Slump in sterling means we should think again about joining the euro

In the run-up to the 1997 general election, Tony Blair and Gordon Brown were asked at a meeting of business leaders whether they would make the Bank of England independent and whether Britain would join the euro. Tony Blair replied that a Labour Government would do one or the other. Gordon Brown added that they might do both.

More than a decade later, with sterling falling to a 12-year low against a basket of currencies, some are beginning to ask whether the Prime Minister might finally do the "unthinkable" and join the euro? On Wednesday against the backdrop of the Bank of England's dark analysis of the economy, the pound plummeted to a new low - making one euro worth 83.56p.

There are some powerful arguments in favour of the return of the euro to the agenda. First, events of recent weeks have emphasised the schism between the UK and the eurozone which continues to hobble the ability of both to deal with the financial crisis. There are extensive investment and capital flows between the UK and the eurozone; not just that over half of the UK's trade is with other EU member states but also the deep links across almost every sector of the economy, including financial services. As many as a quarter of banks in London are from eurozone countries.

France's Nicolas Sarkozy, as the current holder of the EU presidency, has been leading the eurozone, but Gordon Brown has also been showing leadership by providing the template for Europe's bailout package. The relationship between the two is key, but clearly it would be easier for both if they shared the same currency.

The response to the financial crisis would be faster and more effective if we did not have two separate central banks (the Bank of England and the European Central Bank) and instead had a single head of the eurozone.

The increasing ascendancy of the euro over sterling highlights a growing argument for the euro. The Chancellor is rightly looking at a fiscal stimulus package to boost the flagging economy. Tax cuts may mitigate against the recession turning into a slump, but will ironically have the effect of further weakening sterling.

One newspaper magnate privately conceded recently that if sterling continues to fall, we might begin to see the benefits of the euro.

Gordon Brown is reluctant to put the politically sensitive subject of the euro back on the agenda. But if a slump occurs, he might go back to the future and be tempted to do what he hinted at a decade ago and join the euro.

Then there is also the potential domino effect. With Denmark giving serious consideration to adopting the euro, it would be conceivable for other Scandinavian countries to follow suit. This would amplify calls for the UK to consider joining the euro, presently the official currency of 15 member states.

Throughout this crisis, the EU has been arguing for greater coordination. Initially this was ignored by the unilateral action of some member states guaranteeing a minimum level of deposit for savers. Yet Europe has gradually got its act together and it would certainly benefit from greater co-ordination. Some have been arguing for banking bailouts to involve a standard minimum level of interest. It is set at different levels of interest in different countries, and in particular Germany should be held to account for its action towards Commerzbank.