Euro could be so good for UK

Eurosceptics argue that had we been in the euro during the recent crisis, the effect on the UK's economy would have been catastrophic. Yesterday, David Davis, a senior Conservative MP, added his voice to that chorus in an article for the Evening Standard. It is a truism to say that had we joined in 2007 when the pound was exceptionally strong, we would be worse off now. Nobody, however, would have gone in at the wrong rate at the wrong time.

The question has to be: Would we be worse off now, had we joined in 1999? I don't believe we would have been.

Everything about the recent crisis was overwhelming and unexpected. It shattered the orthodoxies of the last ten years. The UK has limped out of recession with humbling growth of 0.1%. We are the last major European economy to do so.

Equally unexpected, however, has been the resilience and stability of the euro amidst widespread financial mismanagement. Markets have flocked to it, making it the second largest reserve currency after the dollar, and non-members are queuing to join. Today, the euro accounts for about 26% of global currency reserves, whilst sterling only accounts for about 4%.

Davis' first argument relates to flexibility. Now, flexibility sounds like a good thing to have - but what about stability? The question is, do we need more stability (the euro), or more flexibility (sterling)? What happened during the crisis begins to suggest an answer.

The euro has provided its members with a measure of stability and insulation from the volatility of the financial markets. It has reduced the cost of doing business and increased capital flows across member states' borders.

On the other hand, the pound and its flexibility has been found lacking. Advocates of sterling say that devaluation is one of our most potent tools in a downturn.

The theory is that the value of the currency falls, making products more competitive, allowing us to export our way out of recession. The pound fell by an astonishing 30% between July and December 2008, levelling out at about 22% now, but the positive effect has been much less than many expected.The latest figures published by the Office of National Statistics show that volume of goods exported is still down by about 6% from pre-recession levels.

Furthermore, even when it does work, devaluation is highly flawed. Dominique Strauss-Kahn, head of the International Monetary Fund, recently warned that the world's leading economies shouldn't rely on exports to drive recovery. Devaluation is a short-term measure, usually followed by inflation (and boom and bust). Essentially, it is a cheap way of avoiding hard fiscal choices. It can't be reliably controlled and has the added disadvantage of weakening purchasing power.

Davis' second argument is about interest rates. Bank of England and European Central Bank rates have followed a similar pattern. The UK could have offset slightly lower ECB rates during the boom times with fiscal measures.