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Friday, 15 June, 2001, 16:44 GMT 17:44 UK
Testing the value of the pound
Treasury Building, London
The value of the pound could prove to be the biggest problem with regards to joining the euro.
By the BBC's business reporter, Jonty Bloom.

Now that the election is over you might have hoped that the country's political reporters would take a few days off.

No such luck - now they are speculating like mad about when the UK will have a referendum on joining the euro and what the result will be.

Politics isn't my area and therefore I have little to say about the varying degrees of europhilia and euroscepticism of those sitting around the UK Cabinet table.

But it is fair to say that it is far from certain that there will be a referendum during this parliament.

For a start the Treasury is planning to decide on whether we have passed the five economic test set by the chancellor, Gordon Brown

Chancellor of the Exchequer Gordon Brown
If the Government decides it doesn't want to hold a referendum then the tests provide the perfect excuse for not having one
These must be passed before the government will call a national vote on the issue.

The Treasury has up to two years to make its mind up, and although it is bound to be a serious exercise, the political side should not be underestimated.

If the government decides it doesn't want to hold a referendum then the tests provide the perfect excuse for not having one.

There is also the matter of the timetable. If the Treasury does not decide on the tests before May 2003, it will probably be too late to have a referendum anyway.

The next election would be too close for comfort.

However, the biggest problem could be outside of the control of politicians or even civil servants - and that is the value of the pound.

Manufacturers have been complaining for years that sterling is far too strong and has been seriously damaging their ability to export.

That is certainly true but up until now the Bank of England has been willing to put up with that because a high pound translates into low inflation.

However, we could not join the euro at anything like this rate - remember what happened when we joined the ERM at the wrong rate?

Therefore the pound is going to have to fall against the euro fairly dramatically over the next 18 months or so, perhaps by as much as 10-15%.

The governor of the Bank of England, Sir Edward George, has already started making noises about the implication of such a fall.

He is worried a sharp devaluation of the pound would spell disaster for the Bank's carefully nurtured reputation for controlling prices in the UK.

But if the pound can not be brought down quickly and gently, it seems highly unlikely that it will be able to join the euro in the near future.

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