All economists agree that, for the euro to be a success in the long term, the euroland economies must constitute an ‘optimum currency area’. If ‘convergence’ of the economies exists, then their policy needs would be broadly similar and a single monetary policy has a better chance of success.
But the most striking thing about the last two years is that Britain’s inflation rate has remained similar to the eurozone for the very reason that Britain has maintained a different monetary policy. In contrast, within the eurozone itself, there has actually been divergence because of the single interest rate with Irish inflation running at three times the eurozone average.
There is a fashionable view among some politicians that convergence is something that can be ‘achieved’ by short-term political manipulation.
But it is simply not enough to have a ‘window of opportunity’ to join at an exchange rate which politicians deem to be ‘the right rate’ at a particular moment in time.
Windows open and close and the ‘right rate’ this year might be the wrong rate in several years time.
That was our experience of the ERM which led to the collapse of 100,000 businesses and left 1.75 million households with mortgages worth more than their homes.
Joining the euro is an irreversible decision and we need to take a long-term view. The British economy differs from other eurozone countries in a number of ways. We have a larger service sector; a smaller agricultural sector and we have much stronger trading and investment links with the rest of the world.
These key differences mean that sustainable convergence is unlikely in the foreseeable future. The British economy has broken out of its spiral of postwar decline. We are enjoying an era of sustained growth with low inflation. Locking into EMU without real convergence would damage our economy and return us to the boom and bust of the past.
- George Eustice is campaign manager at ‘no’ campaign body Business for Sterling.
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