How the euro will straitjacket Britain

Member states will be strapped into a strict economic discipline whether they join the single currency or not. Anthony Bevins reports

The hard terms set for the single currency at the Dublin summit at the weekend makes eventual British membership inevitable, according to Treasury sources.

An agreement reached between economic and finance ministers on Friday, and endorsed by heads of government in Saturday's summit conclusions, straps all member states into a strict economic discipline, whether they join the euro or not.

The report, from the economic and finance ministers (Ecofin), including the British Chancellor of the Exchequer, Kenneth Clarke, says that all member states have mutual interests and obligations in the monetary field. Indeed, the Maastricht treaty says that each member state shall treat its exchange rate policy as a matter of common interest.

The European Monetary Institute put that legal treaty requirement even more firmly, demanding "close policy co- ordination" between the Euro-zone countries, and non- members, as "an integral part of the completion of the economic and monetary union process". It said that Article 109m of the treaty made it an "obligation" to treat exchange-rate policy as a matter of common interest "in order to ensure the efficient functioning and development of the single market".

The assumption running throughout the text of the Ecofin report is that all members of the European Union are to be locked into what one Irish minister called "a disciplinarian straitjacket".

One British source said that once London had met the terms for single- currency membership, the so-called economic convergence criteria - as John Major has said it would - there would be little point in staying out.

Remaining out would mean accepting all the pain of economic and monetary union, without getting any of the gain.

Mr Clarke told the Commons last week that there would be clear advantages in being a euro member, provided membership was restricted to countries genuinely strong enough to survive the rigours of euro discipline.

He said that a single currency would not only reduce foreign-exchange costs, making it easier for small businesses to compete in the single market, but would also force interest rates down. "If a single currency could be made to work," Mr Clarke said, "it is arguable that we might well benefit from it."

A similar message has echoed over the decades, first when British entry to the Common Market was being discussed and, secondly, when the disciplines of the single market were being sold by Margaret Thatcher.

Certainly, Mr Clarke has told colleagues that he was negotiating last week for single currency entry terms that would last for as long as a decade, so that even if Britain did not join on the first wave, the eventual terms of entry would be acceptable to Britain.

But the Dublin text suggests it would be foolish for countries which qualify to remain aloof from the process if the summit lives up to its promise of delivering a euro "assured of its status as a strong currency".

The Ecofin report says that once the euro is launched, there could be three categories of member state in the EU.

Members of the euro are to be selected by qualified majority vote - with no one country able to wield a veto - early in 1998, during the next British presidency of the union. At that stage, a new European exchange rate mechanism, the ERM 2, is to be created for those not joining up in 1999.

Mr Major has given firm assurances that there is no question of sterling going back into the existing ERM from which it crashed in 1992, to the great embarrassment of the Prime Minister, and a large-scale devaluation of the pound.

Last week's Dublin meetings, however, appeared to assume that non-euro states would join ERM 2.

"While membership of ERM 2 remains voluntary," the Ecofin report said, "member states with a derogation can be expected to join the mechanism and thus to have a central [exchange] rate vis-a-vis the euro, thereby providing a reference point which assists in judging the adequacy of their policies."

The third group of countries would be those that joined neither the euro, nor ERM 2.

Nevertheless, they do not escape the straitjacket. The Ecofin report said: "Member states outside ERM 2 and thus not having a central [exchange] rate will present policies so as to enable appropriate surveillance in the council, which can make, when necessary, non-binding recommendations.

"This surveillance will seek to ensure that their policies are oriented to stability and thus to avoid real exchange-rate misalignments and excessive nominal exchange-rate fluctuations.

The other disadvantage of staying out of the euro on a long-term basis will only emerge over time, but the Treasury is already expressing concern that EU ministers will set up their own unofficial caucus meetings to lay down the direction of overall economic and financial policy for the entire union to their own advantage.