Resident Fellow Desmond Lachman

Philip Stephens might want to reflect on the Spanish economy's present predicament within the straitjacket of euro membership before advocating that the UK economy might be served better by euro membership once it emerges from recession ("Never mind the recession--save the pound", December, 9). Spain's euro membership hardly prevented Spanish house prices from approximately doubling in real terms between 2000 and 2006, making Spain's housing bubble the most pronounced among countries in the Organisation for Economic Co-operation and Development. Indeed, it would seem that euro membership deprived Spain of an independent monetary policy that might have been used to deflate the Spanish housing market bubble before it became unmanageable.

Now that the Spanish housing bubble has burst, Spain is finding that euro membership prevents it from either lowering interest rates or allowing its currency to depreciate in order to support the domestic economy in a similar manner to that in which the Federal Reserve responded to the bursting of the US housing bubble in late 2006.

Spain's unemployment rate has already risen to 12.8 per cent, the highest level in the eurozone. Worse still, there is every prospect that Spain will become the sick man of Europe in the years ahead. It will do so as its housing bubble continues to burst, as it struggles with a significant loss in international competitiveness since joining the euro and as the European Central Bank resists aggressively cutting interest rates to come to its aid.

In 1998, at the time the euro was launched, Milton Friedman famously warned that it would be seriously tested by Europe's first major economic recession. Spain's deepening economic malaise could prove Friedman to be right, which could very well make moot the question of the UK joining the euro when it eventually emerges from recession.

Desmond Lachman is a resident fellow at AEI.