Robin Oakley

The ramifications of economic and monetary union, EMU, are likely to dominate the political scene in the UK for years to come.

The Labour government has declared itself in principle for the single currency. But it has said that it will not join until there has been a suitable period to assess the effectiveness of EMU.

It has set five key tests:

• EMU will have to help promote growth and jobs,
• it must demonstrate its capacity to cope with economic shocks,
• the business cycles and economic structures between Britain and mainland Europe must be compatible,
• EMU will have to create better conditions for companies to invest in the UK and
• its effect on the UK services industry will have to be assessed.

Blair: unlikely to allow referendum on single currency this side of an election

Labour insists that it is making the decision purely on economic grounds. But it is of course an intensely political business.

The Government, like the other parties, is pledged to hold a referendum on any decision to take Britain into a single currency. A government determined to win a second full term simply will not take the risk of a referendum campaign on such a tricky issue in the run-up period to the next General Election. Failure in such an enterprise could be the beginning of a downward spiral .

And there is one other key issue: many of Britain's newspapers, notably the Sun and the Mail, but including the Times and the Telegraph, are strongly opposed to British membership of the single currency. Mr Blair and his colleagues do not want to alienate them before the election.

In the meantime that leaves the Labour Government with a problem. It is difficult to live up to its early rhetoric about "leading in Europe" and forging a far friendlier relationship with the European Union than the previous Tory administration while staying outside Europe's biggest single project.

Ministers are already nervous that Britain has lost clout at European negotiating tables. Mr Blair has been trying to counter this by engaging in other projects designed to burnish his government's pro-European credentials, such as the agreement with Spain to press for flexible labour markets and the agreement with France to give the European Union its own defence capability.

A further problem for the Government is that the pound has been pushed to levels which make life uncomfortable for British manufacturers and exporters by financiers hedging against European uncertainties. And some Euro-sceptics within the Labour party warn of the dangers in joining a high unemployment zone policed by a European Central Bank with responsibility for inflation but not for output or employment.

Hague: Instinctive Eurosceptic

For the Tories, William Hague has proved an instinctive Euro-sceptic who now has a vested interest in the failure of the single currency. He won a convincing victory in an internal party referendum on his policy of keeping Britain out of the single currency for this parliament and the next, arguing that EMU had to be judged over at least the period of an economic cycle before such a decision could be taken.

Mr Hague insists, unlike Tony Blair, that there are grave constitutional implications in joining a single currency and he has argued that joining EMU could be like entering a burning building with no exits. But that is not enough for some in his party, who would like the Tories to declare against the single currency in principle.

The disputes over the line on the single currency have seen serious sniping at Mr Hague from former leading figures like Kenneth Clarke and Michael Heseltine and the resignation from his Front Bench of Stephen Dorrell, David Curry and Ian Taylor. It has also distanced the Tories, who are seriously strapped for finance, from a large sections of the largely (though not exclusively) pro-single currency business community.

The Liberal Democrats remain the most enthusiastic of the British parties for the single currency. They accuse the Government, with whom they are allied on constitutional issues, of failing to give leadership on the single currency.