IT tells us something that I have received many more e-mails and letters about sterling’s big fall against the euro than I did a few months ago for a different reason – the $2 pound.

Perhaps we are more European than we think. That is certainly the case in terms of second-home ownership on the Costas and the French countryside. People are also concerned about the impact of sterling’s weakness on import prices. There may be another reason. When sterling is strong the effects are mainly beneficial, certainly for consumers and tourists. Even exporters do not complain too much.

But when sterling is weak it recalls the time when the pound was the tail that wagged the economic-policy dog. There is no question of sterling’s fall against the euro forcing the Bank of England to raise interest rates. There is a risk that sterling weakness, if maintained, might stand in the way of the rate cuts that the economy needs.

For most of last year, sterling was remarkably stable against the euro, at an exchange rate averaging roughly 1.50 euros to the pound. It began to weaken in August, at the point when the credit crisis burst onto the scene.

Sterling stabilised at about €1.45 but embarked on a further big fall from early November. This, as luck would have it, was after Bank governor Mervyn King advised the model Gisele Bundchen, who had complained about dollar weakness, that if she wanted a stable currency for her fees she should look no further than sterling.

To be fair to King, it was his message on interest rates that jinxed the pound, not his modelling advice. This was when the Bank, in its November inflation report, signalled it was switching from wanting to raise interest rates further to wanting to cut.

The European Central Bank, guardian of the euro, had also been widely expected to raise rates further before the end of last year. The ECB, however, has yet to talk of cuts, let alone deliver one as the Bank did last month. Indeed, Jean-Claude Trichet, its French president, has been making hawkish noises about raising rates should there be evidence of inflationary pressure.

It amounts to a loss of sterling’s interest-rate advantage. Add in those dreadful third-quarter current-account figures, loss of confidence in the British banking system as a result of Northern Rock, and the accompanying loss of reputation for the Bank, Treasury and Financial Services Authority and there is a plausible explanation for some of the fall.

The eurozone has not suddenly become an economic success story, however, and will struggle to grow faster than even Britain’s diminished growth rate this year, as began to emerge last week. Tensions within the euro area persist. A change in interest-rate expectations and tough talk from the ECB does not add up to a 14% fall for sterling against the euro over the past year, equivalent to Harold Wilson’s “pound in your pocket” devaluation of 1967.

So something else has been happening, and appears to be directly linked to the credit crisis.

Peter Spencer, in his latest report for the Ernst & Young Item club to be published this week, notes that before August 9, when the crisis broke, there were big short-term capital flows into Britain for a particular reason. Banks and other lenders borrowed internationally, including elsewhere in Europe, to fund some of their UK mortgage lending. These money-market flows helped support the pound.

But when they stopped, as money and credit markets froze, this source of support came to an end. Northern Rock, the credit crisis, the weakness in Britain’s housing market and sterling’s fall are thus directly linked, and by more than just confidence.

This may suggest that, as markets thaw, sterling will regain some of its former composure against the euro. That is what I expect, and there is tentative evidence of it. The big fall, which took the pound down to not much above €1.30, may be drawing to a close, though it is unlikely sterling will recover to anything like its previous highs.

Will this episode have any effect on British attitudes towards joining the euro? On the face of it the euro, having been the ugly duckling of the currency world, has turned into a beautiful swan.

The eurozone has lower interest rates, a harder currency and for now a better-regarded central bank than Britain. These are the conditions that, thanks to Germany, drew a Conservative government under Margaret Thatcher into the arms of the European exchange rate mechanism (ERM).

These days euro membership is so far on the political back burner we do not even bother to ask the question in opinion polls, though it might be worth another outing. When last asked, membership was opposed by two to one. The Treasury vetoed Tony Blair’s last chance to take Britain into the euro in 2003.

Gordon Brown, having presided over two “no” verdicts on entry when chancellor, is not about to warm to the single currency and has plenty of other things on his plate without opening this can of worms. The Tories are ideologically opposed.

So we will watch what happens to sterling and the euro. If the pound falls much further, quite a lot of things could happen. Britain, with a softer currency, could become a less attractive location for migrant workers from Poland and the other EU accession countries.

On the other hand some of the activity that was relocated to other parts of Europe a decade ago, when the pound rose sharply against the euro’s constituent currencies, could find its way back here. With 55% of UK goods exports going to euro countries there could, whisper it quietly, be a revival of British manufacturing.

PS: House prices stopped rising at a point where Halifax calculates private-sector housing is worth £4 trillion, 3.4 times mortgage debt. So the question is asked – do rising house prices do us any good? Would we be better off if they fell?

There are four daft arguments on this. One is that a rise in prices does you no good because until you exit the market you cannot realise gains. But that is true of any asset and plenty of people tap into housing wealth through equity withdrawal.

The second is that because you live in a house it differs from other assets and should not be regarded as wealth. Yes, it is different, and in some respects better. Shares may give you a financial shelter. Housing gives you an actual one.

A third is that the value of housing is always precarious. What if that £4 trillion were to turn into £3 trillion? But house prices are less volatile than shares, and that is also true of any asset.

Finally, are rising prices good for owners but bad for the country? Again this does not stack up. The 70% who are owner-occupiers gain, while the 30% nonowners do not lose – they just don’t gain.

There are better arguments against rising prices; they freeze out potential buyers, steer investment towards “unproductive” housing and reward inertia rather than risk-taking. The tripling of prices over 10 years was certainly too much of a good thing.

The question is the wrong one. The value of housing is boosted by “small island” supply factors but in essence reflects past rises in income and expectations of future growth. Stagnant house prices would tell us the economy had done badly and prospects were poor. Part of the current house-price concern reflects worries about Britain’s prospects.

david.smith@sunday-times.co.uk

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