So Gordon Brown was right then, Britain should not have joined the euro

That Gordon Brown was in fact right about something is a bit of a shock but he was indeed correct that Britain should not have joined the euro. One of his points being that the housing finance system was too different.

In an optimal currency are the different components will react to interest rate changes the same way. But if we've got largely variable rate mortgages and other places have largely fixed rate then they won't react in the same manner. A change in rates will affect, for us, all paying a mortgage, for others only those considering new ones. Our reaction will thus be of greater amplitude.

Some new research on this more generally:

Business-cycle synchronisation is a key criterion for optimum currency areas. The standard argument is that membership in a common currency area becomes costly for any country whose national cycle diverges significantly from the common cycle.

We find that for most EMU member countries there is a tight correlation between the national cycle and the common cycle. At first sight it thus appears that, with the exception of Greece (and possibly Portugal), the standard optimum currency area criterion is fulfilled. But our key argument is that it is not sufficient to look at correlation patterns. Countries that share the same business cycle might nevertheless experience quite different cyclical positions, and thus require a different monetary policy stance if the amplitude of the cycle is very different. We indeed find large systematic differences in the amplitude of national cycles and the degree to which the national cycle reacts to the common one, with many countries registering a ‘beta’ that is significantly different from one.

The practical conclusion for the Eurozone is that the main problem for the ECB might not be a de-synchronisation of cycles, for example between the core and the periphery. Instead, a more relevant problem in practice might be that individual countries have cycles that are tightly correlated, but of very different amplitudes, thus requiring at times a different monetary policy stance at the peak than at the trough. The more general conclusion is that a high degree of correlation is not a sufficient optimum currency area criterion. Having a beta that is close to one is equally important.

As it turns out, nor should anyone else have joined the euro either.