BBC Homepage World Service Education
BBC Homepagelow graphics version | feedback | help
BBC News Online
 You are in: Business
Front Page 
World 
UK 
UK Politics 
Business 
Market Data 
Economy 
Companies 
E-Commerce 
Your Money 
Business Basics 
Sci/Tech 
Health 
Education 
Entertainment 
Talking Point 
In Depth 
AudioVideo 

Monday, 11 June, 2001, 16:48 GMT 17:48 UK
Pound must fall 10% for euro entry
Euro notes and a pound coin
Lower value pound: Good for manufacturers, bad for holidaying in Europe
The pound must fall at least 10% against the euro if the UK is to join the single European currency at a realistic rate, economists have said.

According to the median of forecasts by 28 economists polled by Reuters, the pound needs to fall from 1.6286 euro now to 1.4859 euro. One euro would then buy 67.3 pence, compared with 61.4 pence now.

"A sensible rate has to be one that sees a depreciation of between 10 and 15% against the euro. At those kinds of levels, UK manufacturing can compete," said Trevor Williams at Lloyds TSB.

A weaker pound usually helps UK industry by making its products cheaper and thus more attractive for overseas buyers.

Good for holidaymakers

Current exchange rates, while good for importers and UK holidaymakers in Europe, are making it difficult for UK manufacturers to compete with European rivals, economists say.

At 67.3 pence to the euro, the pound would be very close to the 2.95 Deutschmarks-to-the-pound level at which the UK was forced out of the exchange rate mechanism (ERM) in 1992.

The Chancellor's five euro tests
Better for jobs
Better for investment
Better for the City
Flexible labour markets
Economic cycles compatible
But, said David Page at Investec Bank UK: "The manufacturing sector has made tremendous productivity gains over the past few years of sterling strength.

"This has left it able to compete at levels around 0.65 [pounds to the euro]."

Cautioning against early entry

Following the Labour party's victory in the general election last week, the pound has already moved lower against the euro in anticipation of a referendum during the new parliament on joining the euro.

But economists are cautioning that UK membership of the euro should not be expected any time soon.

Aside from exchange rates, the government would have to turn around public opinion, with polls suggesting that a majority of voters is opposed to early entry into the eurozone.

It would also have to be satisfied that Chancellor Gordon Brown's five economic tests had been met.

When will public opinion like the euro?
Merrill Lynch - not until Spring 2003
Barclays Capital - not for at least two years
RBS - not during the new parliament
In a recent report, US investment bank Merrill Lynch said a referendum this year was "unlikely" given the scale of public opposition to the euro.

It said Spring 2003 was the most likely date for the referendum, with - assuming a "yes" vote - euro notes and coins being introduced in the UK in 2005.

Ross Walker at RBS Financial Markets said he did not expect a referendum on euro entry at all during the parliament.

"Public opinion is unlikely to move in favour of the single currency and the prime minister will not risk a plebiscite under such circumstances," he said.

Lack of alignment

Barclays Capital, focusing on Mr Brown's tests, is also pessimistic about the chances of early euro entry.

Its economists believe that only one of the tests - the one on inward investment - has so far been met.

More depressingly for the UK's euro enthusiasts, they say the other four tests will not be passed for at least five years.

The main reason cited is the lack of alignment in economic cycles between the UK and Germany, powerhouse of the eurozone.

Others disagree with this assessment.

While admitting that judging the tests is a subjective business, the Liberal Democrats are among those saying all five tests have already been met.

They have campaigned for early entry to the euro while the Conservatives promised before the election that they would rule out joining the euro for the duration of the coming parliament.

Search BBC News Online

Advanced search options
Launch console
BBC RADIO NEWS
BBC ONE TV NEWS
WORLD NEWS SUMMARY
PROGRAMMES GUIDE
See also:

08 Jun 01 | Business
Pound under political pressure
08 Jun 01 | Business
Q&A: The falling pound
07 Jun 01 | Business
Pound hits new 15-year low
07 Jun 01 | Business
ECB under fire over euro
Internet links:


The BBC is not responsible for the content of external internet sites

Links to more Business stories are at the foot of the page.


E-mail this story to a friend

Links to more Business stories