Britain: No Go On the Euro?

Economics and the Iraq war are turning Britain Inc. against joining

John R. Pilling recalls a recent meeting of the Confederation of British Industry, one of the country's most influential business groups, in Birmingham. "Almost all those around the table were against joining the euro," he says. "Three years ago, you would have had a very different view."

Pilling makes no bones about his own distaste for the euro. The group managing director of Kidderminster-based Brintons, a world leader in top-of-the-line carpets, thinks that Britain will suffer if it gives up control over interest rates. Politically, he disapproves of the "more centralized, more bureaucratic" direction in which he thinks Europe is going. Pilling has plenty of company. As the June 9 deadline fast approaches for the government's long-awaited decision on joining the euro, Britons are shrugging off Prime Minister Tony Blair's arguments for joining, and they're even hardening their opposition. Some 61% of Britons say they would vote no, up from 54% in December. Only 29% say they would vote yes on joining, down from December's 38%.

Business is skeptical, too. In a poll of senior executives released by MORI in January, just 35% said they thought Britain should go in as soon as possible, while 49% said the country should wait and see how the euro develops. Some 13% said Britain should never enter. This poses a considerable problem for Blair, who would like to crown his term in office and burnish his credentials as a possible future President of the European Union by leading the nation into the single currency.

Unless Blair succeeds in turning sentiment around, Britain could remain outside the euro zone for years, perhaps decades. Britain's ambivalence about the role it wants to play in Europe looks no closer to resolution. "Not only is there little likelihood of a euro referendum in this Parliament, it is becoming increasingly unlikely that there will be one in the next," says Robert M. Worcester, chairman of MORI. If Worcester is right, Britain's entry would be delayed at least until near the end of the decade.

That doesn't bother many British executives. The 10% fall in sterling against the euro in the past 12 months has mollified CEOs who were complaining that the high pound was making it impossible to sell their products on the Continent. Moreover, the dismal performance of the German economy since it joined the euro has shown the downside of relinquishing control of monetary policy to the European Central Bank. "Look at the pain the German economy is going through, and the German government doesn't have the means to put it right," says Nigel Brown, chief of AI Group Ltd., which makes flight simulators for amusement parks in Wolverhampton, near Birmingham. Meanwhile, the acrimonious German and French split with Britain and the U.S. over Iraq this spring heightened Britons' uneasiness about getting into financial bed with them.

Gordon Brown, the Chancellor of the Exchequer, almost certainly will tell Parliament on June 9 that Britain is not ready to join. Brown has spent nearly six years presiding over the Treasury's assessment of the famous five tests that he dreamed up in 1997 to determine if and when Britain should enter. These criteria include whether the British and euro-zone economies have converged, whether the euro-zone economy is flexible enough to cope with change, the impact on investment and Britain's financial-services industry, and whether joining will be good for employment.

Although Brown will stress that he is, in principle, all for joining, he will likely say that Britain's economy is not yet sufficiently synchronized with that of the Continent. Brown wants the two economies to reach a point where it won't make any difference for Britain, over an economic cycle, whether the ECB or the Bank of England sets rates. At 3 3/4%, Britain's interest rates are only a point higher than those of Europe, but the gap is likely to widen as the ECB cuts sharply while the Bank of England holds. "There is little evidence that [British] and European interest-rate cycles have become more correlated," says Ben Broadbent, an economist at Goldman, Sachs & Co. in London. Brown also would like to see the euro zone's stability pact, which limits budget deficits to 3% of gross domestic product, relaxed so as to give governments more power in a slowdown.

All of this economic talk may be something of a smoke screen. To join or not to join will ultimately be a political decision. Brown has long been Blair's partner in revamping the Labour Party and is tipped as his eventual successor. The Chancellor doesn't want to see his chances spoiled by losing the referendum that Blair has promised to hold if the government recommends joining the single currency.

Blair deserves some of the blame for the euro's failure to catch Britons' fancy. In contrast to his impassioned performance leading Britain into the Iraq conflict, his pro-euro pitches have been lackluster. He also may have made a huge mistake in giving so much influence over the decision to Brown, a formidable politician who has become an incisive critic of Europe and its institutions. Blair is certainly taking a beating for letting Brown preside over what could be the biggest economic decision of the Prime Minister's tenure. "Mr. Brown has a neck-lock on Mr. Blair's ambition to take Britain into the euro," wrote Andrew Rawnsley, columnist at The Observer, on May 25.

Perhaps stung by the criticism, Blair has begun to talk up the euro and to hint that he may try to follow up the risks he took on Iraq by forcing Britons to make a decision soon about their role in Europe. "You can't be sure about that at all," he said on May 31, when an interviewer suggested that he would almost certainly lose a referendum. "This is a fundamental question for this country. Do we want to be part of the main strategic alliance right on our doorstep? Or do we want to be marginalized and left without influence?"

Thus far, it's not clear that being outside the euro zone has hurt Britain's economy. Growth last year was 1.8%, compared with 0.2% in Germany. A few years ago, there was enormous angst about London losing its financial preeminence if Britain failed to join. But few of The City's denizens worry about the danger now. Even a euro-zone central banker admits to being at sixes and sevens about the British position. "On the one hand, we want Britain in, because it will encourage existing euro-zone members to push through structural reforms," he says. But he also worries that the entry of Britain, given its economy's tendency to overheat, would make balancing monetary policy between moribund Germany and higher-growth Spain and Ireland even trickier.

The European question, in all its forms, is likely to keep dogging Blair. For instance, there is also growing pressure on Blair to hold a referendum on the EU's new constitution. Blair remains a formidable Prime Minister, but the euro is the kryptonite of British politics: If not handled carefully, it can bring Superman to his knees.

By Stanley Reed in London

    Before it's here, it's on the Bloomberg Terminal.