Labour 'must push ahead on the euro'

The UK will be ready to join the euro in 2003, and the Government should start arguing the case for joining immediately, says the Ernst & Young ITEM club, an independent economic forecasting group.

The UK will be ready to join the euro in 2003, and the Government should start arguing the case for joining immediately, says the Ernst & Young ITEM club, an independent economic forecasting group.

The ITEM club is the only independent group that uses the same model as the Treasury to make forecasts on the economy. It is sponsored by accountants Ernst & Young, but says it aims to stay independent of any political, economic or business bias.

A report published tomorrow, entitled "The UK and EMU - ships passing in the night", says Britain should join the EMU and hold a referendum on the issue in around two years' time. But it warns that unless the Government pulls its finger out and campaigns for monetary union entry, the public is likely to vote "no".

The group said: "The big decision will be a matter of politics. But there's no time to lose. It would be better for New Labour, should it win the election and come clean about its EMU aspirations, to grasp the bull by the horns and start to argue the case immediately."

The group admits it could take several years to win over the hearts and minds of the British public on the issue.

It says the main benefits of joining the euro will be the increase in trade with the rest of Europe, due to reduced transaction costs and lower exchange rate volatility. Some have estimated the gain from this could be 20 per cent of GDP.

It added that a fixed exchange rate will increase the effectiveness of fiscal policy.

The group thinks most economic indicators have now converged with the euro zone and those that haven't, such as the exchange rate and short-term interest rates, will do so in the next couple of years.

It points out that there is an economic risk of joining if we diverge in policy-making. It says this is most likely if the European Central Bank does not react fast enough to the current global economic slowdown.

The Government has set five economic tests that are particularly woolly before it will consider joining the euro. They include: "Will joining EMU help to promote higher growth, stability and a lasting increase in jobs?" and "Would joining EMU create better conditions for firms making long-term decisions to invest in the United Kingdom?" These are fiercely debated points.