the same sorry place as Ireland, the Conservative government would;

a) maintain euro membership at all costs, or

b) withdraw, re-establish the pound, devalue, and print cash to cover banking sector losses.


Elli Davis said...

Alice, you've got a point.

But still, we don't know for SURE...who knows what the whole situation would be like if UK joined?