Failure of leadership on euro leaves pound heading for a crisis

The UK differs less than other candidate economies from the Eurozone. The difference is attitude
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THE EURO question has gone spookily quiet. Not surprisingly, the Government has not wanted to push forward with plans to teach voters to love the single currency for the duration of the beef war.

However. it also seems increasingly possible that a lack of enthusiasm in high places is going to delay the likelihood of British entry until well beyond the next election.

The financial markets are starting to contemplate the entry of Sweden, Denmark and Greece by 2001, followed by central European and Baltic states. The likely date of UK membership is being pushed back to 2005, with many question marks attached, after countries like Poland and Lithuania.

It is certainly true that the British government has a steeper hill to climb in terms of persuading voters that switching from the pound to the euro would be a good thing. In Sweden, voter opinion has been fairly evenly divided, and much of the political and financial establishment is firmly in favour. The central bank, for example, has made it clear Sweden ought to join as soon as possible.

Opinion polls in the UK, however, show the antis have a strong lead over the pros, and one that has been widening recently. The latest Mori poll for Salomon Smith Barney showed the balance against entry unchanged at 20 per cent, but that incorporated only a 31 per cent share in favour, the lowest recorded in this poll.

This degree of voter hostility is not unprecedented in the brief history of the euro. In January 1998, 60 per cent of the German public was anti- euro, and only 30 per cent in favour. A year later, when the currency was launched, the mood had shifted to 49 per cent in favour and 27 per cent against.

Of course, the sense of inevitability helped - the German government never had any intention of calling a referendum. However, there is a belief in the UK too that eventual membership is inevitable. The proportion saying the UK would be in the euro in 10 years' time has climbed from 36 per cent in June to 42 per cent in November, according to the Guardian/ ICM polls. However, it has not boosted public enthusiasm at all.

In the circumstances, it is easy for all but the most hardened euro-philes to understand why Gordon Brown set out his five economic "tests" for UK membership. These are vague and judgmental in the extreme. For instance, have the structures of the economies converged? Would joining the single currency be good for jobs? For the City? The answers can never be more than opinion. Still, posing the questions has given the Government an excuse for delay without being quite so negative as the old "wait and see" stance.

As Alison Cottrell of PaineWebber notes in a report this week, it is rather bizarre that the debate about joining the single currency centres on the economic questions. After all, the UK economy differs less than the economies other candidate members from the Eurozone. There are obviously some important structural differences but they are less marked than in the case of Sweden, Greece or Lithuania.

The difference is mainly one of attitude. As she writes: "This reflects a general perception that it is Euroland which needs to qualify to join the UK, rather than the other way round."

Needless to say, the Euro-11, soon to be the Euro-14, do not share the British view that they need to get their economies in order before the UK can join. While high unemployment makes it plain that something is malfunctioning in some Continental economies, most have higher levels of productivity and GDP per head than the UK.

British attitudes might well start to change as the main Euroland economies pick up speed, especially if this helps the euro strengthen in the currency markets. And, from 2002, euro notes and coins will start to circulate, which will make the whole project seem a lot more real and immediate even to occasional tourists.

There will also be plenty more Euro mergers and acquisitions, with the Vodafone bid for Mannesman just a small foretaste of future battles. British companies - at least the big ones - will swing firmly behind UK membership if it looks increasingly as though the true single European market has its boundary in the Channel.

However, with public opinion still so hostile, it would be romantic to expect the Government to take a firm lead. The electoral timetable means either ministers or opinion polls would need to shift during 2000 for the Government to go cheerfully into an election campaign promising an early referendum. The markets calculate it will therefore be more like 2005/06 than 2003/04 before the UK can join the single currency.

That makes the zloty as good a single currency play as sterling. It also makes it painfully obvious that the pound is a minor currency. A very open economy with a big balance of payments deficit and a floating but decreasingly traded currency is a crisis waiting to happen. Perhaps that is what it will take to drive the UK into the euro embrace.