The euro

The UK will soon face its most important economic decision of the new century - whether or not to join the euro.

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OVERVIEW

On 1 January 1999, the eurozone came into being as 11 European Union members irrevocably fixed together their currencies.

Euro timetable

Jan 1999: Euro introduced in 11 countries

June 2000: Greek membership approved

2001: Final 12 months preparation

Jan 2002: Euro banknotes circulated

February 28 2002: National currencies withdrawn

No dates set for UK, Danish and Swedish entry

Greece became the twelfth member this January. The UK, Sweden and Denmark remain outside.

The only difference so far has been the emergence of shop prices in both the local currency and the euro.

But those local currencies have effectively ceased to exist.

Come January 2002, euro coins and notes will appear, signalling the demise of some of the world's most famous currencies.

In each of the three EU nations still outside of the eurozone arguments continue to rage.

The biggest boost to the anti-euro camp in the UK came when Denmark narrowly voted "Nej" in its September 2000 referendum.

Pro-euro campaigners have since criticised the Danish government for campaigning solely on the economic arguments - and miscalculating how important sovereignty would be to the electorate.

In January, Tony Blair surprised the House of Commons and said that should Labour return to power there would be a decision on euro membership within two years.

On a decision to join, there would then be a referendum. If voters back the euro, converting would probably take at least two more years.

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ECONOMICS

In 2000, the single currency began falling and eventually dropped below "parity" (the point where rates reach 1:1) with the US dollar.

Inflation rates (harmonised prices index, Oct 2000)

UK: 1%

EU15: 2.4%

Eurozone: 2.7%

Source: HM Treasury

At its lowest on 25 October 2000, one euro was worth less than 83 cents (US), a third below its launch value.

The slide prompted the European Central Bank to intervene four times to prop up its ailing offspring.

In the wider European economy, the euro's weakness and high oil prices pushed up inflation and forced up interest rates.

France, Germany and Italy have found it difficult to boost growth - yet some countries on the fringe of group have come close to overheating.

All of which, say sceptics, proves that one-size interest rates won't fit all.

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THE CASE FOR

The currency's supporters believe that the euro's turbulent start will prove to be nothing more than teething troubles and point to its latest rallies on the markets.

The government remains on course to meet the Maastricht Treaty and Stability and Growth Pact commitments

Treasury Report, December 2000

The UK's main pro-euro campaign group, Britain in Europe, says there is a medium to long-term threat to jobs if the UK remains outside.

Some 55% of UK trade is with eurozone nations and BiE estimates that three million jobs are dependent on these links.

Leading financier George Soros has predicted that the UK could be squashed between the US and Europe - though he has also criticised the new currency itself.

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THE CASE AGAINST

Business for Sterling, a leading anti-euro campaign, stresses that joining the euro would mean giving up the levers of economic power.

They point to the Republic of Ireland's current situation. EU finance ministers officially reprimanded Ireland for setting a budget that they said would raise inflation and weaken the euro.

Furthermore, Business for Sterling argues that the UK has enjoyed unprecedented stability and growth because of its highly deregulated economy - and it would be dragged down by the European economies.

It also warns that the UK could become liable for the debts of its partners, should, say, a national pension scheme fail and require a pan-European rescue package.

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THE TESTS

Potential euro members have to meet a number of economic criteria set out in the "Growth and Stability Pact":

Inflation rates should be within 1.5% of the three best performers

Exchange rates should be stable

Annual budget deficit should be below 3% of gross domestic product (the total output of the economy)

The amount owed by the state must be less than 60% of GDP.

The government's position is to "prepare and decide" before putting the decision to a referendum.

In addition to the Maastricht criteria, Chancellor of the Exchequer Gordon Brown set his own five economic tests:

Are business cycles and economic structures compatible?

While the British economic cycle has been at different stages to that of Europe, there is growing evidence that the positions are no longer so different.

UK interest rates which have fluctuated for 20 years appear to be converging with the eurozone since the power to set them was handed to an independent Bank of England.

If problems emerge is there sufficient flexibility to deal with them?

The Institute of Directors says that the UK labour market is becoming more regulated and warns that it is no longer as well placed to deal with sudden economic changes which could affect investment and productivity.

But unions say that the UK is still the least regulated market in the western world and could withstand the shocks.

Would joining create better conditions for firms making long-term investment decisions?

About a quarter of all foreign investment to the EU comes to the UK.

Steel group Corus warned last year that "the volatility of the pound against the euro greatly increases the risk of [UK] investment." However, when it announced more than 6,000 UK redundancies this year, it denied that currency had been a factor.

Business for Sterling believes that global players remain more concerned with regulation, tax regimes and workforce skills than the currency in which they trade.

What impact would entry have on the UK's financial services industry?

Bank of England figures appear to show that the UK's markets have not lost out so far.

Secondly, a report last year suggested that banks continue to rate the UK's financial markets as the most attractive place in the world in which to invest.

Will joining EMU promote higher growth, stability and a lasting increase in jobs?

UK unemployment is lower than the EU average.

The pro-euro camp warns that absence from the euro will eventually harm manufacturing.

Euro-sceptics say the real problem is a lack of competitiveness.

Joining the euro, they say, would sacrifice price stability and jobs for currency stability - something that only benefits exporters.

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IS THE UK PREPARED?

In January this year, the National Institute for Economic Research, an influential think tank, reported to the European Parliament that the UK is ready to join - a view which has since been supported by the European Commission and finance ministers.

I think the UK will have less strength in decision power processes if it's outside of the euro

Romano Prodi, Commission president

The report suggested that the UK's economic cycle was closer to Europe's than many people think. Fears over incompatible economic structures could fall away as EU nations carry out deregulating reforms.

But it added that the government may have to either raise taxation or cut its budget by £12bn because of European rules on balancing national budgets. This has boosted sceptics who warn that the UK could one day face a censure just like Ireland.

But the report's authors stressed that the major issue facing the UK was not its currency - but productivity levels.

The Treasury's own view is that joining the euro is a real possibility.

Its December 2000 report found that: "Consistent with the two fiscal rules, the government remains on course to meet the Maastricht Treaty and Stability and Growth Pact commitments."