It would be 'strongly against Britain's economic interests to join EMU as it is constituted and planned', says Professor Patrick Minford in a detailed assessment of the Chancellor's five economic tests for joining. The Treasury is now carrying out these tests which, it has said, must be passed 'clearly and unambiguously'.
Professor Minford, of Cardiff University Business School, examines the arguments both for and against euro entry.
On the benefits side, he sees only small savings in transactions costs, offset by the substantial costs of changeover. The core of the argument of euro enthusiasts, says Minford, is that exchange rate risk against the euro would be eliminated. But, he points out, the euro is a regional (not a world) currency which has fluctuated considerably against the dollar: it is by no means certain that total exchange rate risk would be reduced by joining the euro and it might even increase.
As regards the costs of euro membership, the loss of interest-rate-setting powers is a serious matter, according to Minford. Within the euro zone, the variability of British output, employment and prices in response to shocks would probably be much increased.
Moreover, he argues, there is a harmonisation agenda implicit in the EMU project which will most likely involve increases in tax rates, social support and regulation. Econometric modelling shows that such harmonisation would be very damaging to the British economy. British citizens should also be very concerned about the very large projected state pension deficits in France, Germany and Italy - which amount to about one third of Britain's gross domestic product. Increasing integration within EMU means that these 'potentially explosive state financial liabilities' could well fall partly on British taxpayers.
If the EMU project were accompanied by a 'free market approach within a treaty of co-operating nation-states' the assessment might be more favourable, says Professor Minford. But, as the project stands, Britain's interests dictate that it should stay out.