News Analysis: Are Britain's hopes to join euro dashed?

Special Report:Global Financial Crisis

by Dongying Wang

LONDON, Jan. 22 (Chinese media) -- With the rapid depreciation of the once strong

British pond against euro in the recent years and the uncertainty of the

country's economy in the face of the ongoing global economic downturn, an

urgency has come for Britons to join the euro but the chance might slip through

their fingers due to their persisted reluctance.

STATUS OF EURO

"The euro has become increasingly a candidate for the status of a reserve

currency alongside, or in substitution for the dollar," Lord Lea, an economist

and life peer of the House of the Lords told Chinese media.

"Familiarity with the euro is now self-reinforcing in Africa, Asia, Latin

America as well as in the OECD area," Lord Lea said, adding "The pound is

nowhere by comparison."

It is widely believed that at the worst point, investors will give up all

but four big global currencies: the dollar, the euro, the Japanese yen and the

Chinese yuan. In that case, Britain will see no way out, he added.

Euro membership has returned to British agenda. It comes on the10th

anniversary of the launch of the European single currency, which has been

adopted by 16 of the 27 European Union member states.

Since its introduction in 1999, the euro has been the second most

widely-held international reserve currency after the U.S. dollar. The

possibility of the euro's becoming the first international reserve currency is

now widely debated among economists.

BRITONS' RELUCTANCE TO ADOPT

EURO

Despite the euro's 10-year success, skepticism towards the currency has not

diminished in Britain. The strength of the euro has yet to draw Britain closer

to the continent. A majority of Britons are still adamantly opposed to joining

the euro, arguing that keeping monetary autonomy would benefit the British

economy.

A latest poll has showed that 70 percent of Britons still reject the euro,

up from 55 percent in 2005.

The big challenge for Britain in adopting the euro is to get a referendum

passed, said Lord Lea, who was a member of the British Treasury Advisory Group

on the euro. In many of the states which have adopted the euro, there was no

such a referendum.

"If we had had the chance of a public vote to join the euro or not in

Germany, I am absolutely sure, we would have kept the Deutsche Mark rather than

switching to the euro, "said Professor Ralph E. Hartleben at University of

Applied Sciences, in Weiden inder Oberphalz, Germany.

"The pound's long history, and heritage as part of British identity are the

main reasons for Britons rejecting the euro," said Hartleben, adding "If I were

British, I also would like to stick to the pound, as in Germany the euro has

nearly doubled all prices."

Lord Lea expressed understanding for Britain's nostalgia of the pound.

"However it is the reality that Britain, as an EU member, functions within the

regional policies and systems," he said.

He insisted it's at the EU level that Britain can make the quickest process

in securing accountability and taxation transparency of multinational

businesses, including multinational banks and associated new financial

instruments.

OUTLOOK OF BRITAIN'S ECONOMY

Being hit hard by the downturn, Britain has been warned of expecting a

difficult year ahead, and a 2.9 percent shrink in GDP in 2009.

Lord Lea believes that Britain's gloomy economic outlook will lessen the

opposition to the euro entry in the coming five years. Instead of suggesting an

exact time for Britain's adoption of the single currency, he stressed the policy

of "not wait and see," but "prepare and decide."

Lord Lea, who was vice president of the European Trade Union Confederation,

restated the point made in 1999 by the British Trades Union Congress that if the

euro entry delay persisted for a period of years, Britain would become less

attractive for inward investment.

THE POUND VERSUS EURO

As economic woe is mounting across Britain and the pound is edging down to

near parity with the euro, euro-entry supporters believe that sailing on the

euro big ship would make Britain better stave off the impact of recession.

The pound has lost 30 percent of its value against the euro since 1999 and

is now worth only 1.05 euro. Lord Lea blames the pound's sharp depreciation on

Britain's higher public fiscal expansion than other European countries.

A devalued pound is a double-edged sword. It benefits British exports, but

will make domestic customers pay more for imports. Meanwhile, Britons will find

their overseas holidays much dearer and not as cost effective as before. The

cheaper pound will enlarge Britain's deficit with the EU, which is a leading

trade partner of Britain. Moreover, it will also force Britain, a net importer

of both oil and natural gas, to pay a higher price for energy imports.

The pound's fast plunge began in October 2008, when the downturn started to

bite hard. Britain's interest rates having been cut to a historical low and the

launch of a second banking bailout package has resulted in further depreciation

of the pound following a slight gain at the beginning of the year.

However, euro-entry critics believe that the downturn will be a temporary

story and Britain will recovery to its economic and financial positions in a few

years. Lord Lea does not share the same optimism, saying that there is a slim

chance that the pound will rebound to its favorable position against the euro.

Though the euro has its upside, including reduced transaction costs, it

turns out to be not fully satisfying some strong member countries.

"The significant difference between rich and poor countries badly

influences the euro as the rich ones have to support some of the poorer

countries," said Professor Hartleben.

In response, Lord Lea said, "Clearly, there is a debate involving in

particular France and Germany about the effects of picking up other countries'

bills, but there has also been an increase of European community solidarity."

ENTRY OF EURO ENCOURAGED

It has been widely acknowledged that in the foreseeable future, the

eurozone, rather than individual EU nations would be strong enough to stand up

to the competition with other big players, including the United States, China

and India.

Britain's favorable employment situation is another key reason behind

Britons' reluctance to join the euro. Britain is one of the top four in the EU

in its employment rate, ahead of France, Germany, Italy, Ireland and Spain.

However, the European Commission has forecast that Britain, in danger of

sliding deeper into recession, will see its unemployment rate rise to 8.2

percent for 2009 from 5.7 percent for the whole 2008.

This means unemployment in Britain will be worse than in Germany, which

will see a 7.7 percent unemployment rate in 2009, according to EC predication.

Britain will have a much more significant role in the European economic

area if it becomes a full member of the eurozone, which looks likely to cover up

to 90 percent of the 27 EU countries in a few years, Lord Lea predicted.

Britain's leadership on bank recapitalization and the coordinated fiscal

stimulus is part of the country's further move forward toward the EU as a whole,

he added.

The euro is a positive rather than a negative factor, said LordLea, thus

urging his people to take a brave step to welcome the single currency as soon as

possible.

However, the chances for Britain to join the euro may be dashed, since the

eurozone may not want a sinking economy to enter their fold. Investment guru Jim

Rogers has this week warned against investing in Britain and said that the pound

is "finished."