What UK industry wants from the euro

by BBC business editor Jeff Randall

With the debate over Europe taking centre stage in British politics, the decision to join or reject the euro is one of the few issues that unambiguously divides the two main parties.

Much to the Conservative's frustration, Tony Blair's pro-euro stance has won backing from many in big business, including the likes of Ford and Nissan.

Competitive devaluation?

But implicit in their support for Britain embracing the synthetic currency is the idea that sterling will go in at a lower rate than it is today, thereby making UK-based manufacturers more competitive against European rivals.

Few British exporters want to lock in at the current level of 1.66 euros to the pound, because, they insist, it's too high and is damaging overseas sales.

But proposals to enter at a much lower rate, say 1.40 to the pound, would almost certainly be opposed by Britain's main European trading parties - France and Germany - whose domestic manufacturers would be outraged if the European Union "fixed" a competitive sterling devaluation.

Though keen to promote the euro's merits, Labour has, so far, refused to say what it considers to be the pound's correct entry rate.

The lesson of September 1992

But for many in business, that's the all-important number when weighing up whether Britain should join. They regard it as a pragmatic issue rather than a political dilemma.

The lesson of the early 1990s was a harsh one.

Britain entered Europe's Exchange Rate Mechanism (ERM) at too high a rate and spent vast sums of Treasury reserves defending sterling's value against bearish currency traders.

In effect, Britain tried by a combination of intervention and bluff to convince the financial markets that the pound was worth more that it really was. It failed miserably.

Britain was forced out the ERM in September 1992, prompting the then Conservative chancellor Norman Lamont to accept defeat at the hands of those who had sold sterling short, notably the Wall Street speculator George Soros.

It was a traumatic time for the government and highlighted the dangers of locking a currency into an inflexible system at the "wrong" rate.

Watching the exchange rate

Memories of that episode still bother many UK business leaders who are undecided over the pros and cons of Britain becoming a euro member.

If Labour wins the election, and presses on with its plan to campaign for euro entry, it will eventually have to declare at what rate.

That's when those in business, who are unmoved by the constitutional issues involved, will make up their minds whether or not to support ditching the pound.