UK government review of sterling euro-entry tests to spark euro rise toward 80p, probable referendum in Oct04
The UK government's announcement that the five economic tests for sterling to enter the euro had failed may have placed Britain on a path toward a referendum in Oct04. UK Chancellor of the Exchequer Gordon Brown set specific dates and a reform program to move economic structures toward the European continent. This amounts to an internal schedule to enter the euro and will weaken the pound to highly competitive levels vs the continent.
The domestic debate in Britain is now likely to become fierce and will impact the next election in 2005 or 2006. Due to the mention of an appropriate euro/GBP entry rate as high as 0.80p - vs the current 0.71 - the euro is likely to strengthen quite rapidly toward 0.75-0.80p in the next few months. This is a putative DM/Stg rate of 2.44-2.60, levels not seen since the mid-90s.
The European timetable is important: in Jun04, European Parliament elections will spark a major debate on the Constitutional Treaty due to evolve from the Convention and the upcoming Intergovernmental Conference. This will allow London to measure its success in building 'a modern pro-European consensus in Britain' and embolden it to review the entry tests again.
SummaryAsset Conclusions: UK National Changeover Plan for euro adoption implies euro/GBP should rise quickly toward 75-80p, adding to ECB rate pressures
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© Graham Bishop
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