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Business in Britain Cools on Euro

With the eurozone's current poor economic performance and Germany's breach of the 3 percent budget deficit, ecomomists in Britain are becoming increasingly cautious about joining the monetary union.


Two-thirds of British voters are against joining the eurozone

When Germany was considering a common European currency back in the mid 90s, it worried about joining a club that included a country - Italy -whose public sector debt stood at a soaring 124 percent.

The German government, at that time under Helmut Kohl, reacted with calls for a set of tough fiscal regulations, rules designed to prevent countries like Italy from overspending. The result - today's Growth and Stability Pact - convinced Germany to abandon the D-Mark and to join its European neighbors in adopting the euro.

Today, Britain, which is still in the process of contemplating membership in the monetary union, is faced with a similar question. This time, however, it is Germany that is causing the worries.

Concern over Germany

Germany, which has admitted it will exceed the 3 percent budget deficit allowed under the Growth and Stability Pact rules, faces a humiliating reprimand from the European Commission next week. In addition, economic growth is crawling at some 0.3 percent and unemployment continues to waver around the four million mark. To top it all off, experts forecast no end to Germany's economic malaise in the coming months.

As a result, wariness in British business circles regarding joining the eurozone is spreading. A recent report, published in the British "Daily Telegraph" this week, showed that only 2 of 21 questioned top economists expected the EU to meet a set of five tests introduced by the British government in 1997 by which it will judge the benefit of adopting the euro for the UK economy. 15 economists said they thought the criteria would not be fulfilled.

Many of the those questioned named Germany's trailing economy as the main reason for their reserve, along with the widening rift between the economic development in Britain and the euro countries.

Economic divide

Growth in the eurozone runs at around half of Britain’s 1.5 percent. Consumer demand has surged by more than 3 percent in the UK; in Europe it dwindles at just under one percent. Unemployment in Britain is considerably lower than the EU average, running at around half the eurozone's 8 percent. In short, Britain's economy is now in its 10th year of expansion, the longest for 40 years.

It is hard to deny the role the euro has played in Europe's current economic malaise. Once described as "Europe's key to the 21st century" by the German chancellor, the euro and the economic policies which have accompanied its introduction have lamed Germany in its attempt to haul itself out its economic slump. This scenario, critics across the Channel say, only goes to prove that a one-size-fits-all economic policy simply does not work.

Not just bad news

However, the single currency has boosted trade between countries in the eurozone considerably, increasing by some 20 percent since 1998. In Germany, trade with other EU countries as a proportion of GDP has risen by 4.8 percent since 1998. The only country where trade has dropped with EU members is Britain.

That the eurozone is proving increasingly attractive to investors due to the absence of the currency risk is a fact Britain is finding hard to ignore. The latest figures on foreign direct investment from the United Nations Conference on Trade and Development show that Britain's share of investment in the EU has fallen from 28 percent in 1998 to a forecasted 5 percent this year. But France and Germany have attracted more investment than Britain for the first time since 1984.

Not enthusiastic, but necessary

The ambiguity of Britain's approach to the euro is well reflected in a recent study published by the Engineering Employers' Foundation. Despite the eurozone's current poor performance, manufacturers see the adoption of the euro as inevitable. More than half of respondents in the survey expressed caution as to Britain joining the eurozone, but said it was "likely" to join by 2005.

This "wait-and-see" attitude fits the government's focus on the "five tests" with which Britain is evaluating the European economy to see how it will influence Britain. With these the government will judge whether a single currency is good for jobs, foreign investment, Britain's financial center in London, and whether Britain's economy is marching in step with that of the rest of the EU.

The attitude adopted in Britain's business circles also matches that of the British public. Voters are still largely reluctant about joining the eurozone, with two-thirds of them saying they do not want a single currency. Four-fifths, however, believe Britain will join by the end of the decade.

This shows that despite Britain's reserve, it has been widely accepted among voters that membership in the monetary union is inevitable. Earlier this year, British Prime Minister said he believed "passionately" that it was the UK's "destiny" to be at the heart of Europe. Britain's people may well have accepted this destiny. But they have not done so with passion.