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Britain Balks At Adopting Euro

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AP
Britain isn't ready to climb on the euro bandwagon, Treasury Chief Gordon Brown told Parliament Monday, but he said the government would pursue reforms to make adoption of the common currency possible.

Brown, the chancellor of the exchequer, said that although Britain's economy was beginning to converge with that of the 12-nation euro zone, it had not yet done so sufficiently.

The British economy was not yet flexible enough to cope with potential economic shocks within the euro zone, Brown said. Dangers still remained, particularly to the housing market and inflation.

His address, however, was largely upbeat and positive about the euro. Brown said membership could increase Britain's political influence in the European Union and expand EU trade by 50 percent over 30 years.

But he insisted it was important for the EU to continue to reform and modernize.

Prime Minister Tony Blair has made it a goal of his premiership to link Britain to Europe via the common currency. Currently, Britain, Sweden and Denmark are the only members of the European Union who do not have the euro.

Blair's government had hoped to hold a referendum on joining the Euro soon, but had tied any vote to five economic tests. In 18 studies released Monday, Brown's Treasury decided the UK was not yet ready for the Euro.

Besides the economic questions, a euro vote faced political obstacles. Many Britons feel an attachment to the pound, which features the queen's profile, as a remnant of the faded glory of the British empire. Others simply distrust their continental neighbors.

What would have been a tough fight for Blair and his pro-euro allies was made even more difficult when the political calculus was complicated by the war in Iraq.

Blair lost some support in his own pro-euro Labor party for backing the war, while euro-skeptics' opposition was hardened by the disagreements over Iraq with France and Germany, two leaders of the eurozone.

Proponents of the euro say Britain should adopt it to take advantage of the vast European marketplace. Having the same currency as one's neighbors makes cross-border transactions easier, smoothes travel and reduces some investment risk.

But opponents worry that Britain's economy was too different from the other euro members, and that Britain would chafe under a common monetary policy. When a country joins the euro, it hands control over interest rates to the European Central bank.

Skeptics note the bank's difficulty in setting a rate low enough to stimulate an economy that's slumping, like Germany's, and high enough to dampen inflation in a booming country like Ireland.

Conservative finance spokesman Michael Howard said the Treasury studies indicated that joining the euro "would be a huge gamble with people's jobs and mortgages, putting the whole economy at risk."

The Treasury studies released earlier Monday indicated that the pound is now too strong against the euro, that Britain's economic cycle is more closely aligned with the United States than with Europe, and that a high rate of home ownership and variable-rate mortgages make interest rates particularly sensitive in Britain.

The Treasury said joining the euro could boost Britain's trade by as much as 50 percent, but that would depend "on sustained convergence of the U.K. economy with the euro area, as well as the absence of any short to medium-term misalignments in the sterling-euro entry exchange rate."

Brown said the government would take "concrete and practical steps" to ensure that the five economic tests for membership could be met and to build a "pro-European consensus" in the country.

The chancellor called for the European Union to reduce tariffs and regulatory and competition barriers to members and also the United States, to encourage a "fully effective, trans-Atlantic partnership."

Liberal Democrat lawmaker Matthew Taylor said the chances of the government going ahead with a referendum before the next general election — due by June 2006 — were "next to nil."

"In principle I want to join the single currency, but in practical terms we have got to make sure that the conditions are right," Brown said in an interview with the BBC on Sunday. However, he appeared to leave the door open for a referendum on euro entry before the next national election.

Brown is widely considered the likely successor to Blair, and observers believe he is unlikely to risk a euro vote before the 2006 election unless there is a reasonable chance of winning. Losing on the euro could hurt Labor's chance in the election.