Posted 3:49 PM by Dil
Blair could destroy euro support

Britain in Europe campaign director warns of mass resignations if the PM offers nothing but 'warm words' in his forthcoming statement

Patrick Wintour and Sarah Hall
Saturday May 10, 2003
The Guardian

The pro-euro campaign will suffer mass resignations and speedy collapse if Tony Blair only offers "warm words" about Britain joining the euro in the government's imminent statement, the Britain in Europe campaign director, Simon Buckby, warned last night.
Mr Blair and the chancellor, Gordon Brown, are finalising their statement on British membership of the euro in the light of the Treasury's assessment of the five tests. The assessment will state that the British economy has not yet unambiguously converged with Europe.

The cross-party Britain in Europe campaign has been fighting a rearguard action to ensure Mr Blair keeps open the option of a referendum in this parliament.

In his strongest warning yet of the issues at stake, Mr Buckby said the organisation would suffer mass resignations if the government statement did not set out a clear road map to membership of the euro.

Mr Buckby would also feel forced to quit. He said: "How could I motivate my staff, invigorate senior businessmen, trade unionists and voluntary organisations without a believable route map to joining the euro soon?"

The disintegration of Britain in Europe, set up in December 1999, would be embarrassing for Mr Blair who has repeatedly promised that Britain's destiny is to join the euro.

Mr Buckby said: "Business wants to know it is the government's intention, not just their hope, that we will join the euro in this parliament. There can be no more wait and see - there has to be a game plan, with a transparent political strategy, to secure membership."

He also warned the prime minister's credibility was on the line with many businessmen and politicians. "There are many business people who made investment decisions on the basis of assurances about the euro that they believe they were given by the prime minister. If the prime minister lets these people down now, he will lose a lot of political credibility. And to avoid a flight of investors abroad, there has to be a series of measurable steps the government will take to join the euro. We cannot rely on private assurances.

"If the political direction is not clear, the prime minister will be seen by his European colleagues as another John Major or Harold Wilson, weak and dithering and as a consequence Britain will be pushed to the margins.

"After 50 years of vacillation, Tony Blair has got an historic opportunity."

Some pro-European ministers have privately acknowledged that a referendum cannot be won in the next 18 months, making it necessary to defer a referendum until after the general election. The Europe minister, Denis MacShane, made that suggestion in an interview in the Italian newspaper, Corriere della Serra.

But pro-Europeans are privately claiming growing confidence that Mr Blair will commit himself to addressing the issue again in this parliament, even though such confidence has not been reflected in the briefings emerging from the Treasury over the past month.

Euro-enthusiast MPs even believe the chancellor's statement - which they expect to be delivered in the week before MPs' Whitsun recess - will pave the way for a referendum to be held next year.

One Labour MP who has held discussions with the prime minister and the 11 cabinet ministers he counts as in favour of a referendum, says he is convinced the statement will be far more positive than media reports have suggested, and will rule that four of the five economic tests have been met, with only the issue of flexibility still a problem.

The backbencher said: "Unless I've been misled, or have been naive, the papers will have got it totally wrong if they run stories insisting a referendum's being completely ruled out. A deal is being hammered out at the moment, and is likely to rule out a referendum this year - but not next year."

The MP said Mr Blair and Mr Brown were locked in discussions "every minute of every day", and that, once the statement had been drafted "every line will be fought over".

Posted 3:22 PM by Dil
Kenneth Clarke: Why is Mr Brown the key figure in the euro debate?
Tony Blair has made the mistake of allowing his Chancellor to take the dominant role over the referendum
10 May 2003


The problem of the euro has become the problem of Gordon Brown. Tony Blair has made the mistake of allowing his Chancellor to take the dominant role in determining whether and when the referendum will take place.

This is a frustrating and faintly absurd position for everyone who wants Britain to make the right decision on the euro. Gordon Brown has made himself the key figure in the whole debate. No referendum can be called until he says so and no referendum can be won unless he joins in the "yes" campaign with some enthusiasm.

Brown's political position may be honourable. I have always believed that his underlying opinion is similar to my own. He says that he is in favour in principle of Britain joining the single currency. He made some sensible announcements in his last Budget about looking at the possibility of adopting the EU measure of inflation in place of our own flawed RPI and studying ways in which we might encourage fixed-rate mortgage finance for house purchase. He argues for liberal economic reform and more flexible labour markets across the EU, which are very desirable.

His enemies see darker motives. I regard Gordon Brown as my political opponent and I am a strident critic of his fiscal policies. But I do not regard him as a personal enemy and I have to admit that I rather like and admire him. I therefore discount the theories I hear from his enemies within the Labour Party that, for instance, he has decided that he will need the support of Rupert Murdoch to have a successful premiership.

I judge that he is suffering from quite uncharacteristic hesitation and indecisiveness. He seems inclined to push off a difficult decision into the uncertain future.

The economic case for the euro is always going to be subject to genuine debate. Distinguished economists line up on both sides, although I personally think that the best heavyweights are on the pro-euro side. Pro-Europeans like me believe that in the long run the upside consequences for Britain will far outweigh the downside. Britain's economy will be damaged if we stay out too long, but the effects, in terms of lost growth in trade and investment and lower rates of GDP growth compared with what we might otherwise achieve, will not be sudden but will take years to show.

It would be a mistake to join in the wrong economic conditions but Gordon is wrong if he believes that we can wait for some perfect combination of political and economic circumstances in which every expert is agreed that the time is right and every critic is silenced.

The Irish joined the euro at a time when they had to reduce their interest rates sharply. Every British euro-sceptic predicted that they would suffer an inflationary disaster as a result of the "one size fits all" interest rate policy. The Irish economy has continued to thrive inside the euro-zone and it continues to outperform the British economy.

The slow pace of economic reform inside some continental countries, particularly Germany, is a much bigger problem for them than it is for the British. It gives us a competitive advantage over them inside the single market, as it would within the euro-zone. We would benefit if our French and German markets could return to higher growth, but their domestic problems are no more a reason for staying out of the euro than they would be for leaving the single market. Germany's problems are not caused by the single currency nor the policies of the European Central Bank.

Our economy is now more convergent with the major economies of Western Europe than ever. I have always said that the exchange rate made it impossible to join in recent years but the euro has now strengthened enough to remove that problem. Indeed there is a danger that if the pound devalues further we will see a return of the problems of inflation in Britain.

The arguments in favour of the euro that Gordon Brown has always agreed with, in terms of an end to exchange-rate risk, improved competitiveness through price transparency and a boost to productivity, remain as strong as ever. If the Chancellor wants to make the case for further delay he had better have strong arguments.

I look forward to reading the Treasury studies and it was a good idea to commission them. However my old colleagues in the Treasury cannot be expected to produce tablets of stone to settle the issue. They will produce high-quality analysis, but different civil servants will privately hold different views about the final decision. They are capable of providing the Chancellor with the best arguments in support of whichever answer he decides to give.

If Gordon Brown pronounces that we must continue to "wait and see" he must describe the next steps in the process and the broad timescale within which this is to be concluded. Timeless uncertainty is damaging to Britain's interests. Everyone who agrees in principle that it will be in Britain's interests to join believes that we are very near to the time at which we should decide. Even hard-line euro-sceptics are demanding a referendum now to end the uncertainty.

Gordon Brown has manoeuvred himself into a position where one man has too much power in his own hands on this subject. He will burn his fingers very badly if he does not at least indicate that we are almost ready to take the big decision in Britain's national interest.

The author was Chancellor of the Exchequer, 1993-97

Posted 3:21 PM by Dil
Britain will use euro 'before long', says MacShane
By Ben Russell, Political Correspondent
10 May 2003


Denis MacShane, the minister for Europe, declared yesterday that Britain will be using the euro "in the not too distant future", reigniting speculation about an early referendum on the single currency.

Mr MacShane told Italy's Corriere della Sera newspaper: "I'm confident that before long Britain will be using the euro."

His comments will increase speculation that Gordon Brown will leave the door open to a referendum on euro entry even if he concludes that the Treasury's five economic tests have not yet been met. The Treasury's assessment could be published in two weeks' time.

But Mr MacShane hinted at a long run-up to a euro referendum, arguing that "leadership is about bringing the people with you".

He said: "In two or three years we will have elections, in which voters will be able to choose between a pro-European party and, barring surprises, an anti-European one."

He added: "A referendum would in any case require a long timescale, and we should ask ourselves if it is a good idea to conduct a campaign that would accentuate the divisions."

Mr MacShane's comments were published as more than 300 of the world's most eminent economists insisted that Britain had already passed the Treasury's five tests for euro entry.

Writing in The Independent, today Kenneth Clarke, a former Conservative chancellor, says: "Our economy is now more convergent with the major economies of Western Europe than ever." And he accuses Mr Brown of "suffering from quite uncharacteristic hesitation and indecisiveness".

Mr Clarke says: "If Gordon Brown pronounces that we must continue to 'wait and see' he must describe the next steps in the process and the broad timescale within which this is to be concluded. Timeless uncertainty is damaging to Britain's interests."

Posted 8:15 AM by Dil
DOUGLAS HURD
Resentful feeling in world against US. But everyone loves travelling to US and studying.
Military supremacy means destroying things, but US really wants to build things.
Imperial power with a difference.
Serious credible threat, imminent threat requited in law for preemtive threat.
Not as much influence as Blair would have liked, penny farthing
so many agencies want different things
Mixed results in Afghanistan, US said picked out Iraq.
UN authority highly desirable.
Need in 6 months time another look at this.
Bit more hopeful on Palestine with US effort.
Disguised lack of success in UN attack on France.
Opportunism goes too far, progress being made because military was there.
Balkans, enlargement, Palestine doing things together
Euro, economic tests, in Brown’s hands, no economic argument for joining yet, City doesn’t need it as shown
defence, diplomacy, political UK is vital player in EU
separate issue of euro and other issues

Posted 4:41 PM by Dil
Stability of the eurozone adds to the attractions of the single currency
The case is proven for EMU now, argues the National Institute of Economic and Social Research
Martin Weale
09 May 2003

As economists it is difficult to have a decisive view on the question of the UK's membership in the European Monetary Union. Economics can only play a part in the final decision, which must ultimately be a political one. But it is important that the economic input into the political decision is of the highest quality. One important aspect of the economic effects of EMU membership is the way that volatility may change if we join EMU. By volatility we simply mean the unforeseen fluctuations that affect economic decision makers. It is a strange contradiction that while it is often very hard to measure volatility, in many ways the only sure thing about EMU membership is that certain aspects of volatility will be removed. So in the euro area there will be no volatility in the sterling-euro exchange rate nor between UK and European interest rates.

Over the last year the National Institute of Economic and Social Research has studied the likely effects of these volatility changes. The first thing, which is common to all our work, is that the measure of volatility must be a sophisticated one. This is because we are making a decision about the future. Most simple measures of volatility are averages in one form or another over the past. They are relevant to decisions regarding the future only if we expect the future to be similar to the past. This will generally not be the case when we are considering the question of EMU membership. So we must use quite sophisticated techniques to measure the changing patterns of volatility.

To our surprise the relationship between the shocks affecting output and inflation in the UK and those of euro area countries has changed considerably over time.

This is important because one of the key criteria for a successful monetary union is that the shocks, which hit the member countries, should be similar. If they are, then policy can respond in an effective way even if the union constrains policy to be the same across the whole union.

If we consider a historical average correlation for these shocks then clearly the UK has not been a good candidate for membership. But when we realize that this average is overlaid with a steady rise in the correlation to the point where we are now in a very similar position to France or Italy the picture looks very different.

The conclusion of this work is that the UK is in a very similar position to the rest of Europe now in terms of the symmetry of economic shocks. In fact the European economy that is most dissimilar from the others is Germany.

The second broad issue to consider is, what will be the effect of removing the volatility in the sterling-euro exchange rate. This is after all one of the only sure effects of EMU entry. Here again we have come across some quite surprising results. Some people argue that growth and flexibility is greater in the UK than in the rest of Europe and that we should not join EMU until the rest of Europe has reached our level. However, evidence of our recent work throws doubt on this argument. Our studies do not dispute the point that the UK is more flexible and has been growing faster recently.

The question they pose is, if the UK is growing faster and is more flexible why should an investor (say from America) choose to invest elsewhere in Europe. The answer is quite straightforward; most investors wish to maximize their returns but also minimize their risks. The UK may be a good place to invest but while the sterling-euro exchange rate is uncertain there is an incentive for an investor to diversify risk by spreading some of his investment across Europe even if the expected return is lower there.

So the conclusion is that even if the UK economy may be performing well relative to the rest of Europe we would actually gain by removing the volatility in our exchange rate with the euro as this would remove the incentive for investors to diversify away from the UK.

In separate work, the Institute researchers have found significant evidence for this effect in general foreign direct investment into the UK, in the foreign direct investment in research and development and with respect to overall domestic investment. This suggests that there would be considerable benefits to UK investment from EMU membership, which would ultimately have important long-term supply side effects producing stronger growth. In effect, this evidence suggests that the strong regions of a monetary union tend increasingly to prosper and that there is absolutely no need to wait until all regions are equally efficient before joining.

What other benefits might we expect from the changing volatility patterns? One definite consequence of membership is that our interest rates will be fixed with respect to general euro area rates. Whether this will lead to higher or lower interest rates in the future is unclear. In the recent past, UK rates have been higher than European rates but this may not continue indefinitely. What we almost certainly can predict, however, is that the volatility of UK interest rates is likely to be lower if we join. This again is likely to have widespread benefits to investors and businessmen who have to plan for the future. It may also have an important impact on the housing market. Over the past 30 years one of the biggest problems facing policy makers has been the dramatic fluctuations that have taken place in the housing market. House prices relative to income have risen dramatically on three separate occasions over a prolonged period and then collapsed back to their original level.

Our interpretation of house price movements is that they are classic examples of an asset price bubble. The question is what starts the bubble? Our argument is that one possible trigger is interest rate volatility. Interest rates fall in an unexpected way, mortgages become cheap (at least in nominal terms) this causes a temporary rise in the demand for houses, house prices begin to rise and the bubble begins as people buy in expectation of further price rises. If the volatility in interest rates were reduced this would reduce the chances of bubbles starting in this way. The Chancellor recognized the problem posed by the housing market in his last budget speech and has suggested reform of the housing market should be considered. We argue that EMU membership is one important way of reducing the risk of future bubbles.

In our view one of the most important aspects of EMU membership from an economic perspective is the positive impact it has on the volatility effects outlined above. Joining the euro area will provide a more stable environment and one in which the UK should be able to compete effectively with the other European economies.

Martin Weale is a director of the National Institute of Economic and Social Research. This article describes work led by Ray Barrell and Stephen Hall at the NIESR.

Posted 4:39 PM by Dil
Experts unite to tell Brown: don't delay over euro
By Philip Thornton and Marie Woolf
09 May 2003

The Chancellor, Gordon Brown, was confronted by the collective might of more than 300 of the world's most eminent economists yesterday, who told him to declare that the UK has passed the five economic tests which will place it on track to join the euro.

The economists, who include Paul Volcker, the former head of the US central bank, Stanley Fischer, a former IMF managing director, the Nobel laureate Professor Robert Mundell and Lord Kingsdown, made their declaration before Mr Brown's own announcement about the result of the five tests, expected within three weeks.

"With only days to go until the Government announces the results of [the] tests, it is clear that not only is the economic evidence overwhelmingly in favour of euro entry, so is the opinion of the economics profession," said Phillippe Legrain, chief economist of the lobby group Britain in Europe (BiE) group, which published the list of pro-euro economists.

The list was reminiscent of the letter to The Times in 1981 denouncing the monetarist policies of Margaret Thatcher's government.

The call is echoed by Martin Weale, head of the National Institute for Economic and Social Research think tank, who, in today's Independent, says membership of the euro would eliminate swings in exchange and interest rates. Mr Weale says: "Joining the euro area will provide a more stable environment and one in which the UK should be able to compete effectively with the other European economies."

The appeal to Mr Brown, by 330 economists, was accompanied by the announcement by BiE of the launch of an Economic Council of Great Britain, to demonstrate the weight of economic support for British entry and provide a group of experts to argue the case.

Armed with a body of support including former heads of the Bank of England, the United States Federal Reserve and the International Monetary Fund, Mr Legrain insisted that a negative assessment of the five tests would be greeted "with scepticism, even disbelief" by economists. "Short-term political considerations must not be allowed to take precedence over the overwhelming economic case for euro entry," he added.

His economic council will be chaired by Professor Lord Layard of the London School of Economics. It includes Lord Kingsdown, who as Robin Leigh-Pemberton was Bank of England governor from 1983 to 1993. Other members will be Willem Buiter, a recent member of the Bank's rate-setting committee, and Andrew Crockett, outgoing head of the central bankers' bank, the Bank for International Settlements.

Patrick Minford, a Eurosceptic former adviser to the Conservatives, played down the significance of the famous 1981 letter. "That letter was signed by 364 economists and they turned out to be totally wrong," he said.

Mr Brown also re-entered the debate on the euro yesterday to dismiss claims that disagreements between Britain and some European partners over the war in Iraq would affect the decision.

"It should neither be made on short-term considerations based on foreign policy or based on other events that have happened this year," he said. "It should be made on a long-term assessment of the national economic interest."

Earlier this week BiE published a report commissioned from independent economists showing that the UK economy would suffer from postponement of entry.

Posted 4:56 PM by Dil
Five tests and a funeral

May 1st 2003
From The Economist print edition
Gordon Brown will soon bury the chances of Britain joining the euro before 2005

BY THE first week of June, Gordon Brown, the chancellor of the exchequer, must announce the results of the most comprehensive study the Treasury has ever made of a single decision: whether or not Britain should join the euro. His answer will be: not yet. This will make it virtually impossible to join the euro before the next election, which will probably be in 2005.

The Treasury's analysis has spawned 18 supporting studies and will run to 2,000 pages. But at its heart are five tests, which Mr Brown first set in October 1997. Are business cycles and economic structures compatible so that Britain can live permanently with euro interest rates? If problems emerge is there sufficient flexibility to deal with them? Would joining the euro encourage investment? How would the City of London be affected if Britain joined the euro? Finally, will joining the euro promote higher growth, stability and a lasting increase in jobs?

Leaked reports suggest that four out of the five tests will be “failed”—the same result as six years ago. But whatever the pass rate, the judgment will be less damning than the dunce's report of 1997. This is especially clear with the first test, about convergence. Short-term interest rates are now much closer than in 1997. So, too, are output gaps, which measure whether economies are overheating or running below capacity.

So does this mean that Britain passes the convergence test? Probably not. The house-price boom of recent years has highlighted a fault line between Britain and the euro area. A house-price bust could weaken demand. As long as Britain retains its own currency, the Bank of England can respond with lower interest rates. A Europe-wide interest rate would make that impossible. Mr Brown revealed in last month's budget that he is looking for ways to make housing finance less reliant on short-term floating-rate mortgages and so less vulnerable to short-term interest rates, which suggests he thinks that Britain has not yet achieved the goal of “sustainable and durable” convergence.

What of the second test, about flexibility in the event of economic mishaps? At present the pound can fall if Britain's costs get out of line with those of the euro area. But once Britain joins the euro, wages will have to fall to restore competitiveness. In 1997, Mr Brown concluded that Britain's economy was not yet flexible enough to join the euro. In his budget speech, he seemed still to be worried about the issue. With good reason: wage costs carried on rising in the trading sectors of the economy when the pound appreciated so sharply in the late 1990s. So the real loss of competitiveness was even greater. This is a further reason to doubt whether the recent fall in the pound against the euro has gone far enough.

The way that the Treasury initially assessed the second test also gives it scope to find fault on another ground: the euro area's own lack of flexibility. The European Council agreed a set of ambitious targets to unclog labour markets when it met in Lisbon three years ago. Progress since then has been disappointing.

The Treasury will find it more difficult, however, to score the third test, about investment, as a “fail”. For one thing, higher investment is potentially the big prize from joining the euro. Businesses will no longer have to worry about exchange-rate risk. Currency unions can give a big boost to trade; and this seems to be happening within the euro area. More trade and greater price transparency should mean more competition and thus higher productivity growth.

Set aside the potential gains in higher investment from joining the euro: staying out could mean less investment, especially from overseas companies. After several years in which Britain was usually the top recipient in the EU, its share of foreign direct investment fell sharply in 2002, according to preliminary estimates from the United Nations Conference on Trade and Development. On balance, it seems difficult to see why this test should not be marked as a “pass” unless Mr Brown invokes broader concerns about the impact on investment if Britain joins the euro before full convergence.

The fourth test is about the effect of joining the euro on Britain's financial services. Staying out has done the City no harm: its current difficulties arise from the general weakness of financial markets. Still, the Treasury concluded in 1997 that it would do better within the single currency area than outside it, so it is likely to stick with that assessment.

The fifth test will highlight the euro area's disappointing record on growth and jobs. Britain has grown faster than the euro area since its launch in 1999 and by even more in the past ten years. That looks set to continue. The OECD is forecasting that Britain will grow by 2.1% in 2003 and by 2.6% in 2004, compared with 1% and 2.4% in the euro area. And it expects Britain's unemployment rate to be 5.4% of the labour force in 2003, compared with 8.8% in the euro area. Mr Brown peppered his budget speech with such unfavourable contrasts, which suggests that the Treasury will also score this test as a “fail”.

So on at least three of the five tests, the decision will be: not yet. But this judgment leaves a lot to play for. Given the clear and stable majority in the opinion polls for staying out, that is clearly the safer option politically. But Mr Blair still wants to go in. Paradoxically, a period when Britain's economy is under-performing the euro area would help him make the argument.

If Mr Blair is determined to take the gamble, the best time to call a referendum would be a few months after a third election victory—in late 2005, say. For that to happen, the Treasury's negative judgment will have to have a positive spin. The five tests are therefore likely to generate two answers. One will be: not yet. The other will be: but we're getting there. Mr Brown may bury the issue for the rest of the parliament, but it is likely to be resurrected a lot earlier than many now expect.

Posted 4:53 PM by Dil
What's it to be - the euro, or yet more wasted years?

Blair and Brown must take a great leap forward on the single currency

Hugo Young
Tuesday May 6, 2003
The Guardian

Deciding to go for the euro presents the British government with a perilous choice. As an advocate of entry, I understand that perfectly. Though I argued last week that failing to hold a referendum soon would begin the reversion of Britain into a country distancing itself from the whole EU project, I do see that the price of ducking out of a decision is matched by a risk entailed in ducking into one. The people, after all, could go the wrong way.
Britain's uniqueness arises not just from the offshore history, but from the timing. The founder members saw the euro as the fulfilment of a vision. It was unthinkable that any of them should fail to join the construct Mitterrand, Kohl and Delors had shaped. And they didn't have to consult their people in a referendum. For Britain and other non-joiners, any visionary impulse is now superseded by hard evidence, not all of it helpful. Empirical data provide an endless supply of food for scepticism, especially when so many Brits seem that way inclined already.

A further difficulty is that so little of the ground has been prepared. People say there has been a great debate here. There hasn't. Far from the steady drip of pro-euro propaganda, as eurosceptics claim, government has created an arid wasteland of non-argument. It set up a campaign group, Britain in Europe, but for several years forbade it to mention the euro. The chancellor has spread his glowering scepticism across the entire scene, issuing diktats against any colleague who dared to contradict him, which most of them pitifully failed to do.

So the propaganda has been exclusively from one side. Not a single government minister has ever given a speech, let alone been part of a campaign, making an unambiguous case for the euro. The sceptics have had a free ride to parade their distortions as well as their uncomfortable questions, backed by a relentless press determined to score an anti-Europe victory going far beyond the currency. The most amazing product of this lopsided environment is that 30-35% of voters still want to join the euro if the economic tests are passed. But most observers agree on a different consequence: that a referendum any time soon is out of the question.

Now we await the verdict on the tests. The economic case, as I've argued for years, will never satisfy everyone. There are some risks both ways. Today the best case for entry, meticulously addressing the costs of non-entry, is published by a group of distinguished international economists. On jobs, on investment, on trade, on national prosperity over the long term, I find it far more persuasive than debating points about the present state of the eurozone economy. But for the purpose of the political decision that's about to be made, the two most relevant truths about the tests have become blindingly clear.

First, they are indeed subjective. The thousands of pages and zillions of economists' man hours we hear the Treasury has devoted to their scrutiny are either a case of Brown becoming unhinged in some delusion about the existence of objective truth, or an elaborate con, supporting a departmental scepticism about Europe that the Treasury has favoured ever since the EEC was invented. Whatever the truth about that, no one with any savvy believes the verdict will merit the awed submission the chancellor seems to be expecting.

Second, most economists now agree that few, if any, of the tests are likely to spring from ambiguity to clarity in the foreseeable future. If the case about investment, financial services, convergence or stability is uncertain now, it will be no more certain in four years' time. The chimera of future economic certainty is being used as cover for present political retreat, by a group of politicians who want to persuade both us and themselves that, while running away from a referendum, they continue to embrace the EU with deathless passion.

Meanwhile, however, other things will have become clearer. The British economic agonising could continue inconclusively for years, but the EU will not stand still. Both the union and the euro-zone will develop, in the hands of the members most fully committed to them. While we sit here demanding that the central bank and finance ministers change their rules before we deign to join them - and some changes are essential - they will ask themselves who we think we are. When the EU develops its own new constitution to cope with the new entrants, it is sure to ask itself how intently it should listen to a major member that has chosen to remain outside its most cementing project.

Their scepticism will go further. We seem to imagine that the choice of entry will remain ours alone for ever. But whenever the moment comes, there has to be a negotiation. Germany and France could make things hard for us. This will not be 1972, when they both implored Ted Heath to come in, and negotiated accordingly. Yet another phase of self-exclusion, with sterling manipulated to secure trade benefits against the euro, and UK diplomacy continuing to be locked into a preference for American options, will not have made the eurozone any easier to enter than it is today. It will in my judgment be much more difficult.

A fair number of important people would welcome this. The articulation of the "never" point of view is becoming more open, along with more brazen questioning of the very concept of an extended and therefore more federalistic EU. Nobody in the government wants any such hostilities to start to prevail in the public mood. My case is that they should recognise the imminent danger of them becoming more potent. Ministers should stop pretending that retreat from a referendum is an easy option, to be painlessly reviewed any time we feel like it.

My better case is that the coming statement from Brown and Blair needs to take a great leap forward. As a minimum, it should make a formal commitment to entry, and declare for a referendum within the next 12 months, other things being equal. This would decisively alter expectations, send a message to business and Europe, and compel the government to abandon the fence on which it sits with such sour self-destruction. It is the only way to prepare, and the only prelude to a victory that lies, among an indifferent and persuadable electorate, entirely within its grasp.

The alternative is more ambiguity. No pledge to a referendum. A paper-thin promise to look at things again next year, which nobody would believe. A statement, in effect, that the strongest government in Europe was backing away. A tragic misdirection of this country back into the Thatcherite vortex. All in the name of a pretence that, with just a little bit more time passing, all obstacles will miraculously recede. They won't. If we don't do it now, another decade will pass before another government pleads to bring sterling in, crawling on its knees.

Posted 2:41 AM by Dil
The price Britain faces for delay
By David Begg
Published: May 5 2003 20:01 | Last Updated: May 5 2003 20:01

Among the many fallacies that cloud the debate in Britain over whether sterling should join the euro, the biggest is that the alternative to joining the single currency is business as usual. Maintaining the status quo is not an option. Continuing to "wait and see" may have a significant price.

Saying No to the euro would damage Britain's trade, undermine the country's attractiveness to foreign investment, harm its financial markets and reduce its competitiveness. It would also reduce the UK's influence over crucial changes that are now taking place in the European Union. In short, it is not only joining the euro that is risky; so too is staying out.

It is likely that the UK will eventually join the euro. The country's economy is becoming ever more tightly integrated with those of the 12 euro countries. Trade with the eurozone countries continues to rise and now accounts for more than half the total. These closer commercial links increase the potential benefits of sharing a common currency, which would promote competition and improve British companies' access to export markets. They also increase the correlation of UK business cycles with those of the eurozone and thus make a single monetary policy more appropriate. Financial structures, and thus the impact of interest rates, have also converged.

Trade within Europe is rising for many reasons: decreasing transport costs, cheaper telecommunications and falling barriers to cross-border trade. But there is also now clear evidence that a common currency promotes additional trade among the countries that share it, without diminishing their trade with countries with other currencies. If the UK rejects the euro, its trade with eurozone countries will keep rising - but more slowly than if it adopted the euro. So although delay would not affect the eventual case for joining, British living standards would rise less quickly than otherwise.

Staying out of the euro is likely to reduce inward investment in Britain because foreign companies that want to gain access to the large eurozone market face higher costs, notably currency volatility. Foreign investment in the UK has fallen recently. Flows of foreign direct investment are notoriously volatile but the decline cannot simply be explained by the global economic slowdown because the UK share of EU inward investment has also dropped since the euro's launch. The latter averaged 39 per cent in the 10 years before the launch but only 23 per cent in the three years since.

The single currency is also making the eurozone more competitive in financial services. Some of the City of London's business has migrated across the Channel. Adopting the euro will not reverse this trend in markets, such as equities and derivatives, where trading in London is relatively expensive. Conversely, where clustering matters - as in investment banking and foreign exchange dealing - London will remain pre-eminent whatever the UK's euro decision. But the location of some markets will be affected: the European Central Bank wants the euro clearing and payments system to be located in the eurozone, for example.

Retaining the pound is not a gold standard against which the risks of euro adoption must be assessed. The status quo is gradually ebbing away. The real issue is when, not whether, the UK should adopt the euro. Deferring the decision would affect the design of the eurozone's institutions. A window of opportunity is now opening for reform of the ECB, the stability and growth pact and the regulation of Europe's financial markets. Current member states want these issues resolved before the wave of new entrants get a voice next year. If it fails to commit now, the UK will have less influence over eurozone architecture, making future entry less likely.

Set against these costs of delay, there are two possible benefits: it could allow time for UK interest rates to complete their convergence to eurozone levels and for sterling to depreciate further. However, UK interest rates exceed eurozone rates for structural as well as cyclical reasons; and there is no guarantee that that, left to its own devices, sterling's next move will be down. The benefits of delay on these grounds are far from established. It is therefore wrong to argue that Britain should simply wait until the government decides its five economic tests are passed. If the UK is likely eventually to adopt the euro, it is worth delaying entry only until the extra benefit of further delay equals its extra cost. Waiting until the extra benefit of further delay is zero would mean waiting too long.

The writer is principal of the Business School at Imperial College, London. He chaired a group of experts whose report, The Consequences of Saying No, is published on Tuesday and available from www.britainineurope.org.uk