Will Britain ever learn to love the euro?

As decision time draws near, Sam Dunn asks which of us will be the winners and the losers if the pound passes into history
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The Independent Online

The euro's ability to divide the nation has become even more apparent recently. Reports of a deep rift between Tony Blair and Gordon Brown ahead of the Chancellor's announcement on 9 June on Britain's entry into the single currency have led to fresh waves of fierce debate over the prospects of membership.

As pro and anti-euro camps press home their arguments, what is clear is that a new currency could have a major impact on savings, investments and borrowings in the UK.

First and foremost, the Bank of England would lose its power to set interest rates and leave a decision affecting your mortgage repayments in the hands of the European Central Bank. The EU does have a history of low interest rates compared to the UK, but home owners with a variable-rate mortgage could find themselves in difficulty if interest rates do begin to rise in response to inflation or other economic changes.

Since some 64 per cent of UK home owners are on a variable rate - a much greater proportion than in Europe - our repayments would be more sensitive to fluctuations in interest rates.

Sue Anderson, spokeswoman for the Council of Mortgage Lenders, warns: "There is a risk that an interest rate decision could be felt disproportionately by UK home owners, with an immediate knock-on effect for the UK's economy." Indeed, the Treasury has already expressed concern about this; last month, Mr Brown used his Budget to announce that he was looking at moves to foster a British mortgage culture marked by interest rates fixed for, say, 25 years.

But while mortgages may be cheaper with entry to the euro, this would be at the expense of savings rates. Andrew Clare, financial economist at insurer Legal & General, says: "Cash rates would be lower and, with possible higher inflation, the real rate of return from a bank or building society would be smaller."

And Britons would probably have little chance of being able to invest in a new, broader choice of savings products across a single European market. A Consumers' Association survey this month suggests that, thanks to our powerful regulator, the Financial Services Authority, and our competitive market, UK financial product providers would have no trouble beating off foreign rivals.

Unfortunately, the pensions situation in the UK, which could do with some help, is unlikely to improve with membership of the euro, as lower long-term interest rates could increase the cost of annuities. Mike Urmston, chief actuary at insurer Norwich Union, says: "Lower interest rates would not be good news for most savers, and if long-term rates fall too far, annuities would cost more to buy."

Tom McPhail, pensions research manager at independent financial adviser (IFA) Hargreaves Lansdown, warns: "It wouldn't affect anybody who has already bought an annuity but the interest rate will be massively important [to those who haven't]."

In fact, the UK would be in good company should it join the euro as, while critics continue to blast the Government for the pensions crisis, many European countries are also struggling to cope with chronic pension underfunding. In France, for example, a recent raft of reforms aimed at averting a financial meltdown has led to strikes by workers.

As far as general insurance is concerned, the Consumers' Association report suggests the cost of premiums would remain much the same. But elsewhere, there are clear advantages to saying goodbye to sterling. Without currency conversion costs, travelling abroad would be cheaper, and a single currency could help us keep track of our spending.

It could also help our stock market investments. According to the Consumers' Association, fund managers' ability to pick shares in Europe is limited by the need to keep a lid on exchange rate risks.

At present, the prospect of losing money as a result of currency swings prevents financial advisers recommending euro mortgages to clients buying property on the Continent. Bruce Jamieson, principal of IFA Jamieson Financial Man-agement, advises against changing a mortgage to euros at this stage. "Make sure your mortgage is in the currency where you live," he says. "Your liabilities and assets must be in the same currency or you could be hit by currency movements."

For those who believe the UK will introduce the single currency, Mr Jamieson recommends getting into corporate bonds and gilts now because eurozone interest rates are likely to fall further in future, given their history. However, don't take anything for granted and don't switch all your investments, as there is no certainty that Britain's membership of the euro will ever become a reality.

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