Britain is a 'long way' from satisfying criteria for euro entry, warns IoD

Click to follow
The Independent Online

Britain is still a "long way" from satisfying the Government's five economic tests for joining the euro, a leading business organisation says.

Britain is still a "long way" from satisfying the Government's five economic tests for joining the euro, a leading business organisation says.

The Institute of Directors (IoD) warns that, if the United Kingdom joins the euro now it would do so at an "irrevocably fixed, overvalued rate".

The institute's report today comes hours before the publication of an independent report commissioned by the Liberal Democrats into whether the UK has met the five tests laid down by the Chancellor, Gordon Brown, in 1997. The report concludes that the tests are "in the process of being met".

The IoD said the key test of convergence between the economies of the UK and the euro-zone would not be met over the next two years. It said there would be "transient" convergence as the weak value of the euro boosted Europe's economy while higher UK interest rates slowed British economic growth.

Graeme Leach, the institute's chief economist, said: "Economies can appear converged in much the same way as ships pass in the night. But this tells us nothing about their future speed or direction." He said sustainable convergence would be impossible unless European politicians attacked the problem of structural unemployment on the Continent.

He said another obstacle was the contrast between the number of people in the UK and Europe who borrowed at variable interest rates - a key factor in determining the impact of rate hikes on the economy.

While 90 per cent of UK consumer borrowing is at variable rates, and so directly affected by rate rises, the comparable figure for France is 13 per cent and in Germany 36 per cent. "This means a 'one size fits all' monetary policy would have a disproportionate impact on the UK household sector, with important political considerations," Mr Leach said.

The Government's stance on the euro is that it believes in principle in joining, but only if a series of economic conditions are met and the Britishpublic agree in a referendum. Mr Leach said: "The only sensible way the UK economy can converge with Euroland is if Euroland changes towards an Anglo-American style system, with a more deregulated labour and product market.

"This is highly unlikely to happen. Europe is showing no signs of moving in that direction and explains why the Institute of Directors says the UK should stay outside the euro for the foreseeable future."

Comments