10 years on, Britain happy to have stayed out of the euro

27th December 2011, Comments 0 comments

A decade after the euro came into circulation, the British are more hostile than ever towards a currency that faces a battle for survival, and cannot hide their satisfaction at holding on to the pound.

Yet such sentiment masks the fact that while the eurozone is struggling, the British economy is not exactly booming either.

According to a poll in the wake of Prime Minister David Cameron's veto at a crunch European Union summit, 65 percent of Britons said they believe the euro is doomed and only one in five respondents thought it would survive.

The Sunday Times newspaper caught the mood with its headline: "It's bad, but at least we're outside the eurozone."

Anyone who hates Europe and the euro "can boast in the pub that they were right all along," it said.

Despite the hostility to the euro, the tangible benefits of Britain's decision to stay out of the single European currency appear to be limited.

Figures from the European Commission show that Britain's public deficit in 2011 will be greater than that of Greece and its debt will be roughly equal to that of France, despite an unprecedented set of painful austerity measures.

Meanwhile, unemployment is at a 17-year high and inflation is twice the rate of the eurozone.

Essentially, Britain is still paying the bill for the financial crisis of 2008 which caused deep damage to its banking and financial services sectors, in which it is the leading nation in Europe.

Financial services were the reason given by Cameron for dramatically using the veto on a revamped EU treaty because he fears new regulations from the bloc would restrict the City of London's room to manoeuvre.

However, Britain does have a distinct advantage compared to its euro-using neighbours -- an autonomous central bank.

Over the past three years, the Bank of England (BoE) has pumped the equivalent of £275 billion (330 billion euros, $430 billion) into the economy and bought large quantities of gilts, in contrast to the European Central Bank.

As a result, rates of return on British 10-year sovereign bonds are now near those on German bonds, meaning Britain is able to borrow on more favourable terms than most of its fellow EU nations.

However the injections of liquidity by the BoE have also contributed to the relative weakness of the pound, which currently buys around 1.15 euros, a mighty fall from its peak of 1.75 euros in May 2000.

That exchange rate helps to sell British products abroad, but Britain still imports far more than it exports.

The pound is failing to benefit from the euro's problems because interest rates in Britain stand at a record low 0.5 percent, deterring foreign investors.

Joshua Raymond, an analyst from City Index, said that "had Britain joined the euro, it (Britain) would have been vastly worse off today.

"The downside potential from being dragged into the sovereign debt [crisis] directly, as opposed to the current indirect picture ... negates any positives from a previous adoption of the single currency", such as greater trade ties.

Colin Ellis, of BVCA, an industry body for the private equity and venture capital sectors in Britain, told AFP that "stuck inside the euro, the Bank of England would not have been able to buy up such a substantial share of UK government debt."

Stephen Gallo, of Schneider Foreign Exchange, said Britain's EU partners who are grumbling about its refusal to adopt the currency should actually ask themselves "how much worse it would be for the euro if Britain were in it".

"If it were, the UK would almost certainly have needed a bailout."

© 2011 AFP

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