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Analysis: Despite opting out of monetary union, the British help bailout the Irish.
LONDON, United Kingdom — Britons in general and British Conservatives in particular woke to their worst nightmare this morning. Despite two decades of resistance to joining in the European Union's single currency — the euro — and trying desperately to reduce its own budget deficit, the British government yesterday joined in the bailout of Ireland's economy. Ireland is an enthusiastic member of the eurozone.
Chancellor of the Exchequer George Osborne told Parliament Britain will make 7 billion pounds ($11.1 billion) available to help Ireland, "a friend in need," weather its current banking crisis.
But the assistance is "an act of self-preservation" rather than an act of friendly charity, according to Philip Whyte, senior research fellow at the Centre for European Reform. "Implicit in the bailout of Ireland's banks is the bailout of one's own banking system."
The numbers explain why. Ireland is considerably more than a "friend" in economic terms. British banks have $149 billion exposure to Irish banks — about 6.6 percent of GDP. Irish banks are an essential part of British economic life. Bank of Ireland, for example, runs the banking operations of Britain's post offices, where many pensioners cash their social security checks and pay their bills.
In addition, British trade with Ireland is significant. Precise figures are not available but Reuters reported that Britain's trade with Ireland, population 6.2 million, is larger than its combined trade with the BRIC economies (Brazil, Russia, India and China), population 3 billion-plus. A fact sheet published by the British embassy in Dublin claims that "every man, woman and child in Ireland spends 3,607 pounds per annum on British goods." A further downturn in Irish economic activity would have a terrible effect on a Britain trying to export its way back to solid economic growth.
The irony is that Osborne is a genuine eurosceptic, who has always been opposed to the single currency and would probably prefer for Britain not to be part of the EU at all. On the BBC, the chancellor explained his reasons for participating in the Irish bailout: "I told you so is not much of an economic policy."
This did not mollify many Conservative backbench members of parliament. Douglas Carswell said: "At a time of austerity, we are again paying vast sums to the EU." Former cabinet Minister John Redwood scolded, "Ireland is part of the euro because it wanted to be ... why should Britain have to [help with the bailout] when we're not part of the euro area?"
Much anti-euro sentiment in Britain is emotional hogwash expressed by people who either lived through World War II or wish they had. They regard Germany as a former enemy still in need of re-education and France as a weak sister that couldn't take care of its own business when confronted by the Hun. But there are more substantial historical reasons for British unwillingness to take part in monetary union.
The precursor to the euro was the Exchange Rate Mechanism (ERM) set up in 1979. The ERM brought European currencies into a semi-fixed alignment. By dramatically reducing the effect of currency fluctuations on economic growth, Europe prospered. Britain finally joined in 1990 but at too high a value for its pounds sterling.