Outlook: We've had the leak - now Blair must deliver

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The Independent Online
If the Government had wanted to test market reaction to the prospect of sterling's early entry into a single currency, then it could scarcely have done it in more spectacular fashion.

The pound plummeted five pfennings yesterday, government bonds shot up and, most spectacularly of all, the Footsie soared away to record its highest one-day points gain since the Tories (remember them?) won the 1992 election - all this on the strength of a speculative story asserting that the Government is about to strike a more positive tone on European economic and monetary union by saying it will take sterling in some time soon after the launch in 1999.

Suddenly, everyone seems to be in love with EMU - the markets and the vast swathe of businessmen of course but now too a majority of Tony Blair's government. Extraordinary as it may seem, even William Hague's Conservative Party may be coming around, albeit reluctantly, to the idea.

Certainly the group of senior industrialists and inward investors who attended last Wednesday's working breakfast in Downing Street with the Prime Minister must have been cock-a-hoop. Ostensibly they were there to listen politely as the Prime Minister outlined his plans for more job swaps between Whitehall and industry. But as the croissants and orange juice passed around the room, the conversation turned to the more pressing matters of the pound and the single currency.

Mr Blair was left in no doubt that his guests felt uncomfortable with the level of sterling. They also expressed their disappointment at the lack of any firm government commitment to take sterling into European economic and monetary union, if not in the first wave then soon after its launch in 1999.

And lo their prayers have been answered with yesterday's Financial Times report saying that the Government would issue a statement shortly committing itself to do just that. "It is now clear that we must indicate our willingness to be in there," confided an unnamed minister.

Why bother to make formal policy announcements when a judicious word in the right ear from an anonymous member of the Cabinet can have the desired effect? The stock market up, the pound down, as dealers scent lower interest rates and sterling at, let's say a much more competitive DM2.60. The mere suggestion that the Government is more favourably disposed to EMU did wonders for a whole range of businesses yesterday as the markets relished a more competitive exchange rate and lower interest rates. Not surprisingly, the biggest benefactors were exporters and the banks who rather like low-interest, low-inflation environments because it irons out the cyclicality of earnings.

Perhaps this is all too conspiratorial. Perhaps the sequence of events was coincidental. Politics is rarely as simple or as structured as that. In fact, was the anonymous minister quoted in the FT actually saying anything that new? After all, Labour's policy on EMU always was characterised more by "wait and join" than "watch and stay out".

Yesterday the markets did not seem to care about any of this, nor did they stop to blink after the half-hearted denials that emerged from the Prime Minister's office and the Treasury.

Sentiment drives markets and the sentiment now is that EMU is on an irresistible roll. The French, the Germans, the Italians, the Spaniards can all be taken for granted. But now Britain, the great unclubbable, looks like joining the throng. We come armed with the IMF's good housekeeping seal of approval and we are going to knock EMU into shape.

Well, clearly the tide is running more strongly in favour of EMU starting on schedule than at any time in the last 12 months.

As our weekly EMU survey shows, expectations that the single currency will start on time and with a broadly based membership continue to grow. Sentiment in the City is being driven by the credibility of the project. The doubts that dogged EMU until comparatively recently are drifting away, helped by firm action such as the decision to fix the rates at which currencies will enter next May and this week's robust French budget.

The calculation that Mr Blair and the more EMU-sceptical Cabinet members such as Robin Cook must make is whether Britain can afford to be outside an EMU launched on firm foundations.

Between now and the end of the year, when Britain takes up the presidency of the European Union, a clear position on EMU will have to be mapped out.

This need not alter the sequence that will be gone through to decide whether sterling enters - decision by Government first, then Parliament and finally the people. But if there is to be referendum some time next year then a commitment needs to be made before Britain assumes the presidency in January.

Plainly, a decision to enter EMU is not without its risks. The last time sterling was hemmed into a fixed exchange rate mechanism it produced recession.

The pound's ignominious exit from the exchange rate mechanism was the cue for the recovery that followed. The Government would also need to be persuaded that entry would enhance employment prospects, not undermine the labour flexibility that Britain boasts.

But this time around, an affirmative statement in favour of EMU could easily have the effect of prolonging the recovery by bringing down the value of sterling and stimulating export growth. That, in turn, could put the British economic cycle in better sync with Germany and France, ready for when we take the plunge and join the club. That, at any rate, is the theory.

The markets may have made their judgement. But there is another, larger constituency to persuade and that is the electorate. Yesterday's leak may have been the start of the softening-up process. If so we can expect to see more of the same as the weeks roll by. Whether it was authorised or not, the leak has built up expectations. It is now up to Mr Blair to deliver.