Sterling falls as world markets welcome euro

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The Independent Online
THE PRIME Minister raised expectations last night of British entry to the European single currency after financial markets around the world rushed to embrace the euro on the first day of trading.

The euro rose sharply against the dollar and share prices on European stock markets registered big gains after a shaky start. London was virtually shunned by investors in what threatens to be a foretaste of life on the fringes of Europe's $10trn capital market - the largest in the world.

A runaway success for the euro would make the momentum for Britain's entry unstoppable, and Mr Blair yesterday reinforced the impression that it was a case of "when" not "if" Britain would join.

Both the Prime Minister and Eddie George, the Governor of the Bank of England, stressed that Britain's economy was at a different point in the cycle to the euro-countries, led by France and Germany, which have lowered interest rates to 3 per cent, but there were no constitutional obstacles to entry.

"It would not have been in Britain's national economic interest to do so at this stage," Mr Blair said in The Wall Street Journal. "But our position is clear ... If the euro works and the economic benefits are clear and unambiguous, we would recommend entry."

He pledged that London would "be at the centre of the euro even though Britain is not part of the first wave".

Trading on the first day showed that the euro had passed its first important test.On the foreign exchange markets, the euro rose nearly three-quarters of 1 per cent against the dollar. Sterling by contrast had a poor day.

"Economic and monetary union (EMU) turns other western European economies from medium-sized players among equals into small entities on the fringe of a giant," said Holger Schmieding, an economist at Merrill Lynch, the Wall Street investment bank, "If need be, these outsiders will have to adjust to EMU, not vice versa."

Nick Parsons, City economist at Paribas, a leading French bank, warned: "Sterling risks being marginalised, at a time when the UK economy is moving into recession.

"We think the euro will be the best performing currency this year as more and more people switch out of the dollar."

Europe's political leaders hailed the first day of trading in the euro as a big success, with claims that the new currency will be strong enough to allow the Continent to escape "economic domination" by the United States.

The French Finance Minister, Dominique Strauss-Kahn, led the chorus of approval, forecasting that the euro would become as important as the dollar. In a radio interview in France, Mr Strauss-Kahn argued that Europe's 11- nation economic bloc will operate on equal status to the US, ensuring that it "will no longer be subjected to economic domination". The minister added: "The euro is an instrument at the service of policy. It will restore to us a power that we had largely lost."

Euro notes will not start circulating until 2002, but the launch of the euro will increase the pressure for an early referendum on Britain's entry, which is not due until after the next general election.

Dealers in the City said the huge task of converting millions of bank deposits and trillions of dollars of assets from the old European currencies to euros had gone smoothly, enabling trading to start on time yesterday without a hitch.

Winners and losers, Page 8

Interest rates fear, Page 12

Hamish McRae, Review, Page 5