Outlook: Euro destiny

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The Independent Online
HOW QUICKLY will Britain become part of Euroland? Much as we might like to think the decision is still ours to make, this may not in the end be the case. The possibility of a de facto introduction of the euro, regardless of what the British people and its politicians want, remains high.

Many big British companies take the view that sterling is already largely an irrelevance. Some plan to account in euros (although the primary accounting currency will have to remain the pound), others propose to invoice suppliers in euros, while a few even plan to offer workers the right to receive their pay in euros.

The speed with which the British economy de facto becomes part of the eurozone, without formally joining it, will largely depend on this latter phenomenon. If the purchasing base of the country turns euro, then sterling too would soon start to disappear. Retailers would very quickly have to accept euros as well as pounds and they, too, would as a consequence eventually start paying their workers in euros.

Plainly this is not going to happen overnight. Since the Revenue will continue to tax in pounds, not many companies will think it worth their while to go this route, initially at least - the administrative hassle would be too great. However, pressure from both sides of industry for payment in euros is likely to mount if the pound becomes highly volatile against the new currency. Employers would find it convenient as well as profitable to foist the exchange risk of the payroll on to their employees, while employees might be made to feel better off and securer if paid in euros.

All this must for the time being remain in the realm of speculation. What looks rather more certain is that prices and the cost of money will quite quickly homogenise to Euroland levels. The establishment of the single currency adds a previously unattainable degree of pricing transparency across the eurozone, and as such is the final milestone on route to a fully integrated single European market place. As crossborder trade and competition picks up, prices should in theory fall towards the lowest denominator.

Big business will no doubt fight tooth and nail to make the process work the other way round - that is, to have prices rise towards the highest denominator - but either way, Britain cannot remain immune to what happens. The euro will galvanise British markets and industry as much as it will those of Euroland. In this respect, Britain will find it impossible to remain an island. The City's key position in financial markets, including for the time being, the euro markets, pushes us further still towards effective integration.

So it certainly won't be possible to avoid the effect of the euro, however much we might wish not to be a part of it, and longer term economic inevitability might force us into it in any case.

In the short term, it seems clear that there is nothing to stop a further fall in European interest rates. The new currency seems destined rapidly to establish itself as a strong and powerful one, prices are barely rising at all in many parts of Euroland, unemployment remains high and growth sluggish.

Wim Duisenberg will surely resist at this month's meeting of the ECB for fear of jumping the gun, but a further cut in rates must follow soon after. That in turn will put pressure on our own monetary policy committee for more action. Nothing is certain, but there is a fair possibility that the British economy will converge with that of Euroland much more rapidly than generally thought.