--- by VICTORIA MAIN ---
LONDON (AFX) - The government is expected to reopen the debate on euro entry before long, following the appointment of euro-sceptic Iain Duncan Smith as Conservative Party leader and signals that it is feeling bolder on the controversial issue, according to economists. Economists said that while the victory of Duncan Smith will not necessarily in itself renew the euro entry debate, the view of some analysts that he is less electable than his defeated rival, europhile Kenneth Clark, could embolden the government to call a referendum on the issue during the current parliamentary term. The theory is that a referendum defeat would be less of a risk for the government with Duncan Smith as Conservative Party leader.
"The question longer term is how effective Iain Duncan Smith will be in making the Conservative Party electable," Investec economist David Page said.
"Clearly, if he manages that, and it seems from the last election results, quite an uphill battle, then it makes the prospects of European entry that much less, not only because they themselves would be in power and wouldn't take us in, but because it makes it much more awkward for the Labour Party to debate the issue in a meaningful fashion," he said.
"If however the Conservative Party isn't taken in that direction and doesn't become an electable force, then it makes it that much easier and it may well be that the Labour Party can hold a referendum in this Parliament without fear of there being too damaging an electoral response," he said.
Page noted the view that Duncan Smith is less electable than Clarke would have been, adding that he seems similar to former leader William Hague whose campaign did not work.
Deutsche Bank economist Ciaran Barr said it has been argued that if Duncan Smith takes the Conservative Party to the right, as many grassroots are urging, Prime Minister Tony Blair will be able to delineate the parties' differences on euro entry.
"Some political strategists argue that this could help the prime minister, using the intervention of such Tory politicians as Thatcher and Redwood during the election as an example -- their fervently anti-EMU stance may have turned off some voters," he said.
Page said that if the government held a referendum this term and lost, the stakes would be lower if Duncan Smith was deemed unelectable. Economists noted the euro-friendly speech that Prime Minister Tony Blair did not, due to Tuesday's attacks on the US, in the end deliver to the Trades Union Congress. Speech notes showed Blair intended to ask, "What other nation anywhere, faced with such a stretegic alliance right on its doorstep, at the crux of international politics, would isolate itself from that alliance?"
Investec's Page said he had for some time thought the government would use the Labour Party conference at the end of the month to revive the issue of euro entry.
"If that were to be the case and they were going to do something like launch the five economic tests, then they'd want to start warming up the public beforehand," he said.
"It may well be that that speech was in the timetable to start bringing the debate to the fore, giving the government's positive assessment of it, building up the public's expectation," he said. "So I think we will see the economic debate hotting up, with the economic tests likely to take at least several months to conduct and to involve the Bank of England," he said.
Deutsche Bank's Barr said Blair's planned speech reinforced the view that the prime minister favours EMU membership. Barr predicted the government will revive the debate before long, "although it is thoroughly possible that this will wait until after euro notes and coins are introduced in January".
Halifax economist Steven Pearson said that while Blair may have tailored the address for the TUC, which is pro-euro, it reflects both his personal stance and personal pragmatism.
"So, EMU entry is, in principle, in the government's view, a good idea, but you have to get the entry circumstances right, otherwise you risk spoiling that good idea, he's as aware of that as anyone," Pearson said.
Economists saw Bank of England governor Eddie George's comment in Frankfurt yesterday that the government's political instinct is "very strongly in favour" of euro entry as more a statement of the obvious than a sign that it is plucking up the courage to tackle euro entry. Investec's Page said George was broadly stating that government policy is to take the UK into EMU if the economic conditions are right.
"It's fairly clear that at least Blair and several other members of the cabinet are very keen to take us in, yet they'll hold a referendum," he said.
"Taken with Blair's speech, Eddie George is almost stating the obvious -- that the government is keen to do it, that that is its political instinct, and we'll see how it develops," he said. Pearson, from Halifax, agreed that George was merely reflecting political reality.
"Obviously, Eddie George did make the point that the government is strongly in favour. But he also made the point that we'd need a significant depreciation in sterling to make entry possible or feasible," he said.
"He's also made the point several times in the past that if we did have a sharp fall in sterling that would necessitate higher interest rates. That would imply a divergence away from interest rates in the euro zone, so I think Eddie George is still fairly sceptical," he said.