LONDON, June 9 - The Treasury highlighted on Monday key obstacles to Britain joining Europe's single currency now, in background studies of the government's assessment of the economic case for euro entry. The 18 studies, running to over 1,700 pages, said Britain's housing market made it more sensitive to interest rate changes than most of the 12 countries in the euro zone and that progress on labour market flexibility in the European Union lagged the UK and had been slow to pick up.
It suggested the pound must fall further against the euro to ease a currency switch but said there were clear potential benefits in terms of greater trade with the EU, should Britain swap currencies. That in turn could sharply increase national income, the Treasury said. Chancellor of the Exchequer Gordon Brown is expected to tell parliament later on Monday that the economics are not yet right to join the euro nearly six years after he first set out his five economic conditions for membership.
The Treasury studies said: ON LABOUR MARKET FLEXIBILITY
-- "Progress across the rest of Europe has been mixed with concrete signs of improvement being evident in the smaller EU member states. Progress in the larger EU economies has been slower and starts from a weak position in terms of unemployment and employment levels. "In addition, wage flexibility has not been fully tested in recent years and could be more severely tested if the UK decided to join EMU."
ON THE HOUSING MARKET
-- "Differences in housing and mortgage markets between the UK and euro area countries suggest the potential for greater sensitivity of household spending to interest rates in the UK. "There are other structural factors, in addition to housing, which may make the UK more interest rate sensitive than euro area economies. "In EMU, interest rates are set in relation to conditions in the euro area as a whole, rather than in relation to conditions in any individual country. The resulting gap between what is appropriate for the euro area and what could be appropriate nationally could matter more in the UK than elsewhere."
ON THE POUND/EURO RATE
-- "There are four main methods that have been used to calculate the equilibrium exchange rate (EER). Taking a recent, well established example of each type of approach suggests a range for the euro sterling EER of 1.175-1.33 euros/pound. "However, recent movements in both the exchange rate and current accounts throw some doubt on the estimates at the lower end of this range. "On the assumption that the sustainable current account deficit is zero in the UK, 3.5 percent of GDP in the U.S. and the euro area has a one percent surplus, the model gives a medium-term EER for the euro sterling rate of 1.37."
ON TRADE
-- "A reasonable range for the potential increase in UK trade with the euro area resulting from UK membership of EMU is between five and 50 percent, without any non-trade diversion from the non-euro area. "With an increase in trade with the euro area at the top of the five to 50 percent range, this suggests that EMU membership could potentially increase the long-term level of output per head in the UK by between 4.5 and 9.25 percent. "This implies an increase in the rate of growth of output per head of between 0.15 and 0.3 percentage points a year. Equally, the lower end estimates for the increase in trade with the euro area imply little effect on the rate of growth of GDP per head over a 30-year period."
ON ECONOMIC CONVERGENCE
-- "It remains true that the UK cycle is strongly correlated with that in the U.S., somewhat more so than with those in Europe, and also that the UK's GDP fluctuations seem to have been sharper than those of the major continental European economies."//