It is one of the great might-have-beens in modern British history. In June 2003, Gordon Brown ruled out joining the euro, for the time being. The road to Brexit 13 years later was a long and winding one. Could departure from the European Union have been avoided if Labour’s redoubtable chancellor of the exchequer had instead endorsed euro membership 20 years ago?
This was not the first opportunity to join Europe’s single currency that the Labour government had ducked. Tony Blair’s landslide victory in May 1997 coincided with a decisive stage in the euro project. The following spring, 11 out of the then 15 members of the EU got the go-ahead to adopt the new currency at the start of 1999.
The previous Conservative government, led by John Major, had negotiated an opt-out from the planned monetary union in the Maastricht Treaty of 1992. But Blair wanted to reset relations with the EU, signalling a fresh start in June 1997 at a summit with European leaders in Amsterdam. To show willing, the new prime minister signed up to the social chapter of the treaty, from which Major had also secured an opt-out. Could Blair go further and drop the euro opt-out?
The answer, from his chancellor later that year, was a resounding no, at least in Labour’s first term of office. If Britain was to join the euro, it would be on his conditions, set out in five economic tests. When Brown revealed the Treasury’s assessment of them in October 1997, he reported four fails and only one pass, closing down the issue for the rest of the parliament.
But by June 2003, Labour was two years into its second term of office and a further and much more detailed assessment of the five tests had been conducted. The two most crucial were about convergence and flexibility. Was the economy sufficiently aligned and compatible with the eurozone to live with interest rates set by the European Central Bank (ECB) in Frankfurt? Was it flexible enough to adjust readily to possible future shocks? The next two tests were about the impact on investment and the financial sector, especially the City. The final one was whether joining the euro would promote higher growth, stability and more employment.
In 2003, as in 1997, the Treasury judged that Britain failed on four of the tests. The only exception was the City, for which membership of the currency union was deemed positive on both occasions. But in 2003, the overall assessment was more positive: outright fails had become near misses. Brown reported “significant progress” in the economy’s convergence and improvement in its flexibility. The chancellor noted that if these first two tests could be passed, then the ones on investment and employment would also be satisfied.
Brown’s statement left room for a further assessment before too long, which might produce a positive outcome. But there wasn’t a next time. The tests might have been strictly economic, but their evaluation was inherently political. However much Britain might have converged with the eurozone, Brown remained unaligned with Blair on joining the single currency. If the prime minister had reshuffled Brown away from the Treasury following his second landslide victory, in June 2001, the outcome might have been very different.
What might have happened if Brown or another Labour chancellor had said yes, rather than not yet, in mid-2003, paving the way to entry in 2005? In fact, the Treasury conducted a similar exercise in counterfactual history as part of its assessment in 2003, examining what might have happened if Britain had joined the euro at the beginning, in 1999. The result, according to this self-serving exercise, would have been an unsustainable boom generated by interest rates that were too low for the British economy, followed by a bust. But, as the Treasury conceded, by 2003 the economy had converged a lot with the eurozone, meaning that interest rates set by the ECB would be more appropriate.
What is indisputable is that retaining the pound and the Bank of England’s control over monetary policy was of little consequence in the very non-hypothetical bust that lay ahead. In or out of the euro, Britain was always going to be particularly vulnerable to the financial crisis of 2007–09 because of the size of its banks and the City’s role as a global hub. In or out of the euro, that crisis would have inflicted the ensuing protracted setback to growth, as a shaken financial sector licked its wounds and other businesses were reluctant to invest while repairing their balance sheets.
On the other hand, a British economy inside the monetary union would have been directly exposed to the subsequent euro crisis. At worst, bond investors would have laid siege to Britain, just as they did to Italy and Greece, pushing up government borrowing rates to unsustainable levels. An austerity programme far tougher than George Osborne’s might have been necessary to restore credibility. At best, Britain would have had to contribute to bail-out rescues for the five countries that required them, first Greece, then Ireland, followed by Portugal, Spain and Cyprus.
As the eurozone repeatedly struggled from 2010 with an existential crisis of confidence, culminating in the confrontation with Greece and an all-too-possible Grexit in 2015, Brown’s decision to keep Britain out of entanglement with the single currency looked prescient. But following the damage wreaked on the economy by Brexit, that verdict looks more questionable. For, once inside the currency union, Britain would have found it virtually impossible to quit, just as was the case with Greece: a restored drachma would have immediately plunged in value, making debts owed in euros far more onerous. And if Britain had had to stick with the euro, there would have been no Brexit from the EU.
At the least, a decision to join the euro—despite its woes in the early 2010s—no longer looks manifestly worse than the path actually taken. And there is another dimension to the counterfactual scenario worth pondering. For a decision in June 2003 that the five tests were passed would not have led automatically to euro entry. Labour had from the outset accepted that a referendum would have to be called on so momentous a change.
Suppose, then, that such a vote had been held. The debate over whether or not to join the euro would have been framed by a wider discussion of Britain’s place in Europe, reminding voters of the wider case, both economic and strategic, for membership of the EU. Even if the electorate had rejected joining the currency union, no one could subsequently have claimed that the public had been denied a say since the original referendum in 1975.
Putting off a decision is itself a decision. Brown’s verdict on the five tests in June 2003 in effect put paid to Britain joining the euro. In Robert Frost’s poem, choosing the road “less travelled by” at a fork in the forest made “all the difference”. From today’s post-Brexit perspective, the decision to opt for continuity rather than change 20 years ago may also have made all the difference, contributing ultimately to the violent disruption of Brexit.