Euro would 'boost trade and create housing turmoil'

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Indy Politics

Joining the euro could boost Britain's trade with Europe by up to 50 per cent but may also create turmoil in the housing market, the Treasury said today.

The 18 background studies prepared by the Treasury - released before Chancellor Gordon Brown's statement on the euro this afternoon - all emphasise the importance of the right economic conditions.

The background studies show that Britain's trade with the euro - zone countries could increase by between 5 per cent and 50 per cent if Britain joined.

But they also warn of the dangers for the UK housing market - which has many more homeowners on variable rate mortgages than the rest of the EU - if British interest rates were set centrally by the European Central Bank in Frankfurt.

One paper, entitled Housing, Consumption And The EMU, said that the structure of the UK housing market meant the whole economy could be badly affected if interest rates were not set at the right level for Britain.

It noted: "This is a combination which may mean that deviations in UK interest rates from their appropriate level could lead to particularly large swings in the housing market (implying correspondingly large swings in the distribution of wealth between home owners and others) and hence in the wider economy in the UK, while similar deviations would be less problematic in some other EU countries."

The documents stress the need for greater labour market flexibility, both in Britain and the EU.

They say that despite improvement in the UK in recent years, "major challenges" still remain.

"In addition, wage flexibility has not been fully tested in recent years and could be more severely tested if the UK decided to join EMU (European Monetary Union)," the documents state.

In Europe, the picture was described as "mixed", with some of the smaller states having made the most progress.

"Progress in larger EU economies has been slower and starts from a weak position in terms of unemployment and employment levels," the documents note.

The documents were more positive on the effect of joining on Britain's trade with the rest of the EU, although they noted there were "substantial uncertainties and risks" surrounding the estimated increase in trade of between 5 per cent and 50 per cent.

"Moreover, smooth appropriation of such benefits would be critically dependent on sustained convergence of the UK economy with the euro area, as well as the absence of any short to medium - term misalignments in the sterling - euro entry exchange rate," the papers said.

Shadow chancellor Michael Howard said the documents underlined the reasons why Britain should not join the the euro.

"This study makes it clear that entry into the euro would be a huge gamble with people's jobs and mortgages, putting the whole economy at risk," he said.

But pro - euro former Cabinet minister Robin Cook said the time had come for Mr Brown to start making the case for British membership of the single currency.

"We are never going to persuade the British, nor should we try to persuade the British people, for entry if we have not got a Chancellor who is willing to go out and say 'I have come to the conclusion that, really, this is in your interests'," he told BBC Radio 4's Today programme.

"It is very important that when Gordon sits down today, the nation and Europe is convinced that Britain is going to join. Otherwise, we will see more and more businesses investing in Europe rather than Britain."

Liberal Democrat Treasury spokesman Matthew Taylor said that he believed the chances of the Government holding a referendum on joining the euro before the next general election were now "next to nil".

"If he (Mr Brown) wanted to join ... he would be setting out today a timetable towards joining, he would be entering into negotiations on the exchange rate, he would be making the economic reforms that are needed, not simply identifying a series of barriers," he said.

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