Britain could join the euro at an exchange rate less than 10 per cent below its current level, according to independent City and academic economists.

A survey of 20 economists by the Financial Times found that the average sustainable entry rate they proposed was £0.68 to the euro. That is roughly equivalent to DM2.90 to the pound: just 8.5 per cent below Tuesday night's closing rate.

The expectation that the pound would have to be devalued sharply if Britain were to join the euro has been seen as a significant obstacle to entry.

Just a few years ago, many economists and businesses still expected the pound to drop back to about DM2.50. Economic techniques for calculating equilibrium exchange rates or assessing purchasing power parity across countries suggest that the pound is significantly overvalued.

However, faith in those techniques has been shaken by the British economy's strong performance.

"Over the past five years the exchange rate has been more stable than at any time since it was floated in the early 1970s," said Robert Barrie of Credit Suisse First Boston.

"I don't see why it shouldn't be sustainable."

Since 1992, when DM2.95 proved impossible to defend as the central rate in the exchange rate mechanism, the economy seems to have grown stronger relative to many other European countries.

"We have seen a massive change," said John Butler of HSBC.

"Britain has seen much sharper falls in unemployment than Germany, France or Italy and kept the lid on earnings. The fact that we have a more flexible labour market means we can live with a higher exchange rate."

If the government does get to the point of trying to agree an entry rate with the governments of the eurozone, Britain's outperformance will figure prominently in what are expected to be fierce negotiations.

Germany is still suffering from having locked the D-Mark into the euro at an uncompetitive exchange rate and would be hurt more if Britain were allowed to join at a favourable rate.

France has similar concerns, although it is said the government would be happy for the pound to join at a rate just below £0.68 to the euro, which would make France's gross domestic product slightly bigger than Britain's.

British industry, particularly manufacturing, will be lobbying for a lower rate.

Corus, which is shedding 11,000 of its 33,000-strong British workforce, says it could not cope if the exchange rate were fixed far above £0.75 and would prefer £0.78.

"We are experiencing real pain; we have had to do a lot just to stand still," an official said.

But other businesses are prepared to accept higher rates. The Confederation of British Industry says that its members could cope with rates up to about £0.68 to the euro, or DM2.90 to the pound.

Recent polls by the Engineering Employers' Federation show that the majority of exporters would be comfortable with a rate somewhere between £0.65 and £0.72, compared with warnings 12 months ago that anything over £0.81 might be too high.

Martin Temple, EEF director-general, said that engineering companies have had to get used to a higher exchange rate and were sourcing more components from abroad.

The Trades Union Congress is advocating entry at between DM2.50 and DM2.90, equivalent to about £0.67 to £0.77 to the euro. John Edmonds, general secretary of the GMB union, believes the euro would have to be 10-15 per cent higher against sterling.

"We must join as soon as possible, with the right exchange rate to help mitigate job losses," he said.

Michael Saunders of Citigroup warned that the imbalance between strong domestic demand and weak exports showed that the pound was still a problem.

"The fact that we have had a consumer boom is no reason to think that the current exchange rate is appropriate," he said. "Our export performance has been dire."

The exchange rate against the euro is not the only rate that matters. When Britain was in the ERM, exporters suffered from a pound at about $2, compared with about $1.45 today. If the euro ever staged a recovery against the dollar, that problem might re-emerge.

But for now, veterans of the ERM debacle can cheer themselves with the thought that trying to fix the pound at DM2.95 has turned out to be not such a stupid idea after all.

more from FT.com
FT.com's euro website

EMAIL THIS PRINT THIS MOST POPULAR