Britain Shouldn’t Leave the EU – It Should Join the Euro Group

Posted on: 07 May 2015

Professor of Economics John O'Hagan

‘Euro zone economic performance bad. Cause: the single currency.” “British economic performance good. Reason: not joining the currency union.” This is not too much of a caricature of a lot of the British debate on the euro.

It has now, it seems, reached the point almost where anyone in Britain who suggests joining the single currency is labelled a guilty “non-believer”. A subject certainly not fit for national debate, especially in an election where the possibility of Britain exiting the EU itself is a live issue.

But increasingly the EU is defined by what happens in the euro zone. If further integration of the currency union continues apace, which it must if it is to survive, then non-members could become in time “bit” players in the European project.

For Ireland the fact that Britain is outside the euro zone is the key economic consideration. If it exits the EU, appropriate trade arrangements can be put in place in time. Remember that many were opposed to Ireland joining the euro without Britain, for very similar reasons to those we hear today about the economic costs to Ireland of a Brexit.

It is striking how little media attention in Ireland is given now to Bank of England decisions or British budgets compared with the past. The centre of gravity for Ireland in fiscal and financial matters has shifted decisively away from London to collective decision-making in Brussels and Frankfurt.

But how could Britain possibly consider joining the “broken” currency union? After all, look at the relative economic performance of Britain and the euro zone.

It all depends, as always, on what comparator countries you use. Why, for example, take the euro zone as a whole but then compare it to individual countries outside it? Whether you take Austria, the Netherlands and in particular Germany, rather than Greece or Spain, makes a huge difference.

The usual retort that the success of, for example, Germany is at the expense of the other euro zone countries is at best disingenuous. It could be said then that British economic success is also at the expense of its EU trading partners, because with its vaunted independent currency it can outmanoeuvre others on competitiveness.

And what about the measures used to compare economic performance? In relation to the labour market, the best measure is probably the employment rate, that is, the proportion of the working-age population in employment.

A real conundrum in relation to the much admired US labour market for example is that while the unemployment rate has dropped significantly since 2009 the employment rate has also dropped.

Less than 69 per cent of the US working-age population in early 2015 are in employment, despite a very low unemployment rate. In the UK, 72 per cent of the working-age population are in employment, a record level.

An even better picture though applies to Germany. It has an employment rate of more than 74 per cent. A broadly similar position applies in Austria and the Netherlands.

There are measures of economic performance other than the state of the labour market. Take, for example, the key indicator of well-being, namely living standards. The usual emphasis is on growth simply of GDP, but this tells us little about the growth in living standards if not adjusted for population increase.

The relative position of Britain in terms of living standards has in fact worsened significantly since 2007. This is in contrast to Germany where relative living standards have increased. Even in much-maligned France, living standards increased more than in Britain.

The picture then is a lot more nuanced than often portrayed.

Within the euro zone the comparative “picture” also needs refinement. Many of the huge differences in employment rates predated the euro crisis. For example, the employment rate of only 50 per cent in Greece is not much below its level in the pre-2007 period. The employment rate in the so-called “sclerotic” French labour market today is actually higher than in the pre-2007 period.

One must also question the “poster boy” image of the Irish economy. The employment rate today of around 63 per cent is still well below the figure of over 69 per cent in 2007, albeit above the low point of 2012.

Living standards in Ireland, though, while they have fallen relatively speaking since 2007, are still well above those in Britain and most other EU countries, even taking account of inflated GDP figures for Ireland.

What then of Britain and the EU/euro zone? It may be better for all that a persistently recalcitrant EU member state no longer belong to the Union. This is a view one increasingly hears.

Much, much better though if Britain was enthusiastically at the heart of and shaping the European project, including the euro, rather than sniping on the sidelines.

If it wants beneficial reform of the EU, as does every member state, then let it be as a fully committed club member, observing the collective rules of that club.

Britain could play a central role not just in terms of the economy but also on other supranational issues such as security, environmental sustainability, migration and global relevance.

This could benefit greatly not only Britain but also the EU as a whole, not least its closest neighbour, Ireland. The forthcoming election will have a major bearing for years to come on which of these scenarios applies. Ireland must prepare well in advance for both eventualities.

Originally published in The Irish Times on Monday, May 5th, 2015