Commentary: Monetary Union: Why Tony Blair Is Ready To Tango

Recent rumors and press accounts suggesting that Prime Minister Tony Blair's government has committed itself to joining European monetary union were probably premature. Nevertheless, Britain's attitude toward Europe has changed dramatically since last May's general election. Unlike his Conservative predecessors, Blair wants to work with Brussels and his colleagues on the Continent. His pragmatic approach could ultimately benefit both Britain and the European Union.

By participating in EMU process, Blair wants to make sure Britain's financial markets aren't left behind when Germany and France adopt the euro on Jan. 1, 1999. He also wants London to have a say in what the new single currency will look like. Perhaps most important, he wants to shape Europe more to Britain's liking, by loosening stifling labor laws and curbing opposition to key British business initiatives, such as the alliance between British Airways and American Airlines. Blair knows that the best way to get concessions from his Continental counterparts is to assure them that he'll play ball on their pet project.

WHINING. Embracing the idea of EMU has pleasant side effects for Blair at home. The prospect that Britain will join the single-currency zone has nudged down 10-year interest rates, to 6.44%, a little closer to the 5.52% prevailing in Germany, which will be at the heart of EMU. And it weakened the pound, as traders anticipate that Britain would enter EMU at a lower sterling-mark exchange rate. That pleases British exporters, who have been whining about the pound's strength.

Some bond traders took big losses on the market swings and are cursing the government for leaking its change of heart. But politically, Blair's stance is safe. With the Tories out of power, British opposition to EMU is melting. Although the public remains skeptical of a single currency, voters are becoming resigned to the idea. With his 80%-plus popularity rating, Blair would easily win the referendum he promised to hold before adopting the euro.

But before that happens, there will be a delicate mating dance between Britain and the Continent. Blair will probably issue a statement in the next month or two, saying he wants Britain to join EMU as soon as possible after its startup date. Yet he is sure to give London the option of staying out if the terms aren't right.

Whatever hints Blair drops about timing, Britain is unlikely to join EMU at the 1999 launch because Britain's economy is so out of sync with those on the Continent. Britain is in danger of overheating, while the French and German economies are barely warming up. Trying to merge them now would be foolish. David Mackie, an economist specializing in Britain at J.P. Morgan & Co., thinks that it will be two or three years before the British and Continental economies converge enough to make EMU work smoothly.

But two, three, or even five years sound a lot better to French and German ears than never. A British blessing would make the EMU a sounder bet and might pull skeptics such as Sweden off the fence. "Britain has, as before, different views on European matters, but we have come considerably closer on many issues," German Foreign Minister Klaus Kinkel said at a Bonn conference on Sept. 30.

The courtship is likely to be particularly animated over the next two to three months in the runup to Britain's assuming the revolving presidency of the European Union on Jan. 1. This also happens to be the date when governments must notify Brussels if they intend to join EMU in the first wave. Blair hopes to take advantage of his six-month presidency to advance Britain's European agenda. He will do what he can to protect the City of London from discrimination in the event that Britain does not join right off. He also plans a big effort to persuade the Europeans to ease up on labor rules, such as bans on part-time workers, that discourage hiring and hurt productivity. Otherwise, he fears, Europe will remain bogged down in slow growth and high unemployment, and EMU will become a tar pit for Britain. "The big point in the Prime Minister's mind is that EMU will only work if Europe has more flexible labor markets," says an adviser. Otherwise it could be "a disaster in the making."

Whatever his doubts, Blair knows that something hot is happening in Britain's neighborhood. Even if he decides to stay out of it for a while, getting involved is the best way to make sure he doesn't get burned.