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Politics to decide on euro-land

Paul Anderson finds the government too in hock to anti-euro opinion to risk a referendum

If you believed the press, when Tony Blair announced in the House of Commons last month that a second-term Labour government would decide within two years whether it was right to join the euro, he was making a stunning change of policy.

According to the Sun the next day, Blair had "sensationally vowed to kill the pound and adopt the euro within two years". The front-page headline in The Times declared: "Blair sets 2003 euro deadline." The Daily Mail confidently reported that "the battle for the pound" had been "thrust dramatically into the heart of the election campaign".

Yet all that Blair had done was to clarify a small point of detail of Labour's policy as it has stood since 1997, when chancellor Gordon Brown effectively ruled out euro membership for the duration of this parliament and announced that "five economic tests" would have to be passed before the government decided whether to join the single European currency.

Labour's line since then has been that, early in the next parliament, a Labour government would make its assessment of whether its criteria for British membership of the euro had been met. What Blair said last month was merely that "early in the next parliament" means "within two years" - and that is hardly a big deal.

Blair's statement does not mean that the government will decide that the "five economic tests" have been passed, let alone that there will be a referendum on joining the euro during the next parliament. There is still every chance that the result of the government's assessment will be an announcement that the criteria have not been met.

This is not because the British economy is in no shape to join the euro. It meets all the criteria laid down in the Maastricht treaty for euro membership apart from participation in the exchange rate mechanism of the European Monetary System. Although there is some room for argument on the first of Brown's "five tests" - whether there is a sustainable convergence between the economies of Britain and the euro-zone - there is growing evidence that the British and continental economic cycles are more in step than for many years. (Brown's other four tests are so vague they could be passed or failed on the whim of the tester.)

Rather, the reasons that the government might decide the time is not right to join euro-land are political. Labour is committed to holding a referendum on joining the euro if the government decides the time is right - and British public opinion is hostile to euro membership. Unless this changes decisively in the next couple of years, it is extremely unlikely that the government will risk holding the referendum.

This is partly because no government will ever hold a referendum that it stands a high chance of losing unless it really has no option. But this particular government is particularly wary of losing this particular referendum. New Labour is notoriously unwilling to do anything that goes against the grain of focus group opinion; and it is hyper-sensitive to criticism from the Murdoch press - of which there is bound to be a flood if it decides to ditch the pound. It is also worth remembering that Brown, who has effectively run Labour's euro policy single-handed since 1997, cut his teeth in grown-up politics in the failed "yes" campaign before the 1979 Scottish devolution referendum.

If in spring 2003 there is the slightest doubt of victory in a euro referendum later that year or in 2004, the chances are that the chancellor will discover that the five economic tests have been failed.

It is, of course, a moot point how immutable public hostility to the euro really is, and some in the pro-euro camp say that a concerted two-year campaign emphasising the benefits of the single currency could turn public opinion in its favour.

They might be right - but only if such a campaign has serious backing from the government, and only if it makes the case for the euro in terms radically different from those in which the pro-euro camp has so far argued.

Up to now, the best the euro-enthusiasts have come up with are the arguments that joining the euro would mean greater exchange-rate stability, cheaper goods as a result of increased price transparency, and reduced transaction costs for businesses and holiday-makers.

These are all relevant points. But against the anti-euro camp's emotionally charged denunciations of surrendering control of economic policy to faceless foreigners they do not amount to much.

The pro-euro camp desperately needs a simple populist argument - and the only one that has any resonance is the case for Britain committing itself to the European social model of capitalism rather than attempting to emulate the US laissez-faire version. The key argument for joining the euro is explicitly social democratic: it locks us into a bloc characterised by strong state welfare systems, well funded public transport networks and tough environmental regulations, along with a social partnership model of industrial relations. In other words, it offers a degree of protection against the ravages of capitalism red in tooth and claw.

This, however, is anathema to the leading lights in the government, who believe that what Europe needs is a large dose of US-style deregulation and privatisation.

The upshot is that, unless the pro-euro unions and what there is of a pro-European left in the Labour Party and elsewhere get their act together (which experience says is unlikely), the most convincing argument for British participation in the single currency will remain largely unheard and public opinion will remain hostile. The smart money is still on Britain being outside the euro-zone at the end of the next parliament.