Swedish 'no' vote on euro reverberates in Britain

Moderate, prosperous Sweden was seen as a useful litmus test for Britain's own much-delayed vote on one of the most important economic issue facing the country. The fact that Sweden, more europhile than Britain, could not be persuaded to vote "yes" bodes ill for Britain.

Related stories: 09/12/03 Sweden mourns on way to polls

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It also reveals how national interests and economic realities - even the founding pro-euro countries are having difficulty implementing the euro's internal rules - may ultimately trump the vision of pan-European unity.

"The lack of growth in France and Germany is the biggest barrier to people being enthusiastic about joining the euro," says one pro-euro government source here, who spoke on condition of anonymity. "And as long as Britain has good growth with full employment, and the other big countries in Europe are in the doldrums, then we won't be voting 'yes' either."

The euro debate is one of the most divisive in Britain, cutting across cabinet and government, political parties and businesses, boardrooms, classrooms, and living rooms. Polls consistently show about 60 percent who do not want to ditch the pound, with barely 30 percent in favor.

In some ways, the euro issue is a microcosm of the love-hate relationship between Britain and Europe. One school of thought, embodied by trenchant euroskeptic and former prime minister, Margaret Thatcher, sees Europe as essentially alien to the Anglo-Saxon way of life - statist, indolent, bureaucratic, and polyglot.

The counterview embraces the history and vision of the "European project," which has assured unprecedented peace and prosperity across the western half of the continent for almost 60 years.

Nowhere is the euro rift more obvious than at the top end of the cabinet, where Prime Minister Tony Blair is a starry-eyed enthusiast while his finance chief Gordon Brown is far more doubtful.

Mr. Brown held sway in June when the government said it was too soon to hold a vote on joining the euro because Britain's economy was not yet convergent with mainland Europe in key areas like inflation, interest rates, growth, and business cycles.

Another assessment is scheduled for early next year, but few now expect a vote on the matter in the next five years.

"We are nowhere near to going to the polls in the UK now," says Adrian Hughes, a currency expert at international banking giant HSBC. "Until the [economy] is reasonably convergent with Europe's, we won't actually see a vote."

The euro is important on many levels. Quite apart from the history and national symbolism associated with the 300-year-old pound, there are grave economic and social implications involved with both staying in and opting out.

The "no" camp argues that joining would cede vital control to Europe, leaving Britain powerless to run its own finances. They point to Irish inflation, a French budget crisis, and German unemployment as signs that the one-size-fits-all euro doesn't work. The more extreme wing of the coalition is suspicious of Europe and would rather Britain joined the North American Free Trade Agreement.

"The euro zone is failing and there has to be ... a lot of reform to improve it," says James Frayne, campaign manager for the No Campaign in Britain. "The message to Blair is that despite all the advantages the Swedish 'yes' vote had, with united government and business support, it still lost. They didn't want to give up control of their economy, and neither do we."

But the "yes" camp argues that failure to join will relegate Britain to a lower tier within the EU, depriving it of influence. That trend could be exacerbated once new countries from Eastern Europe join the EU next May.

"The countries inside the euro zone are impatient with the outs," says Katinka Barysch, chief economist at the Center for European Reform, a pro-European think tank here. "The euro-zone countries will have to decide what they can do to make the euro work, and they can't have the other countries meddling in that."

Euro enthusiasts also argue that foreign investors, principally from the United States and Asia, want Britain to adopt the euro to give them a toehold in the formidable euro-zone market. Failure to join could send investors elsewhere.

"The share of foreign direct investment going to the UK and Sweden and Denmark has fallen substantially, " says Ms. Barysch. "If Britain thinks it can afford that then fine; but I don't think it can."

It all adds up to difficulty for Mr Blair, a pro-European who needs to rebuild bridges to the Continent following his position on the Iraq war, which alienated key partners in Europe.

NOTE: Denmark, Sweden, and Britain are members of the European Union but are not currently participating in the single currency. Denmark is a member of the Exchange Rate Mechanism II, which means that the Danish krone is linked to the euro, although the exchange rate is not fixed. TOM BROWN - STAFF SOURCE: EUROPEAN UNION