The euro decision: Not quite there

Date: 12/04/03

Decoding Mr Brown's hints about the euro

THIS was not the speech that Mr Brown had hoped to give. Faced with owning up to higher borrowing, he would have liked a diversionary tactic. Announcing the long-awaited assessment of whether Britain is ready to join the euro would have done nicely, but Mr Blair, anxious to repair relations with Europe, would have none of it.

Even so, Mr Brown implied what the outcome of the assessment would be. Helpfully, he pointed out that long-term interest rates were now below those of the euro area. He drew attention to the fact that the unemployment rate in Britain was 5% whereas it was 9% in the single-currency zone. And he highlighted the fact that the British economy had grown over the past two years at roughly double the rate of the euro area. Looking ahead, “the largest repercussions” for the British economy arose from the fall in growth prospects for the euro area to around 1% in 2003.

Mr Brown left it to MPs to infer that there was no compelling case for joining the euro in a hurry. And he hinted that Britain's volatile housing market could prove at least a temporary barrier to a euro referendum. He announced a new study to examine how Britain could develop a long-term fixed-rate mortgage market and so wean itself off the ever-popular short-term floating-rate loan. Floating-rate loans make the housing market and the economy unusually responsive to short-term interest rates - which is a problem if they are to be set at European, not national, level.

Mr Brown also implied that Britain would fail the second of his famous five euro-tests: “if problems emerge is there sufficient flexibility to deal with them?” The rationale for this requirement is that national economies in a single-currency area can no longer adjust to shocks by changing interest rates. The chancellor said that the budget's microeconomic reforms were designed to achieve greater flexibility in capital, product and labour markets. He suggested that the assessment might also find fault with the euro area on this count: flexibility was “too often undervalued in Europe”. The budget may not have delivered a euro-decision, but it dropped some heavy hints.

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