UK to be cautious on euro

Brown: five tests not started

LONDON, England (CNN) -- Chancellor of the Exchequer Gordon Brown has moved to cool speculation that the British Government is preparing for swift adoption of the euro.

In his annual Mansion House address to City financiers and business leaders he pledged a "considered and cautious" approach to join the European monetary system, describing the government's stance as "pro euro realism."

Many observers had predicted that PM Tony Blair's Government would launch a campaign for euro entry immediately after its second election victory on June 7. The uncertainty had led to volatility in the value of the pound.

Brown said that assessment of the five economic tests he set out in 1997 had not yet started. Technical work would have to be done to enable the assessment to be made within two years, as Labour had promised before the election.

Britain's top finance minister did however acknowledge the pressure from some sectors of UK business for euro entry, saying: "Around the future of the euro there is, of course, an ongoing national debate."

He said that government and business should join in "putting the case unequivocally for Britain in Europe."

But he also called for EU economic reform, calling for liberalisation in the fields of of telecoms, financial services and energy.

Brown also used his speech to called for a stronger trading and commercial relationship between Europe and the U.S., which would extend some of the features of the European single market across the Atlantic.

He called for "a new and enhanced form of engagement" with the U.S., tearing down barriers to trade and developing common competition rules and common strategies on energy, debt and poverty.

Explaining the Blair government's stance of "pro-euro realism" Brown said: "Pro-euro because, as we said in 1997, we believe that -- in principle -- membership of the euro can bring benefits to Britain.

"Realist because to short-cut or fudge the assessment, and to join in the wrong way or on the wrong basis without rigorously ensuring the tests are met, would not be in the national economic interest."

Brown stressed the importance of the eurozone economies to Britain, with half of the nation's trade -- worth some £132 billion ($185 billion) and supporting 3 million jobs -- being with the rest of the EU.

Brown was warned by the Governor of the Bank of England, Sir Edward George, that artificially lowering the value of the pound to enable early entry could have dangerous economic consequences.

George said that the current strength of the pound against the euro was a "potentially serious obstacle" to entry and welcomed Brown's adoption of a cautious approach to the timetable.

In a speech following Brown's comments, George said: "Most people agree that sterling's exchange rate on entry to the euro would need to be substantially lower than our present rate, which few would regard as sustainable in the medium and longer term."

He warned: "If achieving what was considered to be an appropriate entry rate against the euro -- whatever that was precisely -- involved a substantial depreciation of sterling's overall, effective exchange rate... that would be bound to put strong upward pressure on our domestic rate of inflation.

"That would not only destabilise our domestic economy, it would also cause the intended euro-entry rate to appreciate in real terms, with adverse implications for our competitiveness within the eurozone."

Liberal Democrat Treasury spokesman Matthew Taylor said: "Gordon Brown continues to send out confused messages about the euro. He doesn't seem to be able to make up his mind whether he is in favour or not.

"If Labour are serious about joining the euro, they need to make clear their exchange rate target and the benefits they believe the euro will bring."