It is true that holding on to sterling has given Britain more flexibility than it would have had with the euro. Keeping the pound leaves open the possibility of using currency movements as a mechanism for economic adjustment. But this is a secondary factor compared with the policy weaknesses that Britain shares with its neighbouring monetary bloc.
In broad terms the two economies have two important features in common. First, their institutions are designed to bypass democratic pressure. This inevitably means they are detached from the needs of ordinary people. Secondly, both economies, Britain and the eurozone, have extended credit as a way of evading economic restructuring.
The eurozone bypasses democracy by embodying its power in inherently undemocratic institutions such as the European Commission and the European Central Bank. Both have considerable weight in decision-making but neither is democratically accountable.
In Britain’s case the trend is to cede power to the technocrats at the Bank of England. Since 1997 the central bank has been operationally independent in running monetary policy. More recently Mervyn King, the governor, has taken a broad interpretation of his mandate for a 2% inflation target. The shift towards macroprudential regulation, in which the Bank plays a central role in managing systemic risk, involves further strengthening of its technocratic rule. (Strategy blog continues below)
Britain, like the eurozone, has also come to rely on technocratically defined regulations and monitoring bodies. Under New Labour it was two fiscal rules, the golden rule and the sustainable investment rule although these have since been discredited. More recently the ruling Conservative-Liberal coalition has set up the Office for Budget Responsibility to monitor the public finances.
Such rules and institutions represent a way for politicians to evade making difficult decisions themselves. Instead they prefer to leave it to the men in grey suits to devise policy. Such aloofness is not only undesirable in a democracy it also severs policymaking from the real needs of the public.
The second key weakness of British and eurozone policymaking is closely related to the first. Rather than tackle hard challenges about economic regeneration both have for many years preferred to extend credit. In Britain this has typically taken the form of keeping interest rates relatively low and public spending relatively high. Such actions have postponed the need to make difficult decisions into the future but eventually the problems have only re-emerged in a more virulent form.
Even today the scale of public spending cuts in Britain is far smaller than generally assumed. At the same time monetary policy remains incredibly lax with interest rates still at a historical low and a new round of quantitative easing recently announced.
Despite all the talk of promoting economic growth, neither the eurozone nor Britain’s rulers have any idea how to achieve it. Instead they resort to bluster and putting off challenges to the future.
Daniel Ben-Ami is a writer on economics and finance. His personal website can be found at www.danielbenami.com