What a pity. What a relief

Date: 14/06/03

Many Europeans are glad that Britain is hesitating over the euro

BRITAIN'S decision to stay out of Europe's single currency, at least for now, was not front-page news in the rest of Europe. The decision was, after all, hardly a surprise. Most commentators interpreted it as further evidence of Britain's deep ambivalence towards the “European project”.

Although the European authorities were careful not to express much of an opinion on the British government's wait-and-see verdict, there does seem to be genuine regret that Britain is not joining. The fact that London, Europe's major financial centre, will stay outside the euro zone is an irritation. A British decision to sign up would be seen as a powerful vote of confidence in the euro.

Conversely, the decision to stay out raises a question-mark over the European Union's official view that the single currency is both historically inevitable and unarguably beneficial for all who adopt it. Morale in the euro zone has increased in recent months, as the new currency has risen against the dollar.

Yet there is the uncomfortable knowledge that economic growth in much of the euro area is feeble and that the “stability and growth pact”, whose fiscal rules are meant to bind all members of the single currency, is falling apart. Some European politicians had hoped that a British decision to join might provide the occasion for a wholesale renegotiation of the dreaded pact.

On the other hand, in some respects the managers of the euro zone have reason to be grateful that Britain is keeping out. Their decision-making, hard enough as it is, would become even trickier if Britain adopted the single currency. The single biggest difficulty in the euro zone at the moment is that interest rates have been consistently too high for Germany, whose economy needs a boost.

But if Britain took up the euro, there would now be stronger pressure to raise rates from their current level to take account of relatively high inflation in what would be the euro area's second-biggest economy. Similarly, British financial circumstances would argue for a relaxation or a scrapping of the euro zone's fiscal rules, since Britain has a low national debt, a comparatively well-funded pension system and badly wants to spend more on public services.

The fiscal situation in other parts of the euro zone, where national debts are higher and the pensions crisis much worse, is very different. One-size-fits-all policies are hard enough to sustain as it is, without the British complicating matters further. Perhaps the next time Europe's finance ministers meet, they should pass a vote of thanks to Britain's chancellor, Gordon Brown.

Many Europeans are glad that Britain is hesitating over the euro.

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