---- by VICTORIA MAIN ----
LONDON (AFX) - The prospects of the UK's early participation in European economic and monetary union have faded further with last week's resignation from the cabinet of ardent europhile Peter Mandelson, according to analysts.
Without wanting to overstate Mandelson's sway over Tony Blair, they said his demise could lessen the prime minister's political will to hold the referendum on the euro promised for the next parliamentary term.
They said chancellor Gordon Brown -- who appears noncommittal on joining the euro zone -- is expected to be in the ascendancy after the latest resignation of the cabinet's leading EMU enthusiast, after Mandelson misled Downing Street over the granting of a UK passport to Indian millionaire Srichand Hinduja.
The analysts said that without Mandelson present to counter Brown's more equivocal stance, Blair could be less willing to take the political risk of forging ahead with a referendum if Labour wins the general election expected in May.
Halifax chief economist Adam Chester said sees any prospect of the UK's early entry to the euro disappearing with Mandelson's departure from the cabinet for the second time.
"It's another move towards delaying EMU entry, if we go in at all. Received wisdom is obviously that Peter Mandelson was on the pro side of the euro camp. He was one of the strongest advocates for EMU entry, himself and Robin Cook. The fact that Peter Mandelson has now left the cabinet swings the balance back in favour of a more neutral or anti stance," Chester said.
"Gordon Brown and Peter Mandelson were seen as being at the two extremes on the euro debate, Peter Mandelson for and Gordon Brown against. The consensus now is that Gordon Brown will have the upper hand in the euro debate with Peter Mandelson's departure."
Bank of America economist Lorenzo Codogno echoed this view, saying: "I think it's weakened a little the position of the pro-Europe camp in the government."
However, Dresdner Kleinwort Wasserstein's Paul Meggyesi said the impact of Mandelson's demise on the government's approach to EMU has to be seen in a wider context.
"Yes, he was one of the most ardent pro-European players in Tony Blair's inner circle but it's hardly conceivable that he would have been driving the government's policy single-handedly, particularly against the opposition from cabinet heavyweights such as Mr Brown," Meggyesi said.
"So on the margin, it doesn't do the pro-Europeans any favours to have lost one of their main advocates within the cabinet. But ultimately EMU entry is a matter for the British public and whatever Mr Mandelson had to say about the matter, I think it was going to have very little impact on the eventual outcome of the referendum."
The analysts noted UK press speculation -- denied by Treasury sources at the weekend -- that Brown is seeking to benefit for Mandelson's exit by pressing for stiffer political and economic tests to be met before Labour will agree to call a referendum. The chancellor is reported to want a sixth test: that Labour should be confident of winning a comfortable margin in a referendum. The existing five tests cover the flexibility of the economy, the impact of joining and whether the UK has achieved sustainable convergence with the euro zone.
The analysts said the tendency now will be to tidy the potentially damaging issue out of the way until after the general election. Halifax's Chester said: "Obviously a referendum is contingent on five economic tests being met -- or possibly six economic tests if reports are to be believed -- which is not something the government is going to prioritise for the time being. Going into the general election, they are trying to say as little about EMU as they possibly can."
Standard & Poor's MMS currency analyst Russell Bloom agreed. "It does seem that politically, they're trying to take away the whole question of EMU ahead of the general election because Labour is concerned that the Conservatives, who are not pro-euro, are going to use it as the basis of a campaign," he said.
Dresdner Kleinwort Wasserstein's Meggyesi said Blair is such a pragmatist that in the end he will only call a referendum if he considers it winnable.
"Ultimately Mr Blair will push for it if he believes he is capable of winning the vote. If he is incapable of winning that vote, than he's not going to make it an issue over which his government will stand or fall."
Bank of America's Codogno said the issue is so hot politically that he would not be surprised to see a referendum postponed beyond next term.
Chester, from Halifax, agreed the timing of a vote will depend on public opinion as much as on whether Brown's five tests are met. "The general consensus a year ago was that there could be later this year but those expectations have now been pushed back towards mid or late next year. But even that's contingent on how the public mood is and how the economy stands up to the five tests."
Dresdner Kleinwort Wasserstein's Meggyesi will not be surprised if the government keeps its referendum plans permanently on the backburner, given the unpopularity of the euro in the UK. "Personally, given that it's unwinnable, I still have my doubts as to whether they're going to call one."
However Bloom, from S&P MMS, suggested that in the event of a U.S. recession followed by a UK slowdown, Blair could seize the opportunity to extoll the merits of joining the euro zone.
"There's obviously going to continue to be a bit of scepticism at first with the euro, but people will eventually decide that the UK will have to join. It's inevitable," he said. vm/jsa