When Britain finally decides to join, will they have us?

Leading economist Martin Weale has just completed a comprehensive study of Eurozone member states. Here he answers key questions on the feasibility of the UK joining them

Isn't the British economy doing much better than the Eurozone?
There is a great deal of confusion on this 'outperformance'. We know that productivity is about 10 per cent lower here than in the Eurozone. In plain English this means that we achieve a similar living standard but have to work longer for it. But if we had a working week as short as that of the French and the Germans, we would not feel better off. It's a mistake to talk solely of GDP growth outperformance; the question of membership has to be seen in a wider context.

How closely is our economy aligned with the euro economy?
The technical study that we released last night suggests inflation shocks are more closely correlated with France and Italy than ever before. It's not so much Britain but Germany that would have problems with monetary union on this convergence basis. So, a monetary policy that is right for the Eurozone as a whole would be right for Britain. If the European Central Bank was overly sensitive to the German economy it would make matters less than ideal for us; but its mandate shows it is far more likely to choose a policy that suits Britain, France and Italy, than Germany.

Isn't the pound too strong for us to join?
At one level you cannot expect to identify a specific 'correct' rate. A range is more likely. But those who are following the debate will appreciate that we are no longer seeing, on the news, people in business complaining about the strong pound. Entry at the current rate would be feasible. Inflation would certainly pick up a little with entry, but averaged over a five-year period that would be perfectly manageable and not in itself a reason to rule out joining.

Does this week's accession of 10 new members make a difference?
In the short term, no. There will be a lot more 'outs', so in political terms we should feel more at home. But if new members join fairly rapidly we would have an EU of 25 countries, 24 of which would be in the euro, and one of which would be outside it. The question of whether Britain could sustain its membership of the European Union would then arise. So there is a clear issue about the dynamics in 10 years' time and about the worry that Britain might drift away from the rest of the EU. This is why I maintain that the economic tests set by the Chancellor, Gordon Brown, are not the whole picture but just an input into the national interest.

Could we 'Anglicise' the European Central Bank, making it more effective and sensitive to our housing market, and so bolster support in Britain?
The general point is that central banks can learn from each other. I would expect that Britain could play a part in helping the ECB to evolve. But making these conditions for entry probably isn't the most sensible idea.

When you look at the facts it is not evident that we are any more interest-rate sensitive than other European countries. There are a number of studies showing that Germany is more interest-rate sensitive. The fact that British rates have been more volatile does not mean we are more sensitive at all.

Are the strict rules on euro deficits compatible with Gordon Brown's fiscal rules?
Europe's Stability and Growth Pact may not be ideal, but it's a mistake to say that Brown has got it all right and the Europeans all wrong. Whatever fiscal rule you keep, there is bound to be some point where you can rationalise being better off breaking it. In that sense the European system is better, because there is a graduated response that allows deficits to go above 3 per cent for two years before a penalty kicks in.

But no one knows what would happen if the Treasury fiscal rules were broken; if you enquire, officials just say they will never be broken. The European Commission also stresses that budget deficits need changing on a cyclical basis.

What about the five tests?
I think that they have been met but I do not expect the Treasury itself to pass them. If it decides to fail the economics it probably cannot be looked at again for another three years. It would be extraordinary to say 'no' to convergence now but 'yes' in one year's time. Preserving the credibility of the tests would mean waiting until the next Parliament.

Until the past two months I had been convinced that everyone wanted Britain to join and that they would remove all the obstacles for us. But France aspires to a leadership role [in the wake of the war on Iraq] and, as it was with the Common Market, when we finally are ready to join it may just be that our move gets vetoed. Of course we would not expect to see a formal veto, but the requirement could be, for instance, an insistence on two-year membership of the exchange rate mechanism before we are let in.

· Martin Weale is head of the National Institute for Economic and Social Research.