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Thursday, 21 June, 2001, 10:49 GMT 11:49 UK
What Brown's speech means
Gordon Brown: no hurry on euro entry
Gordon Brown: no hurry on euro entry

by BBC News Online's Steve Schifferes

Gordon Brown's Mansion House speech has effectively squashed speculation that there will be an early referendum on the UK's adoption of the euro.

A fortnight ago, as Labour headed towards an election landslide, the belief was rife in financial markets that the government would use its huge majority to launch an early referendum on joining the single currency used by 12 European countries.

To join in the wrong way or on the wrong basis without rigorously ensuring the tests are met, would not be in the national economic interest.

Gordon Brown, Chancellor of the Exchequer
As a result, the pound fell sharply on foreign currency markets, because the belief is that the UK could only adopt the euro at a lower exchange rate.

But within days of coming into office for a second term, the Chancellor has gone out of his way to emphasise that there will be no early UK entry to the euro

In his most important speech of the year, the Mansion House address to the City of London, Gordon Brown quelled speculation that the government was going to use its popularity to launch an early campaign for the euro.

Eddie George and Gordon Brown: euro-sceptics together?
Eddie George and Gordon Brown: euro-sceptics together?
He made it clear that the Treasury had not yet even begun considering the five economic tests that the government will use in deciding whether to recommend euro membership to the public.

Over-valued pound

Mr Brown's message was reinforced by the Governor of the Bank of England, Sir Edward George, who warned that interest rates would have to rise if the pound fell sharply in value.

That is because imports would be more expensive, so pushing the inflation rate in the UK higher.

Robin Cook: moved because of pro-euro views?
Robin Cook: moved because of pro-euro views?
The dilemma facing Brown is that joining the euro at the current rate would cripple British industry, but engineering a fall in the value of the pound would have inflationary consequences - and political risks as well.

The collapse of the UK currency when it left the Exchange Rate Mechanism in 1992 was widely seen as the moment at which the Conservatives lost their reputation for economic competence.

And previous Labour governments, both in the 1940s and 1960s, have suffered severe political consequences for devaluing the pound.

The easiest way out of the dilemma is for the euro to rise sharply, both against the dollar and the pound - but no one can predict when the euro will recover its value, or if it ever will.

Euro-sceptic Brown

Mr Brown has also gone out of his way in recent weeks to raise other objections to the way Europe runs its monetary affairs - raising suspicions that he does not feel very enthusiastic about handing over a substantial part of the running of the UK economy to Frankfurt.

He has argued that the European Central Bank should adopt some of the practices of the Bank of England, such as the publication of its minutes and the adoption of an explicit and "symmetrical" inflation target (which means the Bank must cut rates if inflation falls too low as well as raise them if inflation becomes a threat).

He says that the UK government's priorities are the completion of the single market and economic and institutional reform - such as liberalisation of labour and capital markets - which could take years to come to fruition.

Mr Brown also called for a closer relationship between the United States and Europe - which the UK might mediate.

Conflict with the PM?

So much of the discussion has been about whether Mr Brown's views conflict with those of the Prime Minister?

During the election campaign, there was a striking difference in tone between Tony Blair and Gordon Brown when speaking about Europe.

Mr Blair has been keen to proclaim his European credentials, backing proposals for a European army and an elected Senate in the European Parliament.

But Mr Blair knows that the Chancellor has something of a lock on any decision about the euro, having bounced him into agreement in 1997 that the Treasury would rule on the five economic tests.

And he also knows that he would face a huge political task at the moment in persuading an increasingly sceptical public to adopt the euro in a referendum.

The two leading advocates of early euro entry - the former foreign secretary, Robin Cook, and the trade secretary Stephen Byers - were both moved to less sensitive jobs during the post-election cabinet reshuffle.

Just as important for Labour is the prospect that euro delay will discomfort their opponents.

During the election the Conservatives failed to make much headway with their "save the pound" campaign, which made them look extremist - and the issue still deeply splits the Tories.

So, if a delay in euro membership can be justified on economic grounds, it may also work to the government's political advantage - at least in the short-term.

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