Officials are looking at how to bring sterling down from its current high level and how to keep it stable for the two years required by the Maastricht Treaty. One scenario includes requiring the Bank of England to take the exchange rate into account in setting interest rates after a vote - possibly in 2001.
Tony Blair gave his clearest signal yesterday that Britain would join the single currency. He said the country had to resolve once and for all its ambivalence towards Europe over the next few years. "I want to end the uncertainty, the lack of confidence, the Europhobia," he said in speech in Aachen, Germany, where he was presented with the Charlemagne prize for his commitment to Europe.
He linked joining the euro to Britain becoming "once again a leading player in Europe".
The Prime Minister also coupled Britain's drive for membership of the euro with reform of the European Union, a campaign in which Chris Patten, the former Tory Party chairman and Governor of Hong Kong, is expected to play a major role as one of Britain's two European commissioners.
Separately yesterday, Gordon Brown, Chancellor of the Exchequer, repeated his five economic tests for British entry to the euro. But he emphasised the parallels between British and European economic policies. He said Europe was pursuing stability through monetary union and the independent European Central Bank, just as Britain had an independent Bank of England.
Mr Brown told a TUC conference on monetary union: "My EU colleagues agree with me about the importance of economic reform in Europe for job creation."
Mr Blair will become the first prime minister to address the annual conference of the Confederation of British Industry in October. Along with the Chancellor, he will use the event to rally business support for the euro.
Planning for the exchange rate being carried out in Whitehall centres on the assumption that Britain will be able to join the euro at a rate of 75p to 80p,a devaluation of more than 10 per cent from the current 66p.
The problem is how to steer the pound to that level in the currency markets before beginning the two years of exchange-rate stability required for euro membership, which is unlikely before 2003. Announcing Britain's intention to join would probably help in itself. But officials believe that interest-rate cuts will also be needed.
"It would be much easier if the pound would just fall, but life is not so convenient," said Graham Bishop, a euro expert at Salomon Brothers.
If sterling stays strong in the meantime, other European governments are likely to argue that it should join the single currency at a high exchange rate - a proposition British industry and manufacturing unions would greet with horror.
The Tories will launch a drive next week to "save the pound" as the cornerstone of their campaign for the European elections on 10 June.
Tories seek EU opt-out
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