UK told it needs euro

Wim Duisenberg: has dubbed himself 'Mr Euro'

The UK has satisfied all but one of the criteria for adopting the euro and is suffering economically by not joining, according to the president of the European Central Bank.

Wim Duisenberg told Italy's Il Sole 24 Ore business daily: "Great Britain satisfies all the conditions to enter, except that foreseen for exchange rates."

UK's five tests

Economic convergence to be sustainable

Flexibility to cope with change

Improve investment

Not harm financial services industry

Good for employment

"The performance of the British economy is admirable but it is suffering a great deal by not participating in the euro. That said, the decision [on joining] is one to be taken by the British people."

At the same time, UK Foreign Secretary Robin Cook was reported as telling a meeting of the Trades Unions for Europe organisation on Thursday that Britain's adoption of the euro was "inevitable".

The Conservatives said Mr Cook's remarks amounted to a humiliation for Chancellor Gordon Brown, who has insisted that euro membership rests on his five economic tests.

Downing Street countered by saying Mr Cook was commenting on an opinion poll and that membership certainly was not inevitable.

A statement said Mr Cook had indicated in his speech that he did in fact support the validation of the five economic tests.

Hot potato

Mr Duisenberg's comments follow a week of controversy over Britain's adoption of the euro, with some foreign multinationals claiming they will reduce future investment in the UK if there is no clear signal on euro membership.

Euro has struggled since its launch 18 months ago

For example, car-maker Nissan threated last week to shift production from its Sunderland plant to the continent because of the strength of sterling.

And in a leaked document, the UK's ambassador to Japan said foreign investment would be lost unless steps were taken towards adopting the euro.

Adding to the war of words on Friday was Northern Ireland Secretary Peter Mandelson, who rejected Mr Duisenberg's view.

"Whilst his opinion is interesting ... it is a matter for the British government to carry out the assessment to see whether all five tests that have been set down by the government have been fulfilled," he said.

"I know other people have offered views and evidence that that is not the case."

Back to Maastricht

If the UK does eventually decide to join the euro, the ECB will judge its application against the Maastricht criteria for membership of the single currency.

The UK's inflation rate is one of the lowest in Europe, meeting the criteria that new entrants should have an inflation rate within 1.5% of the three EU countries with the lowest rate.

Long-term interest rates have to be within 2% of the three lowest interest rates in the EU. British long-term interest rates are currently lower than those in Germany.

The UK's strong public finances easily meet the budgetary criteria.

The amount of money borrowed annually by a government, known as the budget deficit, has to be below 3% of Gross Domestic Product (GDP).

The total amount of money owed by a government, known as the public debt, has to be less than 60% of GDP.

But the biggest problem would be caused by the exchange rate, after the strong rise of the pound relative to the euro.

Exchange rates must be kept stable for two years against other European currencies, within "normal" fluctuation margins of Europe's exchange-rate mechanism.

The UK economy might be at a distinct competitive disadvantage if Britain joined at too high a rate.