Labour would like to airbrush out the euro issue

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The Independent Online

For a government that is supposedly enthusiastic about the UK adopting the euro, it has done remarkably little about it. Although its official policy is "prepare and decide", it looks more like a case of "procrastinate and dream".

For a government that is supposedly enthusiastic about the UK adopting the euro, it has done remarkably little about it. Although its official policy is "prepare and decide", it looks more like a case of "procrastinate and dream".

Despite a commanding opinion poll lead, Labour has been reluctant to argue in favour of the single currency. There is some room to debate cause and effect, but this is connec- ted to the fact that public opinion is running more than two-to-one against the euro. But what is striking, especially as the Government stresses that Britain's economic interests are paramount, is how little it has been doing to prepare the ground economically. In fact, some of its policies will make it harder for the UK to join European Monetary Union (EMU).

Of course the Government, were it to join the debate, would argue that the UK is getting closer to satisfying the "five economic tests" that will supposedly determine its decision on EMU. In particular, it could point to convergence between the UK and eurozone economies. Their growth rates have moved closer together, and interest rates have converged markedly over the last few months as the European Central Bank has continued to raise rates while the Bank of England has stood pat. Even sterling has stopped playing kid brother to the US dollar, and begun to track the euro more closely.

The Government might also argue it is beginning to win the battle of ideas within the EU. It was the prime mover behind the summit in Lisbon earlier this year, that agreed the EU needed to accelerate supply-side reforms in an effort to catch up with the dynamism of the technology-led new economy in America.

But it is hard to argue that the Government has done much to help put the UK economy in a position to join EMU early in the life of the next parliament. It is doubtful whether the recent economic convergence will be sustained: it may be a case of "ships passing in the night". As for the structural reforms, they will take years to pay dividends, even assuming that they are delivered.

More importantly, the basic thrust of the Government's macro-economic policy is now running directly counter to the goal of EMU entry. The Chancellor may claim the thrust of fiscal policy remains "prudent", but his decision to crank up public spending will boost growth and keep sterling and interest rates higher than they'd otherwise have been. As there is a widespread feeling that they both need to be lower before the UK can comfortably enter EMU, this may put back the possible entry date.

And the Government's reticence about the euro has left the outlook for monetary policy shrouded in uncertainty. The Government is silent on the topic of the possible timing of entry. This is hardly surprising as it is coy even about the timing of the euro referendum, not least as the date of the general election that'll precede it is still far from fixed. It is also silent on what sort of exchange rate it expects sterling to enter EMU, or even on how it plans to negotiate this with existing members.

It has made no attempt to map out the changeover from the present inflation-targeting monetary policy regime to EMU. Will the Government require the BoE to move to a transitional stage in which interest rate decisions are set with a view to keeping sterling's exchange rate to the euro within a narrower range?

Nor does it seem to have given any thought to addressing one of the key structural differences between the UK and eurozone economies: namely the former's greater sensitivity to changes in short-term interest rates. One reason for this is the relatively high exposure of UK borrowers to mortgages whose rates are tied to short-term interest rates. Greater fiscal restraint, that would help to cut long-term interest rates, or specific incentives, perhaps including tax relief, could encourage borrowers to take out loans tied to longer-term rates.

For all the Government's efforts to portray EMU entry as purely an economic issue, we are inevitably drawn back to the politics for an explanation. Quite simply, the Government's overriding objective is to win the election, and the euro is an awkward topic that it would like to sweep under the carpet until that objective is secured. Although it will claim it is consistent with its core ideology, the timing and the composition of the public spending spree is clearly designed to garner votes. The Government's attitude seems to be that if it creates a problem for EMU entry, then that's just too bad: it will deal with that after the election.

But that will still leave the election after next to be won, which means that the uncertainty over the UK's intentions towards the euro may persist for some years yet. While this thought will appeal to foreign exchange dealers, it will depress British business.