Christopher Johnson: Ireland thrives as Britain dives

Does Tony Blair know something Gordon Brown doesn't? His keenness to hold a referendum on the euro is supported by the latest statistics showing that we are not doing as well on the outside as the Treasury's spin doctors maintain. Britain's steady progress down the international league table of living standards is measured each year by the Organisation for Economic Co-operation and Development in a little booklet, OECD in Figures. This shows that in 2000 we slipped from 10th to 11th place among the 15 European Union countries in terms of gross domestic product per head.

The Treasury is still liable to boast that in terms of current dollars we were fourth in the league. The OECD adjusts for the fact that if the purchasing power of GDP is being measured, the euro is 15 per cent undervalued against the dollar and the pound. In other words, the UK economy is worth 15 per cent less per head in euro terms than the current dollar figures show, and the pound needs to be devalued by 15 per cent against the euro if the playing field is to be level.

The UK has fallen behind Italy since 1999, because the OECD has found that Italian GDP needs to be revalued upwards by 5 per cent to make accurate purchasing power comparisons. This puts Italy 2 per cent ahead of the UK, thus confirming what the Italians call il sorpasso, or overtaking. Britain's GDP per head is slightly above the European average, which is dragged down by Spain, Portugal and Greece, all with living standards 20-30 per cent below the average.

Apart from Luxembourg's little El Dorado, the richest country in the EU is now Ireland. The UK's once poor relation now has a GDP per head 19 per cent higher than that of Britain. Ireland has attracted major foreign investment by joining the euro. Now the euro sceptics are chortling that the US slowdown will be a setback to Irish economic growth. But even if Ireland's growth rate slows to 3 per cent, this will still be higher than that of the UK or any other European country. Ireland has had inflation rising to a peak of 6 per cent, but this was actually needed to offset the downwards pressure of rising productivity on the price of exports. Ireland is clearly better off in than out of the euro.

The opposite could be said of the two European countries that have stayed out of the European Union altogether, Switzerland and Norway, both of which are even better off than Ireland. The reasons for this are nothing to do with the euro. Switzerland has an advantage in financial services, Norway in oil and gas. They did not need to join the EU because they were already doing well outside. The UK needs the euro because it is doing relatively badly outside.

Europe still has a lot of catching up to do with the US. The American standard of living is 53 per cent above the EU average, and 26 per cent above that of Ireland. The recent period of super-growth in the US widened the gap, but it is hard to see it narrowing in the coming period of slower growth worldwide.

The US and European economies have asymmetrical convergence. When America slows down, Europe slows down – but when America speeds up, Europe does not speed up. British policy should be not just to do better within Europe, but to help Europe as a whole benefit from the example of America. Better productivity is part of the answer, and so is joining the euro. The euro will make Britain a better economy, and Britain will make the euro a better currency.

Christopher Johnson is UK adviser, Association for the Monetary Union of Europe.