The strong pound bolsters the case for the euro

The success of the Phoenix rescue bid for Rover is a notable exception to the iron rule of government that the most unexpected events are also the most unwelcome. It has swiftly revived Stephen Byers' previously stricken-looking career - though of the two, his friend Alan Milburn still at present looks a better (very) long-term bet as a potential future leader of the Labour Party, at least if he can show some real results from the new injection of serious money into the National Health Service.

Whether it will reduce as easily what looked like the threat of electoral fall-out from a significantly over-valued pound is rather less clear. The collapse of BMW's attempt to make Rover work was not exclusively, perhaps not even predominantly, a result of the high level of sterling. But that was probably a factor, and as such came to symbolise fears of the impact of exchange rates on manufacturing industry jobs. To the extent that Rover is saved, it is no longer such a symbol. But there are likely to be others, starting with a bleak announcement expected from Ford.

What has so far made this much easier for the Government than it might have been has been the eerie silence of its main critics on the subject of the exchange rate. Although the Longbridge ward remained Labour, it looks as if the threat to the Rover plant cost Labour at least some votes in the West Midlands. But if it did, it was no thanks to the Conservatives, who with the exception of those like Michael Heseltine, whom the Hagueites regard as being as eccentric as that other public euro-enthusiast Ken Livingstone, have studiously refrained from exploiting the worries of manufacturers over the pound.

The Conservative position is, of course, full of contradictions. For exactly the same people in the Tory party who boasted about the low pound after the collapse, under John Major, of British membership of ERM now regard the high pound as a symbol of a successful economy. The Conservatives are fatally inhibited from attacking the Government over the currency. In other circumstances it would be a natural line to run.

But the shadow Chancellor can't do it because it would undermine the argument that Britain would have everything to lose, economically as well as politically, by joining the euro. Worse still it might require an admission, however tentative, that the weak euro may be rather helpful to European industry at present. And since the present Tory front bench likes to ignore the inconvenient signs that the European economies, led by the Germans, may actually be reforming, the weakness of the euro epitomises for them the cherished, if fanciful, notion of the rest of Europe as a basket-case economy.

So far, this has suited the Blair government mightily. It, too, hasn't wanted to make a great fuss about the over-valued pound, or as Gordon Brown would much prefer it, the under-valued euro, beyond some clear nods, of the sort which the Chancellor made in his important James Meade lecture on Monday, towards the worries of exporting industry. To go further would be to raise uncomfortable questions of when, if at all, the Government intends to enter the single currency. And while to be firmer about its intentions to join the euro in the next parliament, runs the calculation, might in the short term talk the pound down, it would be fatal to engage with Hague on his own territory, lending nothing but credibility to the Tory claim that Tony Blair is determined to scrap the pound.

Modestly, but appreciably, attempts are now being made to lift this taboo on discussion of euro entry imposed by the front benches of the two biggest parties.

The first came earlier this week when, emboldened by their undoubted success in last Thursday's elections, the Liberal Democrats announced the establishment of quite a high-powered commission of serious economists to discuss ways of easing the path to euro-entry, including the probable setting of a date and/or exchange rate level.

Today the Labour chairman of the Treasury Select Committee, Giles Radice, publishes a crisp little booklet setting out the case for joining and observing that given the currently high rate of the pound "it may well be that a firm government statement of its intention to join the single currency early in the next parliament, provided the economic circumstances are right, could itself influence the market."

It is possible that the economic circumstances could change quite dramatically before the next election; the Bank of England's Deputy Governor Mervyn King warned yesterday that one of the problems of the current level of sterling is that it could fall very suddenly, necessitating another rise in interest rates. Radice would almost certainly argue that pursuit of the strategy he proposes would help to ease the pound down more gently. But in any case one of his points is precisely that euro entry would save the pound from its potential instability relative to the euro.

Attractive as it is, it doesn't look as if the strategy proposed by Kennedy and Radice, is going to happen. All the signs, so far, are that Gordon Brown has the firm backing of the Prime Minister in his view that the least said about the euro - let alone a change of policy - the easier it will be to get through an election which William Hague desperately wants to be about the pound. Gordon Brown is understandably anxious to fight the election on the Government's - and his - economic record. Secondly both he and Byers have argued in the past - albeit sometimes to the irritation of business - that high sterling is an incentive for exporters to increase their productivity. Thirdly, perhaps, the rejection in Mr Brown's lecture of quick fixes suggests he may justifiably be haunted by past devaluations by Labour governments which fatally undermined their economic credibility.

Nevertheless the underlying terms of trade may be subtly changing; this is illustrated by the fact that next month Professor Richard Layard, a leading economist with a record of having been close to New Labour in the past, is expected to be among a team of experts arguing a strong economic case for euro entry. The debate, in other words, will sharpen even without the participation of the leaderships of the two main parties. That is one reason why William Hague's task in making euro-opposition the central feature of his campaign may prove more difficult than at present. But there is another.

It is possible that the Government, fearing an electoral backlash if it were more firmly to foreshadow euro entry, might encounter one for not doing so. But it is not lost on Tony Blair, I suspect, that if the high level of the pound does begin to worry the voters in earnest, then it may look a lot less sensible to an ultimately pragmatic electorate to close off the option of euro entry as Mr Hague firmly intends to do.

Interestingly, it was Blair and not Hague who yesterday blamed Ford's troubles on the high pound. It is no doubt too much to say that euro entry will suddenly become a heartland issue. But a high, or even a volatile, pound could in the end be worse news for the opponents of the single currency than for its supporters.