Don't take risks on EMU, Mr Blair

Wait-and-see, with a strong bias towards eventual euro membership, has worked so far. Why change now?

TONY BLAIR'S statement on Britain's preparations for EMU membership last Tuesday was described as a major change in the Government's attitude towards the single currency. However, the Prime Minister simply repeated in almost every particular the precise words used by Gordon Brown in the Government's previous benchmark statement on this subject in October 1997. Although the mood music of these statements has certainly become more pro-EMU in the past 18 months, the Prime Minister has done nothing to reduce his flexibility to move in either direction after the next general election.

The financial markets increasingly take it for granted that the UK will in fact apply for EMU membership after a referendum in 2002. The successful launch of the single currency, and the useful role played by EMU in shielding Europe from the worst effects of the global financial crisis last year, have fuelled this feeling of inevitability. But this could yet prove premature.

There is no possibility that this Government will call a referendum before there has been a decisive shift in British public opinion towards EMU. No risks can be taken on this. Just imagine the scale of the disaster - not least for the fans of EMU - if this referendum goes against membership. It must be dispiriting for Mr Hague to realise that, however skillfully he argues his corner, he will not get the chance to win a referendum on this as, if the result is in any doubt, the vote will not take place. The key question is therefore whether public opinion is changing enough to make the result of the referendum an absolute certainty by 2002.

It is true that recently there have been a few indications that public opinion is warming to the euro. According to MORI/Salomon opinion polls, the majority against membership is now running at only 10 to 20 per cent, depending on how strongly the Government recommends membership, and the trend shows a gradual erosion of the hostile balance. Maybe British opinion is following the pattern seen in Sweden and Denmark, where the launch of the euro has caused public support for membership to rise sharply. But this is far from certain, and only a minor glitch in the economic performance of monetary union would be needed to solidify British opinion against the euro.

These uncertainties would on their own be sufficient to persuade the Government to maintain maximum flexibility on EMU until the next election is well and truly over. But, on top of this, New Labour must be content with the party political consequences of its current EMU strategy. All previous British governments have been dogged by the European question for the past 30 years. This time it is the opposition that is facing the torture.

The Government's "wait and see" - sorry, "prepare and decide"- attitude might almost have been designed to maximise the potential for open warfare in the Tory party, and it has certainly had that effect. Another, even more useful, side-effect for Mr Blair is that British business is increasingly detaching itself from the euro-sceptic Hague camp. Only by actually holding a referendum can the Tories be put out of their misery. It does not make political sense to hurry towards such a conclusion.

Furthermore, the same economic issues that prevented British membership during the first wave could prevent it after the next general election. These were primarily connected to the relative positions of the UK and continental Europe in their respective economic cycles. Put simply, given the economic boom which was under way in the UK in 1997, it would have been madness to have reduced UK base rates towards continental levels at that time.

Clearly, this problem has diminished in the past 18 months, and it is no longer impossible to believe that the UK and continental cycles may meet somewhere in the middle by 2002. But, just as easily, the two economies may cross over rather than converge, and therefore not attain true synchronisation for at least another full cycle.

Then there is the question - increasingly seen in Whitehall as decisive - of how the European Central Bank (ECB) will perform. The penchant for secrecy and ill-concealed hostility towards elected politicians so far evidenced by the ECB is not encouraging. Clearly this is an institution born of the recently-unsuccessful Bundesbank school of central banking, not the recently-more-successful Anglo-Saxon school.

Details - such as whether the minutes of board meetings should be published - are not crucial. But the lack of co-operation between the fiscal and monetary authorities in the European Union has always been an Achilles' heel of EMU, and it will be interesting to see how this plays out over time. At present, the central bankers are refusing to reduce European interest rates unless they see signs of structural reform from the politicians. Meanwhile, the politicians are content simply to threaten fiscal expansion unless they get some action from the ECB. This stand-off is most depressing viewed from this side of the Channel, especially as the relationship between the Treasury and the Bank of England seems to be functioning well at the moment.

In fact, for most people the prospect of a sclerotic European economy, with a continuing war between the ECB and the politicians, now seems to be the main stumbling block to UK entry. Mr Blair made it clear in his statement that Britain would only join a "successful" single currency, and his definition of "successful" appeared to include a requirement that the EMU bloc should introduce labour and product market reforms to make the European economy more flexible. In other words, a condition of UK membership seems to be that the continental Europeans must implement a sizeable dose of the American and British economic reform programmes of the 1980s and 1990s.

Clearly, a reform programme along these lines would be in the self-interest of the EMU economies, but it is not so obvious that this should be made the crucial criterion for UK entry to the single currency. As this issue - should we "join" a sclerotic Europe - is fast becoming the nub of the debate, it merits comprehensive treatment later.

But for the moment consider the following. First, joining the single currency will have no direct impact on whether the UK can pursue its own agenda of market flexibility. This is determined by the rules of the EU, which already apply to us. Second, the encouraging recent performance of the Netherlands demonstrates that a reformist economy can flourish within EMU, despite the behaviour of others. And, third, if the European economy really does fail, the UK will be severely damaged, whether inside or outside EMU.

At the end of the day, fears about catching Euro-sclerosis are therefore not sufficient to keep the UK permanently outside EMU. But there are plenty of other reasons for avoiding a snap decision on this question.

Wait and see, with a strongly positive bias towards eventual membership, has so far been an extremely attractive combination - politically and economically - for this Government. Why change now?