Major says 'maybe never' for single currency

Paul Wallace examines the latest arguments for and against monetary union
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Circumstances may not ever be right for Britain to participate in a single currency, the Prime Minister told the House of Commons yesterday as conflicting reports were issued onthe Government's approach to European monetary union.

Britain should opt in to EMU, advised the Kingsdown Enquiry, a working group set up under the chairmanship of the former Governor of the Bank of England by the pro-European Action Centre for Europe. Britain should stay out, the Institute of Directors warned.

The report of the Kingsdown inquiry was significant because of Kenneth Clarke's presence on the advisory council of the Action Centre for Europe (ACE), a pressure group set up last year to counter the influence of Eurosceptics. A Treasury spokes-man said Mr Clarke was not involved in preparing the report. However, there is an obvious risk that the report will spark another bout of the vicious infighting in the Cabinet the Chancellor's speech provoked in February, when he contended that monetary union would not diminish the UK's political sovereignty.

Speaking at the launch of the report, Lord Howe, president of ACE, warned that if a decision was taken not to join EMU in 1999 "Britain would pay the cost - in terms of higher interest rates, a depreciating pound and diminishing economic influence in the world."

The inquiry accepted that the plan for EMU was "politically driven", above all by the Franco-German axis. The "automaticity" of the Maastricht treaty would count for nothing if Germany was unwilling and France unable to participate.

But "if a handful of advanced European member states decides to go ahead to form a Monetary Union, it seems all too likely that they will form a political inner core of the European Union, which is likely to become increasingly integrated in many fields, not just in Monetary Union ... if Britain stays outside, there must be a real risk that Britain could become increasingly marginalised".

It warned that government opposition to new moves to political integration at the 1996 Inter-Governmental Conference "may be dangerous for Britain", since it "could not be counted on to prevent other member states from making new moves towards European integration; on the question of EMU, Britain would be more isolated".

The report drew attention to the economic dangers the UK would face outside monetary union. Foreign investment could be jeopardised if Britain was seen to occupy the sidelines. By contrast, there were clear economic benefits to participating in monetary union. Interest rates and inflation would be lower as Britain piggy-backed on the greater credibility of a European central bank modelled on the German Bundesbank.

The Institute of Directors, on the other hand, argued that "for the foreseeable future, it will not be in the economic interests of the UK to take part in a single European currency". The British economy did not move in step with other European countries and was structurally different.

As a result, a common European monetary policy could be highly damaging. For example, with many mortgages funded by variable rate borrowing, Britain was particularly vulnerable to interest rates set for European rather than domestic needs.

The IOD argued that sensible domestic monetary policy could achieve the benefits of low inflation. The argument that the role of the City of London as a financial centre and Britain's success in attracting inward investment would be threatened did "not bear close scrutiny".