The Euro Could Cost Tony Blair Dearly

He was a shoo-in for reelection until just recently. Riding high on the back of Britain's strong economy, Prime Minister Tony Blair seemed unassailable by Conservative Party leader William Hague or any potential rival within his Labour Party. But in the past several weeks, New Labour has taken the blame for everything from an ailing national health service to the violence of English soccer hooligans. And now a fierce debate is breaking out over when and if Britain should join the European Monetary Union (EMU).

Indeed, the euro is threatening to turn into a political bomb that could blow away Blair's chances of easily winning a second term when he calls the next election--probably next spring. Blair's strategy has been to keep the euro off the agenda. That seemed smart, since two-thirds of voters oppose exchanging sterling for Europe's single currency, out of a long-standing distrust of collective European projects.

But Blair's game plan isn't working anymore. The 50% surge in sterling against the German mark since 1995 has sparked complaints from manufacturers ranging from Britain's largest steel producer, Chorus, to Ford Motor Co. that the strong pound is ruining their competitiveness. Senior ministers such as Northern Ireland Secretary Peter Mandelson and Foreign Minister Robin Cook have embarrassed Blair by wondering publicly about the implications of being stuck between the euro and the dollar. Hague is also exploiting the issue from the other side--traveling the country on a "Save the Pound" campaign. Although most pundits still favor Labour to win the next election, Hague is gaining. A recent survey by Market Opinion Research International shows Labour's lead over the Tories narrowing to just 3%--down from 23% only a year ago.

Despite the intensifying debate and calls for a referendum on the pound, Blair insists he will not be swayed by politics. Both he and Chancellor of the Exchequer Gordon Brown maintain that they will only make the decision on the pound's status when five economic criteria are met. Intentionally vague, the criteria include convergence with the euro-zone economy, plus assessments of the impact of EMU membership on British inflation, employment, investment, and the City of London. In a recent TV interview, Blair defended his caution by recalling his Conservative predecessor John Major's decision to join the European exchange-rate mechanism, only to be forced to leave it almost immediately in 1992. "That was a decision made on political grounds, and it resulted in disaster for this country," Blair said.

WAIT AND SEE. Yet the danger for Blair is that he will get caught in the same sort of euro-paralysis that undid Major. Labour's "prepare and decide" policy is eerily similar to the wait-and-see attitude toward Europe that contributed to Major's defeat by Blair in 1997.

Paradoxically, Britain has already met many of the European Union's own criteria for membership. At 0.5%, Britain's inflation rate is the lowest in Europe. The interest rate differential between Britain and the euro zone has narrowed to 1.75%--close to the 1% range required for membership. The remaining obstacle is the volatility of sterling, which is currently at three marks to the pound. Most economists think Britain should enter the EMU at a rate of around 2.8 marks.

The technical questions, however, are nothing compared with the political ones. How Blair plays the euro card could determine the makeup of Britain's next Parliament--and possibly his own career. It's unlikely he'll be able to dodge such a key issue much longer.

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