Joining euro would aid public services, Mandelson claims

Peter Mandelson rejected claims by allies of Gordon Brown that joining the single currency would threaten the Government's drive to improve public services.

The former cabinet minister, still a close ally of Tony Blair, risked reigniting his personal battle with the Chancellor last night by insisting early euro membership would help rather than damage public services in Britain. Although Mr Brown wants to rule out a euro referendum before the next general election, Mr Mandelson's intervention showed leading Blairites have not given up hope of one in this Parliament.

Bill Morris, leader of the Transport and General Workers' Union, who is close to Mr Brown, maintains joining the single currency would endanger the Government's plans to inject billions into health and education. Ed Balls, the Treasury's chief economic adviser, has called on the Government to concentrate on public services in this Parliament rather than divisive issues such as the euro.

In the first of a series of debates on the euro staged by the financial and news service Bloomberg, Mr Mandelson said opponents of membership ignored the dynamic impact further EU integration would bring. "It is staying out of the euro, not joining it, that is more of a threat to public services," he said.

Mr Mandelson challenged Mr Brown, when he makes his assessment of the five tests, to look at Britain's likely economic position in the future. "We are not deciding whether to adopt euro interest rates now," he said. "We are deciding whether we should join the euro in two years, following a referendum this year or next."

He suggested the first test – achieving "sustainable convergence" between the British and eurozone economies – had already been passed. "The likelihood that the paths of the UK and eurozone economies will diverge is slim, especially if the prospect of joining becomes firmer," he said.

The former trade and industry secretary tried to demolish other possible arguments against early entry, including the state of Britain's housing market. "The housing market booms have proved a headache for successive British governments even with national control over the interest rate. Irrespective of the euro – and there is no reason to believe that membership will make matters worse – if the state of the housing market poses a long-term problem then we should tackle it now."

Highlighting the benefits of membership, Mr Mandelson said: "By removing exchange rate risk we make it as easy to sell in France as in Britain, Spain or in Germany. This is a major spur to competition, which keeps companies on their toes and prices lower. It stimulates innovation – the ultimate source of economic growth – and gives companies and employees the incentive to raise their game and become more productive. This is the right combination of opportunity and pressure Britain needs. Our economy has done well. With the euro we will do even better."

The case against joining the euro was put at the Bloomberg debate by Michael Howard, the shadow Chancellor. The other speaker was Stephen King, chief economist at HSBC. Mr Howard insisted Britain had not achieved "sustainable convergence" with the 12 countries in the eurozone. He said: "The Treasury is right to say joining the single currency before sustainable and durable convergence is secured would risk growth and jobs. That sustainable and durable convergence has not been secured. So growth and jobs would be harmed. That is one of the reasons why joining the eurozone would be bad for Britain."

He said the reason sustainable convergence was so important iwa that by entering the single currency, Britain would give up its right to set interest rates to suit our circumstances. "If they are set at the wrong rate for us, the damage this could do to jobs and livelihoods is huge," he said.

Mr Mandelson had talked of the difficulty in setting a "one size fits all" interest rate for the UK. "Who would say that the interest rate set by the ECB for the whole of the eurozone is the right rate for Germany, with four million people out of work?"