The governor of the Bank of England, Sir Eddie George, yesterday moved centre-stage in the debate over Britain joining the euro when he rejected the government's argument that membership of monetary union was an economic rather than political question.
In remarks that were immediately seized upon by the Conservatives as support for their line on the single currency, Sir Eddie said monetary union involved pooling of sovereignty in pursuit of both economic and political goals.
Speaking about monetary union, in a speech in Switzerland, Sir Eddie said: "It necessarily involves the deliberate pooling of national sovereignty over important aspects of public policy, in the interest not just of collective economic advantage, but of a perceived wider political harmony within Europe."
John Redwood, leader of the Tories' parliamentary campaigns unit, said: "The governor of the Bank of England is quite right that Emu is primarily a political project with huge implications for how we govern ourselves. His action has highlighted the complete failure of this government to lead a sensible national debate on whether we wish to join a United States of Europe."
The government has said that it sees no constitutional or political barriers to Britain joining the euro, but that the economy has to show real and lasting convergence with the rest of the single-currency zone before the issue can be put to voters in a referendum. It plans to assess early in the next parliament whether the five economic tests laid down by the chancellor, Gordon Brown, have been met.
Tory leader William Hague has ruled out British membership for the duration of the next parliament. He plans to make Europe a key issue at the next election.
Yesterday, opposition leaders were delighted, both by Sir Eddie's remarks about the political ramifications of the single currency and his warning that membership might make Britain less able to respond effectively to any economic crises.
The governor said that the UK would almost certainly have been pitched into an inflationary boom if it had joined the euro from the outset, because the outcome would have been a cut in interest rates to the level of those in euroland.
While accepting that membership of the single currency would have protected exporters from the effects of a rising pound, Sir Eddie said that the impact of higher inflation would have affected the entire economy rather than one part of it.
The "one-size-fits-all" interest rate applied across the euro-zone left governments without the macro-economic levers which are normally used to damp down inflation, he said.
"The fact is, there are no easy answers or ideal solutions to the one-size-fits-all problem at the eurozone level, without substantial - and sustainable - convergence between our economies," he said.
Sir Eddie added that there were "potentially powerful arguments in favour of UK membership" of the euro; particularly these advantages were the exchange rate certainty within Europe, the greater transparency of costs that it delivered, and the possibility of greater integration of financial markets.
But he also said: "The risks of divergent monetary policy needs within a monetary union are certainly real."
