There has been some debate in the media this week about the significance of statements by leading Liberal Democrats about their policy on joining the euro. Does this mean they care about it less?
Chris Huhne declared in an interview last weekend that “the truth is that within the British debate it’s completely off the radar, and therefore there is simply no point in regarding it as a runner worth investing political time in.” This isn’t a reflection of what the Liberal Democrats think about the importance of the euro, but of what everyone else thinks about its importance.
And that’s a pity. At a time when the interconnections between different national economies are becoming more pronounced and more clear, the management of those interconnections becomes more important too. There is an important role for coordination between the different regulators of the major financial institutions, to create a regulatory regime that is consistent, transparent and reliable. If business is conducted on a transatlantic basis – Lehman Brothers used to ship money and assets back and forth between New York and London every week – then the regulation has got to be transatlantic too.
But what has sharing a currency got to do with this? Two things.
First, stepping in to the market to shore up tottering banks requires lots of cash, readily available. This is something that only central banks can do, and a large central bank can do this better than a small one. From the point of view of the UK, the European Central Bank would be a better vehicle for this than the Bank of England on its own.
Secondly, when it comes to rebuilding global economic activity in the aftermath of this mess, it is clear that those countries whose economies were artificially inflated by the housing and credit bubbles are going to have to manage a dignified decline. It is in everyone’s interest for this decline to be controlled rather than precipitate, because countries such as America and the UK remain good customers for the rest of the world’s exports, if a little less good than they used to be.
A key tool in managing that decline is the adjustment of exchange rates. Rather than being simply a price whose level can be left to the marketplace, the relative value of the world’s exchange rates is a matter of intense and vital political concern. The British voice in the debate about future exchange rate management will be weakened because Britain has a small offshore currency rather than one of the big three.
However, the time when Britain most needs to be in the euro is a time when Britain cannot join it. Membership will take longer to bring about. Staying out of the euro in 1997 looks even more like a short-term political decision now than it did then.