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.
Then Germany began cranking up its post-communism unification boom at the same time Britain entered into recession. This brought the pound under attack from currency speculators two years later.
On Sept. 16, 1992, "Black Wednesday," Britain's Conservative government was forced to raise interest rates to 12 percent in the hope of getting speculators to buy sterling. The effort failed. George Soros is reported to have made a billion dollars that day shorting the pound. Britain left the ERM and never seriously considered joining the euro.
The chancellor of the exchequer on Black Wednesday was Norman Lamont, serving as his "special adviser" was 25-year-old David Cameron, who today is Britain's prime minister. The lesson Cameron and Osborne took away, rightly or wrongly, was that when you join a currency union you lose control of your economic destiny to the bigger fish — and the reunited Germany is always going to be a bigger economic fish than Britain.
For a long while being on the sidelines of European monetary union was just fine with the Brits. The single currency was launched in 1999 and for much of the next decade the pound was worth 40 percent more than the euro. Britons flocked to the eurozone on holidays and snapped up expensive houses in Tuscany and the Cote d'Azur and cheap apartments on Spain's coast. The Algarve in Portugal was like an extension of London's stock broker suburbs except it hardly ever rained on the golf course.
But the events of the last three years have been a salutary lesson for the British on the interconnectedness of the European economy despite their not taking part in the euro. One of the centers of the banking crisis of 2007-2008 was London. The pound lost value against the Euro and plunged into recession. Britain may not be part of the euro but for its own economic sake it must work in concert with its EU partners to make sure the euro doesn't collapse.
Just before leaving office last May, the Labour government led by Gordon Brown and his chancellor, Alastair Darling, signed Britain up to the "Stabilisation Mechanism" — an EU fund originally meant to help members that suffered the economic shocks created by major natural disasters. But the fund was used in the bailout of the Greek economy last spring and is now expected to be used in the Irish bailout. Any funds left over will be used in the next bailout — and yes, there are expected to be more before Europe's economic crisis ends.
Speculation today is focused on which European countries will be next to require the International Monetary Fund and the EU to come to the rescue. Portugal and Spain are the names being mentioned. It's the latter that is the real concern. Spain's largest bank, Santander, already owns three British banks.
Call it globalization, call it integration — whatever terms the British use — geography, history and diplomatic/economic realpolitik make it impossible, in the words of economist Philip Whyte, to "clean its hands of involvement in the euro crisis."