---- by VICTORIA MAIN ----
LONDON (AFX) - European Central Bank president Wim Duisenberg's apparent waiver of an obligatory two-year stint for the UK in the European Union's exchange rate mechanism will facilitate the entry of sterling to the euro, economists said.
They were sceptical, however, of Duisenberg's assertion to the European Parliament's economic and monetary affairs committee yesterday that the UK government would be able to determine the exchange rate at which sterling joined the euro. The government has promised a referendum on euro membership should it win a second term in the June 7 election.
Economists were at odds over the significance of Duisenberg's comments, which came as the euro debate is eclipsing other issues in the UK election campaign, but they agreed they would have the practical effect of smoothing the path for membership of the single currency. "On the face of it, it would seem that the European authorities are taking a slightly easier line on a few pre-entry requisites," Investec chief economist Philip Shaw said.
"I'm referring not just to the comment about the entry rate but the hint that sterling might not have to be in the exchange rate mechanism for two years, which is a sharp u-turn on the ECB's previous assessment of what the UK had to do to become eligible," he said.
"It may well be that the ECB and the EU are quite keen for Britain to join the single currency for various reasons. Those include -- to lend more credibility to the project. And I guess British membership of the single currency would speed up liberalisation and other reforms in the existing euro zone area," he said.
However, Societe Generale director of economic research Brian Hilliard disagreed, saying that while the ECB may desire UK membership so as to complete the euro zone, the bank would not see this as boosting its credibility or enhancing the club.
Hilliard saw Duisenberg's comments as only "mildly helpful" to the UK's euro entry.
"I think they're an acceptance of the political reality. It's one thing for him to say what the letter of the treaty of Maastricht law is; it's another for the euro zone countries to say what is in their best interests as a whole," he said.
"This will do very little for euro entry because there is no way the government would be prepared to go into the ERM again," he said. JP Morgan economist Danny Gabay agreed that the ECB appeared to want the UK in the euro zone so as to have a key EU player on the inside but that this was unlikely to reflect an admission of any shortcomings in its credibility.
Bank of America economist Jeremy Hawkins said that by waiving the ERM requirement for sterling as it had for the Italian lira and Finland's markka, the ECB would make euro entry easier but he did not regard Duisenberg's comments as especially significant. He doubted the UK government would be able to set the exchange rate for entry, saying this was something for negotiation with the rest of the euro zone.
Investec's Shaw agreed that "the thought of the UK government just demanding an entry rate and the other EU leaders conceding to it is in practice extremely unlikely.
"It could well be that Duisenberg is saying the UK government should be able to have a large say over where sterling should enter but I don't really think in practice that it would go any further than that," he said.
Shaw added, "I think there would be a range of acceptable entry rates from the point of view of the UK government. For example, there's no way that the government would take us in at current levels against the euro.
"There is likely to be a fair degree of agreement between the UK government and the EU on where the exchange rate would enter, but I don't think it will be a matter of the UK government saying we're going to enter at 0.70 stg, take it or leave it," he said. JP Morgan's Gabay saw Duisenberg's comments as "very helpful to the government in the practical sense, although I don't think it changes the political dimension in the sense that it won't sway the referendum vote".
Investec's Shaw agreed that "the main issue with the UK electorate is more fundamental than the issues Duisenberg raised, and I don't think that the technical arguments which arise from this sort of debate will filter much beyond the financial markets".
Bank of America's Hawkins was of the view that "all he's doing is making the prospect that much less unattractive" to the UK.