Labour outlines single currency criteria for joining in 'first wave'

Gordon Brown, Labour's shadow chancellor, yesterday set down five criteria on which a Labour government would decide whether to join a single currency. Speaking in Washington to the US Treasury Secretary Robert Rubin, Mr Brown said: "If the economic conditions are right, we will retain the option of joining ... in the first wave."

Mr Brown said that Labour would look at the impact of EMU on investment, on financial services and on unemployment. He would also consider whether countries were at different stages in the economic cycle, and whether the stability pact was sufficiently flexible.

But the five criteria do not yet clearly determine whether Labour would join in the first wave or not. Graham Bishop of Salomon Brothers said: "On balance these criteria will enhance the chances of the Labour Party joining EMU." However, Michael Lewis of Deutsche Morgan Grenfall said: "These criteria form a more rigorous test; they would push you away from joining in the first wave and towards waiting to see how EMU panned out."

Mr Brown's first criterion is to "examine the likely impact on investment by British firms ... and on inward investment". Fears are already growing that an opted-out Britain could lose inward investment as companies such as Toyota consider relocation within the euro-zone. Moreover, if the euro is a strong currency, interest rates in Britain are likely to be higher than in the euro-zone, discouraging investment by British companies, too.

The risk of lower investment, growth and job creation outside EMU would, according to Mr Bishop, be "bound to have a significant impact on a party that cares about unemployment". Employment, after all, is another of Mr Brown's criteria.

But Mr Lewis argues that concern for investment would not necessarily lead to early membership: "That's more a long-term consideration."

Mr Brown plans as well to consider "the effect on our financial services". However, a recent report by David Currie for the Economist Intelligence Unit argues that financial services should in fact do well inside or outside EMU so long as they prepare properly, keeping Mr Brown's options wide open.

The shadow chancellor also said, "we will examine whether European countries are at different stages of the economic cycle". Britain is currently in its fifth year of economic growth, while the German economy actually shrank in the last few months of 1996. According to Mr Lewis: "this condition could delay Britain's entry for some time." However, the single currency could itself speed the integration of economies and reduce the need for separate monetary policies across the union.

The final Labour criterion is to examine whether there is sufficient flexibility in the Dublin stability pact to cope with economic shocks. As the David Currie report points out, unable to use monetary policy to react to local economic problems, governments will need the freedom to adjust borrowing to tide them through bad times.

A strict interpretation of the stability pact - as the Germans prefer - would remove much of that flexibility. Mr Lewis said: "It looks as though Labour wants to wait and see how much discretion national governments will have."