Global Policy Forum

by Patrick Wintour

Neil Kinnock, the European commission vice-president, yesterday held out the prospect that the European Union will agree to significant reforms to the euro regime - including loosening government borrowing levels. Opponents of the euro on the left - and in parts of the Treasury - have traditionally argued that joining the single currency would mean cuts in public spending because of the strict rules which govern membership. These fresh moves could overcome many of those objections. Drawing on his knowledge of thinking inside the commission, Mr Kinnock said the changes could be negotiated prior to Britain joining the euro. "Britain will be pushing at an open door, but it is a door that needs pushing".

His remarks may be designed to encourage the Treasury to negotiate reforms over the next few months, rather than sit back and simply conclude a negative assessment of whether Britain has met the five tests set by the Treasury. The Treasury has to complete its assessment by next June. Mr Kinnock also claimed at a briefing that Britain might be able to join following a small devaluation of sterling against the euro down to between £1.45 to £1.55.

At the same briefing, Britain in Europe campaigners warned that there would be a backlash if Tony Blair rejected a referendum, but conceded that he faced a difficult choice between "being gutless or brave". Mr Kinnock predicted the commission would be willing soon to introduce greater flexibility into the current stability and growth pact - which sets out the economic rules governing the euro. He said the current "close to balance" target, requiring annual borrowing to be 0.5% as a proportion of GDP over the economic cycle, was "unrealistic in most countries and at most times".

He said it would be better if the commission could take greater account of a country's overall debt levels. Britain has an accumulated debt level of only 42% of GDP, as opposed to Italy's figure of 102%. He asserted that countries could be given greater latitude by allowing public sector investment to be set against borrowing, closer to the golden rule adopted by the chancellor, Gordon Brown. "We can win that argument," he said. Mr Kinnock also argued that Britain could not reasonably influence other reforms to euro management so long as it remained outside the euro. "One thing is clear, they are not arguments that will be heeded, let alone adopted, from the outside," he warned.

He added: "If you want higher sustained public sector investment, you must have a means of dealing effectively and persuasively to counter speculation - and that means you join the single currency." He argued that joining the single currency would be the best way to prevent speculation against the pound. He said that if sterling remained outside the euro it would be "the equivalent of bobbing around between the two great ocean liners with the dollar to the left and the euro to the right".

Richard Layard, the LSE economist, also produced figures to show that Britain's exclusion from the euro was starting to have an impact. He cited figures from the commission showing Britain's share of total direct investment into the EU coming into the UK had fallen from 52% in 1997-8 to 24% in 1999-2001. Britain's trade with other EU partners also fell in 2001 whilst it rose in France and Germany.

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