Conflict between economic and euro policies

TONY BLAIR and Gordon Brown may, or may not, be best friends. But their problem is not just personal. Labour's economic and euro policies are in conflict. Lady Thatcher used to remind her Chancellors, if they became too frisky, that the Prime Minister is also First Lord of the Treasury. If Britain is to join the euro, her successor may also have to pull rank.

When Tony Blair became Prime Minister, Europe was run, via the back door, by France and Germany. His success on the world stage has changed that. Euroland's leaders now clamour for invitations to dine at 10 Downing Street, which formerly they might have refused.

Italy's President, Carlo Campi, is against Europe being run by Britain, France and Germany. They must, he claimed, abandon any idea of a return to a Europe dominated by the great powers. This must be music to the ears of Tony Blair. When, he will be asking himself - and possibly his research staff as well - was the last time that Britain was called a great power?

The Prime Minister would hate to see his new status undermined. He therefore hates Britain's exclusion from the Euroclub. He wants the economic conditions to be right for entry - and they are not.

The debate about these conditions is a bit mad. It is conducted as if the Government has no influence on the economy. This at least makes a change. The Government's ability to influence the economy is normally overstated.

Sterling needs to fall before Britain joins. It would be wildly irresponsible to enter at the present rate. If the Government wants us in, it must either get sterling down or wait, like Mr Micawber, for something to turn up.

The way to lower sterling is to lift taxes and cut interest rates. Chancellor Gordon Brown does not want to do this. Sterling is too high because he should have done it before. But to raise taxes now would emphasise his bad timing.

It would also be risky. The world teeters on the brink of a recession, which Britain might yet avoid. If the Government will not act, it must wait. This might seem a good answer, as currencies fluctuate in the most unpredictable way. It has, however, two problems. The first is the Prime Minister's impatience. The second is that British industry's pain will get worse.

The UK already has a two-tier economy. As the service sector prospers, manufacturing declines. Export orders are at their worst for three years. Sterling is too high because the Bank of England has had to restrain UK demand. This will get worse if public spending rises without higher taxes.

Sterling's overvaluation would become semi-permanent if we joined the single currency at the present rate of exchange. Manufacturing is already in the doldrums. Perhaps New Labour thinks killing it off would end all embarrassing references to a two-tier economy.

The epitaph of manufacturing may soon be: 'If you have tears, prepare to shed them now.'

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