Euro to 'benefit' UK economy

The UK's economy is getting into step with the eurozone, and the country could benefit from joining the euro, according to a report from the National Institute of Economic and Social Research.

A report from the House of Commons Treasury select committee, to be published on Friday, is expected to come to similar conclusions.

The study comes a day after the leak of a memo by Tony Blair, in which the prime minister argued the political case for joining the single currency was "overwhelming".

"Our analysts suggests that EMU (European Economic and Monetary Union) membership will be favourable for the economy", the study says.

The government's euro tests

Sustainable economic convergence

Flexibility to cope with change

Improved investment prospects

No harm to financial services industry

Good for employment

However, it warns not to set expectations too high: "It would be foolish to argue that it is bound to lead to a further reduction of unemployment or increase in economic growth."

The institute's experts say the UK is on course to meet the economic tests set by the government as conditions for joining the single currency.

In his leaked memorandum, the prime minister had said these tests had yet to be met.

The president of the European Central Bank, Wim Duisenberg, recently weighed in on the debate, saying the UK's economy would suffer if it failed to join the euro.

Investment, City under threat

Despite foreign direct investment in the UK currently running at record levels, the National Institute says long-term investment decisions could be harmed if Britain does not join the euro.

Take that! ECB president Wim Duisenberg wants Britain to join the euro

"Part of the foreign investment in Britain appears to take place because Britain offers a gateway to the European Union. If the United Kingdom remains outside the monetary union, then other countries are likely to offer a more attractive gateway", the study says.

The institute also worries the City of London could suffer if the UK does not join the euro.

"One can think of all sorts of reasons why, if the UK decides not to join a monetary union, the financial services industry will gradually ebb away to the continent", the report's authors argue.

Testing times

The Chancellor of the Exchequer, Gordon Brown, has set five conditions that need to be met before putting the euro decision to a referendum.

• The UK's economy cycle must be in step, or converge, with that of the 11-country eurozone.
• The euro system must be flexible enough to cope with economic change
• Joining the euro must improve the country's chances to attract foreign direct investment
• The City of London and its financial services industry must not be harmed
• Monetary union should boost overall employment levels.

One of the biggest concerns cited by eurosceptics is whether the UK's economy will ever be in sync with that of its European partners or not.

Historically, the UK economy has been more in line with that of the United States than the continent.

But the National Institute says a key indicator, the difference between the actual and long-term sustainable economic output, the so-called output gap, is now very much in line with the eurozone.

"In any case, the degree of cyclical cohesion of the euro area has increased over the last five years or so", according to the institute, which goes on to argue that "one would expect that, if Britain joins the monetary union, that in itself will promote cyclical cohesion".

Among European Union countries, only the UK, Sweden, Denmark and Greece have not joined the single currency.

Greece will become a member next year, while Denmark will hold a referendum on euro membership in September.