Five tests, a single currency and still no clear decision

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Indy Politics

Gordon Brown sounded like a man who was saying "yes" to the euro. But his unexpectedly positive language could not disguise that he was saying "no" - or, at least, "not now."

In yesterday's long-awaited Commons statement, the Chancellor included enough pro-euro window-dressing to please the Europhiles, including Tony Blair. His aim was to give the Prime Minister enough cover to protect his pro-European credentials.

Mr Brown announced that only one of his five economic tests for joining had been met - the impact on financial services - as it had been in 1997. He said two others - investment and growth, stability and jobs - had not been passed yet but would be if the remaining two were met - on flexibility and, crucially, sustainable economic convergence with the eurozone.

Although Mr Brown kept the door open to a euro referendum before the next general election, the mood at Westminster last night was that the tests were unlikely to be met by then.

The good news for euro supporters was that Mr Brown promised to look again at the issue in next year's Budget, and his aides even talked up a possible referendum in autumn next year. In a change of gear, the Chancellor promised a great debate on the benefits of euro membership.

The bad news for Europhiles was the absence of any timescale for joining. The Treasury's new National Changeover Plan, issued yesterday, contains no dates. Although legislation for a referendum will be published in the autumn, it will be in draft form only.

Mr Brown highlighted the potential benefits of euro membership, saying the Treasury's 18 studies, running to 1,723 pages, found that the gains were "greater than anticipated". For example, membership could boost trade with the eurozone by up to 50 per cent in 30 years.

But the studies also included ammunition for Eurosceptics. The Conservatives seized on a warning that the euro "could lead to particularly large swings in the housing market" and that rises in stamp duty might be needed to prevent a housing "boom and bust".

The Chancellor promised action on several fronts to help Britain pass the other four tests, including reforms to bring the housing market into line with the Continent, a new inflation target, and more regional flexibility in pay - a move opposed by trade unions. However, analysts doubted whether such changes would have any impact before he reviews progress next March.

Mr Brown told MPs: "We will report on progress in the Budget next year. We can then consider the extent of progress and determine whether on the basis of it we make another Treasury assessment of the five tests which - if positive next year - would allow us at that time to put the issue to a referendum." He insisted there was "a realistic prospect of making significant progress over the next year".

Although Mr Brown will reassess the euro policy in each Budget, Treasury officials denied the reviews would amount to a "running commentary". The Chancellor said: "With a programme of European economic reform benefiting Britain, I believe a modern long-term and deep-seated pro-European consensus in Britain about Britain's role in Europe and Europe's role in the world can and will be built."

Mr Blair and Mr Brown will spell out their plans to "sell" the principle of euro membership to a sceptical British public at a Downing Street press conference today. Last night, the Prime Minister hit the phones to nine world leaders, to reassure them that Britain was not turning its back on the euro.

Government sources said the involvement of the whole Cabinet in shaping the policy had made yesterday's announcement more positive than it would have been if it had been left to Mr Brown. Even ministers cautious about the euro, including John Prescott, Jack Straw and David Blunkett, backed Mr Blair's desire to see a positive statement. "Cabinet government has broken out," one member said.

Pro-euro ministers, MPs and pressure groups welcomed the statement last night and insisted that a referendum before the next election was now a real prospect. "It's more likely than not," one Cabinet minister said.

Lord Marshall of Knightsbridge, chairman of Britain in Europe, said: "We welcome the Government's positive assessment of the benefits of a future for Britain within the euro and are encouraged by its commitment to remove remaining obstacles. It is very helpful to know that these issues will be reviewed in next year's Budget. The euro game is clearly on. "

Peter Mandelson, the Europhile former Cabinet minister, said that before yesterday he did not believe a pre-election referendum was possible but now thought one "a distinct possibility". Writing in The Independent today, he said "the battle ahead" on the euro would be "bloody and beastly".

Nigel Smith, chairman of the No campaign, said: "We are not concerned by the token statements of intent announced today. Public opinion will not be moved by a draft referendum Bill. The reality is that the pro-euro campaign is far weaker now than it was in 1999. Public and business opposition has increased and the Labour movement is turning against it."

Richard Brooks, a research fellow at the Institute for Public Policy Research think-tank, said: "The promise to revisit the tests in next year's Budget is an empty gesture because the long-term barriers the Chancellor has identified to euro membership cannot have been addressed by then."

Michael Howard, the shadow Chancellor, said Mr Brown and Mr Blair were "united in rivalry". He said: "This is not a decision taken in the national economic interest. It is a political fix to cover up the deep divisions between Gordon Brown and Tony Blair ... It maximises uncertainty for business. Business organisations have said that they don't want rolling assessments, yet that is exactly what we have now got with Gordon Brown's promise of a rolling assessment."

Matthew Taylor, the Liberal Democrats' economics spokesman, said the announcement had done nothing to clear up the euro issue. "The time for indecision is over; warm words are not enough," he said.

The five economic tests: Brown's verdict

CONVERGENCE "Significant progress" since 1997, with interest rate gap with eurozone falling from 4 percentage points to 1.75 percentage points. "Grounds for optimism" about increasing compatibility of business cycles. But "short to medium term" differences still exist between UK and euro economies. Housing market differences are a particular "high risk". VERDICT: FAIL

FLEXIBILITY "Considerable progress" has been made, but volatile inflation inside the eurozone means more needs to be done. Labour, product and capital markets in the UK and EU must be more flexible to cope with the divergence of their economic cycles. "We cannot be confident that UK flexibility, while improved, is sufficient." VERDICT: FAIL

FINANCIAL SERVICES EMU entry would enhance the already strong position of the City. Membership would offer greater potential to compete and capture the effects of greater EU integration flowing from the single market.

Benefits of the EU's financial service action plan are postponed while the UK is not in the eurozone. VERDICT: PASS

GROWTH, STABILITY & JOBS Euro membership could "lead to a lasting increase in jobs". Trade could go up 50 per cent, national wealth could go up 0.25 per cent a year, equivalent to £3bn, over 30 years. But EU stability and growth pact would lead to instability. If convergence is achieved, test will be passed. VERDICT: UNDECIDED

INVESTMENT Japanese, American and European investors say British euro membership is "important" to them. British firms would benefit from lower capital and bank-loan costs. There is a risk that investment gains will be lost "the longer euro membership is postponed". If durable convergence is achieved, test will be passed. VERDICT: UNDECIDED

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