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“Wait for the dollar to fall and the euro to rise,” was the advice given in 2001 by Goldman Sachs economist Gavyn Davies to Tony Blair about UK membership of the euro. Seven years on, foreign exchange markets have obliged. Caught between the world’s two diverging reserve currencies, sterling sits near 15-year highs against the dollar. Against the euro, meanwhile, sterling has fallen to the depths it reached after its 1992 ejection from the exchange rate mechanism.Today it is worth the equivalent of 2.44 D-marks, 16 per cent below the rate at which the ERM experiment was attempted. As Jim O’Neill (
Mr Davies’s successor at Goldman) has noted, that is a competitive rate to lock in for exporters, just above half of whose goods and services go to the European Union. The superiority of the UK’s financial framework and central bank are also suspect after the credit crunch, especially given the European Central Bank’s steady performance. The traditional worry that the City of London might lose out to Frankfurt if the UK joined is obsolete today.

On most headline metrics the UK is surprisingly converged with the eurozone. Consumer prices rose 3 per cent year on year in April against
3.3 per cent in the eurozone. The UK public deficit will soon be higher than the Maastricht criteria permit but, helpfully, many big eurozone states now ignore these rules. Growth rates have been remarkably similar to the eurozone’s since 2004.

That leaves two hurdles. First, to achieve similar rates of inflation, the UK still seems to need far higher real interest rates. Europhiles argue this reflects a credibility problem at the Bank of England (and thus that, by joining, the UK could have the same inflation with lower rates). Sceptics argue it betrays a UK economic cycle that still has a life of its own. There is no definitive answer on this point: it remains largely a political choice. And that is where the second hurdle exists. An embattled UK government is in no fit state to swing public opinion. Britain may be oddly close to meeting the economic tests for euro membership but it is nowhere near passing the political ones.

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