Outlook: After a bad week for the euro, the joiners need to rethink

We know that the Federal Open Markets Committee was split on its decision to keep US interest rates on hold at its meeting this week, with two members voting for a cut. We know that Britain's Monetary Policy Committee was unanimous in leaving interest rates unchanged a few weeks back. But we don't have a clue what goes on at the European Central Bank's Governing Council when it meets monthly to decide on the eurozone's interest rates.

That's because no minutes of the meetings are published nor is the result of any vote on the council. Members are not allowed to talk about what went on nor are they allowed to say what they think should have happened. Indeed, we don't even know when a vote takes place at all, since the idea is that decisions are reached by consensus.

There are lots of things wrong with the way the ECB operates. Lack of transparency is only one of them. The European Parliament is on a mission to improve things, but progress is slow. The size of the council in another big drawback. With 12 central bank governors and six executive board members, possibly soon to be expanded by EU enlargement, it's far too big and unwieldy a body to be able to make sensible decisions. The inflation target of "less than 2 per cent" is arguably all wrong too. The effect is to make the ECB constantly err on the side of caution in setting interest rates. In the trade off between inflation and growth, inflation always wins.

Reform of the European Central Bank is not one of Gordon Brown's five pre-conditions for Britain joining the single currency, but neither the Chancellor or his economic adviser, Ed Balls, have ever tried to hide their distaste for the way the ECB works. They don't like it and rarely do they miss an opportunity unfavourably to contrast its ways with the practices of the Monetary Policy Committee, which of course they were responsible for establishing.

Their dislike of the ECB is in marked contrast to the mutual backslapping that went on when Alan Greenspan, chairman of the Federal Reserve, opened the new Treasury building this week. Mr Greenspan was over here to accept an honorary knighthood from the Queen. He's a foreigner, so following the American constitutional ban on honourary titles, we won't be using it.

There can be little doubt about who must have recommended the title. For Mr Brown, no honour would be too high for the grand old man of central banking. "The world owes you a debt of gratitude for your stewardship of the world's greatest economy", gushed the Chancellor, as if Mr Greenspan is single handedly responsible for US economic supremacy. He then went on to reveal how he had sought Mr Greenspan's personal advice while in opposition in devising his policy for making the Bank of England independent.

His visits weren't generally known about at the time, and what was later to become one of New Labour's most successful policies was deliberately left out of its election manifesto – this in the belief that it might have been interpreted as being pro-euro. One of the pre-conditions of joining the euro is that member nations must have a pre-existing independent monetary policy. Mr Brown was terrified that his political opponents would seize on any commitment to make the Bank independent as proof positive that Labour planned to take Britain into the single currency.

Today the Monetary Policy Committee is seen in a completely different light. Its apparent successes contrast favourably with the ECB's plodding and at times inappropriate implementation of monetary policy. By joining the euro, Britain would be surrendering not just the flexibility of its own independent monetary policy, but an apparently superior system for administering it too. The MPC's existence has become a key part of the eurosceptic argument.

Mr Greenspan presumably knew what he was doing when in his speech at the Treasury he referred to London's "sterling reputation as a place to do business". The eurosceptic cause could scarcely believe its ears or luck. Mr Greenspan's reputation may have taken a knock in recent years, but he's still the most respected and talked about central banker in the world, and he seemed to be adding succour to the anti-euro argument. Mr Brown was able to bask in the reflected glory. When before has Mr Brown been described by the Daily Mail, no less, as "our prudent and formidable chancellor"? But there it was in a leader that lauded Mr Greenspan for a remark which scarcely qualified him as a fully paid up member of the eurosceptic cause.

Nobody on his staff is prepared to elaborate on whether that's what he meant and before jumping to conclusions another famous Greenspanism should perhaps be noted: "If I seem unduly clear to you, you must have misunderstood what I said". If Mr Greenspan was pitching his tent on eurosceptic ground, then he in any case chose the wrong issue. Of the five euro tests, there is only one which is likely unambiguously to be passed and that's the one to do with whether the interests of the City might be damaged by membership of the single currency. Mr Greenspan pointed out that the City has continued to thrive outside the euro, but it is hard to argue that it would be positively disadvantaged by being in it. That's the conclusion the Treasury will reach too.

None the less, this has been a bad week for proponents of British membership of the euro, of that there is little doubt. On Tuesday the European Commission was forced to ease the stability pact rules to accommodate the burgeoning budget deficits of key European economies.

Opponents of the euro were able to argue it both ways, on the one hand as evidence that fiscal discipline was breaking down and on the other as proof that the euro applies an inappropriate degree of constraint on tax and spend when some regional economies are in the doldrums. It is arguable whether either fiscal or monetary action would do much to ease Germany's plight right now, but it is certainly clear that the ECB should be at least trying with further sharp cuts in interest rates. The failing is not so much that of the euro as the ECB.

That said, the problem with the German and French economies is not much to do with inappropriately high interest rates or fiscal constraint. As Germany sinks back into recession, no amount of easing or spending seems capable of addressing the rigidities of its economic model. Last weekend's election result has piled political paralysis on top of the pre-existing economic one, and with little hope of meaningful reform, it is hard to see where Germany goes from here.

The chances of a single currency referendum in Britain this parliament are fast receding. Few things are going the euro's way right now, and if anything, public opposition to British membership is growing. The introduction of notes and coin seems only to have hardened opinions. Far from falling in love with the new currency after holidaying on the Continent this summer, many came back thinking it had only succeeded in making everything a lot more expensive.

The five economic tests are more than just a charade. There is an exhaustive and detailed appraisal of them going on at the Treasury, which is being professionally and impartially conducted. Even so, it's hard to believe that a Chancellor who so self evidently mistrusts the euro's monetary and fiscal authorities is going to be campaigning for a yes vote early next summer.

The pro-euro argument has always been that meaningful reform is more likely if Britain is inside the tent looking out than outside it looking in. But let's get real here. No government intent on achieving a third and fourth term is going to embark on such a high risk crusade, in the hope that eventually the Europeans can be brought round to our way of thinking. The pro-euro lobby needs to step back in order to move forward. The cause is not yet lost, but its approach may need to be substantially rethought.

jeremy.warner@independent.co.uk