Report hints that Treasury will reject 2003 euro entry

Gordon Brown has warned of the dangers of Britain accepting "rigid rules" to govern the economy, a move observers say further indicates the Treasury's intention to reject a referendum on entry to the euro next year.

A Treasury paper released alongside the pre-Budget report last week warns that rigid economic rules "do not allow any flexibility to respond to economic shocks", leading to claims that Mr Brown may never back euro entry.

The paper praised the operation of the Bank of England, and said: "A rigid fiscal policy rule which requires offsetting adjustments regardless of an economy's cyclical position could exacerbate the cycle and undermine public support for the policy." It echoes warnings about the effects of a"one-size-fits-all" European interest rate and a European central bank on the British economy.

In the foreword to the report, Macro-economic Frameworks in the New Global Economy, Mr Brown praised the economic framework established in 1997, saying it was "producing real benefits". He said: "This puts us in a strong position to benefit from the opportunities brought about by globalisation and to cope with the risks, including the challenges posed by the current global economic environment."

The report said that if Britain wanted to join monetary union, "the conditions that need to be met to minimise the risk of destabilising shocks are specific and demanding." The conditions were: "The economy must be very open, with a high share of trade with the country to which it is pegged; the economic and financial system must already extensively rely on its partner's currency and the shocks it faces must be similar."

David Laws, the Liberal Democrat Treasury spokesman, said: "This is an incredibly significant document which not only indicates that the Chancellor is unlikely to approve a European referendum in this Parliament, but which also suggests that while Gordon Brown is Chancellor, Britain may never enter the euro. One wonders whether the Prime Minister realised the significance of this documentwhich was issued by the Treasury."

Mr Laws' verdict was echoed by some independent analysts, but last night pro-European ministers and MPs rushed to insist that the Treasury document had not changed the position. "I don't think anything's changed ­ the issue has still to be resolved," one senior minister said.

"I think Gordon's verdict will be either 'Yes' or 'Yes, but not yet'. He can't say 'No'. The Europeans will say we're stringing them along and inward investment will dry up."

Pro-euro groups still hope that Tony Blair will risk calling a referendum and seeking a yes vote within the next 12 months, despite polling evidence that shows that voters are still hostile. They point to Mr Blair's speech on the need for full involvement in the European Union last week as evidence that the referendum will still take place next year.

Yesterday the pro-euro pressure group, Britain in Europe, signalled its confidence by announced a move to a £1moffice, designed to serve as the headquarters of a "yes" campaign when a referendum on euro entry is called.

A confidential memo from the organisation's campaign director, Simon Buckby, said that evidence showing Britain would pass the Chancellor's five economic tests would be overwhelming.

Britain in Europe's new headquarters off the Edgware Road in north-west London will allow the organisation to increase its staff of 30 to about 150.

The centre includes a 350-line telephone exchange costing £50,000 and a suit of television and radio studios designed by the same team that produced Labour's Millbank Media Centre.