Time's up: we must decide on the euro

Michael Portillo's remarks on the single currency last weekend were a triumph of coded delivery. The most forensic examination of the text reveals not a word out of place, not a hint of deviation from current Cabinet orthodoxy. Yet it formed an important message to dissidents rallying for the last big internal struggle within Tory ranks before the general election. So sensitised is his party to every nuance of the European argument that by merely saying that Britain would have to decide "quite soon" on the single currency, the Defence Secretary was able to reassure the Euro- sceptic right that their Cabinet champions are preparing once again for battle. The formulation was calculated to draw attention to the imminence of that momentous decision.

Few Tories now talk of persuading John Major to rule out British membership of EMU for the duration of the next Parliament. Instead, the new fashion on the right is to press for a "compromise" under which the Prime Minister would rule out, in advance of the election, the prospect of joining it by the starting date of 1 January 1999. Such a formula, its Euro-sceptic protagonists argue, would allow the party to show its true colours without losing the chance to join monetary union later if it proved to be a success.

Their case is seductive. Can Mr Major really go through an election saying he hasn't made his mind up on the most momentous decision a new government will have to take? After all, the EMU timetable will force whoever wins to make that decision within a few months of taking office.

Some on the right now recognise the catastrophic consequences of provoking the resignation of the pro-European Kenneth Clarke. Instead, they suggest that the Chancellor and his ally Michael Heseltine will be persuaded that, with the ratio of public debt to gross domestic product currently above 4 per cent, it will be impossible to bring it down by 1997 to the 3 per cent required by the Maastricht treaty as a precondition of EMU membership and that there is no harm in admitting as much before the election.

This way, Mr Clarke need not resign. After all, has he not frequently and publicly stressed the importance of sticking rigidly to those preconditions? Finally, isn't there still a danger that Tony Blair will play the populist trump card and rule out the prospect that a Labour government would be an EMU founder member?

Seductive, yes. Persuasive, no.

Let's take Labour first. It is certainly possible, if not probable, that the more Euro-sceptic Robin Cook will seek to persuade Mr Blair and Gordon Brown that Labour would do well to rule out Britain's joining at the starting date. Neo-Keynsian to the last, he might seek to argue, for example, that the first Labour budget for 18 years should not be constrained by the need to keep borrowing down to EMU-acceptable levels. The problem is that Mr Brown himself will be pulling Mr Blair the other way. If anything, Mr Brown is more likely to argue that the party should be more positive about EMU than it has been in its carefully neutral draft manifesto. In that way, if it decides to join, it could argue that the general election had given it a mandate and therefore would not have to put such a decision to a referendum. For all the signs are that Mr Brown, like Mr Clarke, is deadly serious about keeping open the possibility of joining EMU.

The backbench left-wing argument against EMU is different to that of Tory Euro-sceptics. It is about economics and not the issue of political sovereignty: you can't devalue or reflate at will if you are locked into a single currency. But neither Mr Blair or Mr Brown is going to run that kind of economic policy, in or out of EMU.

Given that a British government outside EMU will have to pay a premium, for example in higher interest rates, for running as tough a monetary regime as countries inside it, there remains a strong case for joining.

Labour's policy may well not change at all before the next election. But it is not likely to change in the direction the Tory Euro-sceptics would like.

Their wishful thinking about Mr Clarke isn't convincing either. He, of all people, is hardly going to offer himself up as the Chancellor who couldn't make Britain's economy qualify for the single currency. The current forecasts are that the ratio of debt to GDP will reach the required 3 per cent, or close, by 1997. And anyway, even the most literal interpretation of the Maastricht treaty leaves some leeway in the criteria for EMU. His Tory opponents are dreaming if they think they can rule out membership in 1999 without risking his resignation.

Mr Major, the party manager, will still be tempted. He should remember, however, that the Euro-sceptics have impaled themselves on their own success in persuading him to grant a referendum if a Tory government should decide to enter a single currency. The argument that Mr Major should rule out a single currency before the election was always going to have less moral force if the people would get their say in the end anyway. Which is why Mr Portillo - and John Redwood, until he left the Cabinet and changed his stance in the heat of the 1995 leadership election campaign - were against the referendum pledge in the first place.

To rule out a single currency in 1999 would still, in practice if not in theory, rob the opt-out clause that Mr Major won at Maastricht of its purpose. It would violate one of the first laws of politics, which is not to take a decision until you have to. It would leave his Euro- sceptics asking for more, without remotely serving the national interest. It is not much of an exaggeration to say that it would do for his foreign policy in 1996 or 1997 what Black Wednesday did for his economic policy in 1992.

As the deadline nears for launching the single currency, European Union governments resemble a pack of middle-distance runners shifting into sprint mode for the finish. However, the aim of the race is not exactly to come first, but to breast the tape inside an agreed qualifying time.

Of the 15 racers, only three seem virtual certainties not to join monetary union from the outset. It is planned to start in January 1999, with the irrevocable fixing of exchange rates among participating countries. But Britain and Denmark have opt-outs from the euro, and Greece's economy is too weak to permit membership.

For most of the other 12 runners, the last lap is proving to be a rigorous exercise in financial self-discipline (some would say self-punishment) designed to ensure that they fulfil the Maastricht treaty's criteria for joining the single currency. Governments across Europe are preparing sharp cuts in their 1997 budgets so that their public sector deficits meet the Maastricht target of 3 per cent of gross domestic product.

If anyone in Britain doubts the political commitment of continental governments to monetary union, the scale of the austerity measures being introduced from Germany, France and Belgium to Italy, Spain and Portugal should dispel all illusions. Chancellor Helmut Kohl's government aims to cut Germany's deficit by DM50bn (pounds 22bn) next year, or roughly 1 per cent of GDP.

In Spain, where an unemployment rate of 22 per cent suggests the need for an urgent programme of job creation, the government wants to cut the deficit from 5.8 per cent of GDP in 1995 to 4.4 per cent this year and reach the hallowed 3 per cent in 1997. Portugal's Socialist prime minister, Antonio Guterres, said: "It is vital for Portugal to be at the centre of the European integration process. We will have to be extremely tough in cutting expenditure."

Most governments are so determined to adopt the euro that they are willing to risk social unrest by taking unpopular measures at a time of high unemployment and sluggish growth. Yet despite taking so brutal a knife to public spending, some governments are doomed not to meet the Maastricht targets, which also specify a stable currency and low public debts, inflation and interest rates.

A recent study by Deutsche Morgan Grenfell, the investment house, forecast that only eight countries would meet the deficit target in 1997: Belgium, Britain, Denmark, Finland, Germany, Ireland, Luxembourg and the Netherlands. Only four would meet the debt target of 60 per cent of GDP: Britain, France, Germany and Luxembourg.

To dwell on numbers, however, is to miss the point. Monetary union is a politically conceived project, designed to set an eternal seal on European unity, and its supporters will not be deterred by "trivia" such as a budget deficit that is slightly too high.

As Luxembourg's Prime Minister, Jean-Claude Juncker, put it: "If Germany is 3.5 per cent and France is 3.7 per cent, it's OK. You're not going to miss an historic opportunity over 0.4 [sic] per cent of GDP."

This goes for the debt target, too. Monetary union is almost inconceivable without Belgium, whose capital is the EU's heartland, so the Belgians will join even though their 1997 debt will be far above 60 per cent of GDP - 130 per cent, according to Deutsche Morgan Grenfell.

Maastricht allows such flexibility because the relevant clauses say that a country's deficit can exceed 3 per cent if it is "exceptional and temporary". Public debt can exceed 60 per cent provided that it is falling to that level "at a satisfactory pace". Ultimately, political judgements will prevail.

It nevertheless remains vital that EU governments avoid giving the impression to financial markets that wobbly economies may participate in monetary union. If the markets take fright, they could destroy the project by stampeding into the German mark and dumping weaker currencies - just as they wrecked the old Exchange Rate Mechanism in 1992-93.

For this reason, it is improbable that all 12 countries will launch the euro in concert. Particular question marks hang over Italy, Spain and Portugal, yet this trio would bitterly resent the implication that they must languish in a southern second division while Germany and other rich northerners revel in a euro premier league.

In the countdown to 1999, perhaps the most important and unpredictable factor is the role of public opinion. People in most EU countries have only a hazy idea of how the euro might affect their lives (and the European Commission's decision not to run an information campaign in this country speaks volumes about its view on whether Britain will join).

In countries with high unemployment (most EU states), or sensitivities about sovereignty (France and Sweden), or great devotion to their national currency (Germany), opponents of the euro will seize every opportunity to swing public opinion in their direction. If the euro becomes associated in people's minds with austerity and stagnant growth, it may never get off the ground.

However, no one in Britain should be complacent. The best guess now is that monetary union will happen, with Austria, Belgium, Finland, France, Germany, Ireland, Luxembourg and the Netherlands as the likeliest members from the start. The governments of the other seven (with the telling exception of Britain's) would all like to be there eventually.

If Britain is to reject the euro for political reasons, it needs to wake up sharp and confront some important questions. Can we prosper on the outside? Will the City retain its financial pre-eminence? What will remain of Britain's influence in Europe and the world?