- The Washington Times - Monday, June 9, 2003

From combined dispatches

LONDON — Britain rejected the euro yesterday, saying that four of the five economic tests set for membership have not been met.

Chancellor of the Exchequer Gordon Brown, in a long-awaited announcement, raised the hurdle for the country’s early adoption of the currency by making it conditional on major housing reforms.

Although he emphasized the benefits of euro membership to Britain, 2,000 pages of detailed documentation from the Treasury concluded that the country’s economy was still too far out of step with the rest of the European Union to scrap the pound. Britain is a member of the 15-nation bloc.

The opposition Conservative Party seized on a Treasury study showing that moving to euro zone interest rates, which are lower than Britain’s, could lead to “particularly large swings” in the country’s housing market, widening the gap between rich and poor.

Mr. Brown acknowledged that the volatile nature of the housing market was a major obstacle to euro membership.

He outlined reforms intended to produce greater stability, including speeding the supply of houses and a move to longer, fixed-rate, European-type mortgages.

The Labor government had set five economic tests for membership: sustainable convergence between Britain and the euro economies, flexibility to cope with economic change, effect on investment, effect on jobs, and the effect on the country’s enormous financial-services industry.

In his speech to the House of Commons, Mr. Brown said only the last of those tests had been met.

In what was seen as a concession to Prime Minister Tony Blair, who wants the option of a referendum, Mr. Brown announced that he would give a progress report on “radical” reforms in the housing and labor markets in the spring. That could lead to a reassessment of the five tests which, “if positive,” could result in a referendum later in the year.

“In this statement, we strengthen our commitment to, and support for, the principle of joining the euro, showing that the gains to the country and to our businesses are greater than anticipated,” Mr. Brown told lawmakers.

But there was skepticism that there would be sufficient change in the economy during the next 12 months for Mr. Brown to say that all the tests had been met, and a referendum before the next election is deemed unlikely.

Many members of Parliament say euro membership could be delayed until at least 2007. But Mr. Blair told Labor members Sunday night that progress on Mr. Brown’s reform agenda by next year could be enough to pave the way for a referendum.

The Treasury said it was not confident that British business cycles were sufficiently compatible with those of the European Union to allow Britain to live comfortably with euro zone interest rates permanently.

“So, despite the risks and costs from delaying the benefits of joining, a clear and unambiguous case for [British] membership of [European Monetary Union] has not at the present time been made and a decision now would not be in the national economic interest.”

But Mr. Brown, renowned for his skeptical approach to the euro, cloaked his verdict in the most pro-European rhetoric he has deployed.

The expected benefits of euro membership include greater productivity, lower transaction costs for businesses and consumers, and growth in trade of up to 50 percent over 30 years with other members of the euro zone.

But Britain’s economy must first converge more closely with those of the euro members and strengthen its flexibility to withstand economic shocks, he said.

For example, the high degree of home ownership and the prevalence of variable-rate mortgages in Britain means that the British are more vulnerable to interest-rate movements than their counterparts in the euro zone. Mr. Brown pledged to promote long-term, fixed-rate mortgages as a way to reduce this risk.

He also committed to adopting a more widely accepted gauge of inflation that excludes property prices, to replicate the euro zone’s measure.

Mr. Blair phoned the leaders of euro zone members Germany, France, Ireland and Spain to assure them that his government remains committed to joining the single currency if the economic conditions are right, his office said.

The European Commission, the executive arm of the European Union, said it would continue to follow the British debate about euro membership “with interest” but declined to comment on Mr. Brown’s assessment.

There has been fierce opposition in Britain to membership.

“Joining the euro would damage our prosperity, destroy jobs and lead to an irreversible … loss of control over economic policy,” Conservative Party treasury spokesman Michael Howard said after Mr. Brown’s speech.

Businesses in Britain are divided on the issue. Larger companies that buy and sell in euros elsewhere in Europe are more inclined to favor membership, whereas smaller firms tend to worry that membership may lead to an increase in red tape and taxes.

“Our members are telling us that the five tests, while important, are not enough to convince them that it would be in the U.K.’s interest to join,” said David Frost, director general of the British Chambers of Commerce.

Mr. Frost said 49 percent of the companies surveyed by his group felt that Britain should wait and see how the euro develops before deciding whether to join, even if all five tests are met.

Digby Jones of the Confederation of British Industry welcomed Mr. Brown’s caution on joining now and amplified the chancellor’s call for reforms within the euro zone itself.

“It is not insular arrogance to seek a Europe that is flexible in its labor markets, reformed in its pensions, financial services, agriculture and energy sectors, as well as transparent in its decision making,” Mr. Jones said.

Adopting the euro isn’t simply a matter of changing currencies. The euro nations have locked their economies together, submitting to the discipline of a European Central Bank that must determine a one-size-fits-all interest rate.

Skeptics note the bank’s difficulty in setting a rate low enough to stimulate an economy that’s slumping, like Germany’s, and high enough to dampen inflation in a peppier country, such as Ireland.

“I think it is an intrinsic flaw in the system,” said Richard Jackman, a labor economist at the London School of Economics.

Britain, Denmark and Sweden sat warily on the sidelines when the euro was introduced across Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain for financial transactions Jan. 1, 1999. The 12 nations started using euro coins and bills three years later.

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