It’s extremely difficult to make credible predictions about economics at the best of times – let alone whether it would be financially sound for the UK to rejoin the European Union.
Take interest rates and think back five years. If you had taken out a five-year fixed-rate mortgage in 2021, the rate would probably have been below 2 per cent.
Now it has come up for refinancing the rate would be around 6 per cent. Again, no one could reasonably have predicted that.
So trying to gauge the impact of something as huge as rejoining the EU and dropping the pound for the euro can be no more than a best guess.
The suggestion has been posed by Andy Burnham, who said the Government would explore “different options” on improving Britain’s long-term relationship with the European Union.
But seismic economic decisions are inevitably made on imperfect knowledge – so let’s try. Here are 10 questions and some tentative answers.
Would rejoining the EU require Britain to adopt the euro?
We don’t know. Technically the answer seems to be that it would, as the opt-outs that the UK had when it was a member have lapsed, but in practice it might be possible to renegotiate these.
It’s a big issue. To rejoin the EU with an even closer relationship than before would be a difficult pitch to UK voters – but the decision will ultimately be determined by politics, not economics.
Would we have a stronger or weaker currency?
Looking back over this century there’s no question that the euro has been a stronger currency than the pound. Back in 1999 when the Euro was launched as an accounting (or virtual) currency (the notes and coins came later) the exchange rate was just over €1.40 to the pound.
To start with, the pound strengthened, rising to €1.75 in October 2000, but then it fell steadily, hitting an all-time low of €1.02 in December 2008, as it seemed that the UK would be harder hit than Europe by the global financial crisis.
Although the pound recovered after the eurozone crisis, the referendum to leave the EU followed and the pound fell sharply. It has since settled between €1.10 and €1.25. So there seems to be a marginal advantage to the euro, but only a marginal one.
Would we have higher or lower inflation?
Right now UK inflation is similar to that of the eurozone. In August it was 3.1 per cent against 3.2 per cent, but if you go back to 2000 there is no question: it is obvious the UK has had a significantly worse record.
According to the Bank of England’s inflation calculator, our prices have nearly doubled since 2000, whereas those in the eurozone have risen by about 75 per cent.
Does that mean that were we to join the Eurozone we would have lower inflation in the future? Not necessarily, but I think it would be fair to expect slightly lower inflation than were we to keep the pound.
How would rejoining affect interest rates?
Although over the past decade Europe has generally had lower interest rates than the UK, there’s a catch. When those lower rates have led to excessive inflation or a surge in borrowing, governments have been forced to take other measures to hold down prices.
In the UK, interest rates are set by the Bank of England, so if inflation rises above the target of 2 per cent, the Bank increases rates. That damps down the economy, which in turn cuts wages and prices.
But in the Eurozone, the European Central Bank (ECB) sets rates for the entire region. So if one country has higher inflation than the rest, then it has to cut government spending and force down wages.
Would the EU have control of UK tax and spending policies?
No, but the ECB would have a big influence on these policies if the financial markets started to lose faith in our government’s finances. And to keep the central bank’s support would probably mean sharp cutbacks.
That happened in a number of European countries in the Eurozone crisis of 2010, which forced severe austerity on Greece, Portugal, and Ireland. In the case of Ireland, unemployment reached 15 per cent in 2011.
What about unemployment?
Consistently, unemployment has been higher in the EU than the UK, and in the Eurozone it now stands at 6.4 per cent as opposed to 4.9 per cent here.
However, some Eurozone members, notably Germany, have lower unemployment than the UK, so it is possible to keep the rate down despite membership.
There are a number of reasons why the Eurozone has seen higher unemployment, including more stringent employment laws in some of its member countries. Over the Eurozone as a whole, it is also worth noting that the figures are skewed by the fact that certain nations – for example Spain and Greece – have much higher unemployment rates than other member states, sometimes rising into the double figures.
On balance, however, Britain would probably end up having higher unemployment were we to join.
Are there practical advantages of euro membership?
There are strong attractions. These include individuals not having to change currency when travelling to most other EU states; and companies trading with these states being able to do so without any exchange rate costs. But clearly these advantages come at a price, and several EU members have held out against joining, including Sweden, Denmark and Poland.
Given all these issues, is the euro popular with the European public?
The answer is a clear yes. According to a survey carried out last year by the European Commission, 83 per cent of people in the Eurozone support it, a record level. That’s a contrast with their perception of the situation of the European economy, where 44 per cent thought it good while 48 per cent found it bad.
Would the euro be popular in the UK?
It’s impossible to unpack that from the issue of rejoining the EU. Having interest rates – and in effect mortgages – set in Frankfurt (the headquarters of the ECB) rather than London would be a hard sell.
While many more British people holiday in Europe than elsewhere, if you look at where Britons emigrate to, the top three are Australia, the US and Canada, which of course all have their own currencies. In that sense our links are with the Anglosphere, not Europe.
What will happen to the Eurozone?
The answer, inevitably, is that we don’t know. What we do know is that adopting the euro, if it were ever to happen, is a long, long way down the line. First, we have to rebuild a better working relationship with the EU – and that requires give and take from both sides, the EU as well as ourselves.