Tory Euro-sceptics could gain ammunition from stance

The row between Brussels and Dublin over the December Budget could provide Tory Eurosceptics in Britain with ammunition for use in their campaign against the Prime Minister, Mr Blair, surrendering sterling and taking Britain into the euro-zone.

In terms of political reaction in Britain to Ireland's difficulties with Brussels, the Treasury has adopted a cautious line, insisting it does not want to pre-empt EU discussions today.

The Tories have yet to make any political capital on Dublin's argument with Brussels, but this could soon change and it could have important implications in a referendum on the euro in Britain.

Some commentators argue that should Ireland get a "slap on the wrist" from Brussels, the Tories could use the rebuke as ammunition in a British referendum, boosting their campaign to keep the pound. Mr Peter Spencer, economic adviser to the Item Club, the economic forecasters at Ernst & Young, points out that the Murdoch press in Britain has consistently highlighted Ireland's high inflation "and this conflict provides a huge amount of ammunition for Euro-sceptics. "If there is a formal rebuke, I would be surprised if William Hague or Michael Portillo did not say this is an example of the great big bullies in the Commission leaning on little old Ireland," says Mr Spencer.

In terms of the upcoming UK election and the referendum on the euro there, the row set a very bad precedent because it looked as if countries such as Britain and Ireland could not live with lower interest rates than those on the Continent without having high inflation. "It convinces the British public that low rates of interest are good for you," he adds.

Mr Spencer argues the EU's difficulties with Ireland's are not entirely justified. "Ireland has pushed ahead with an expansionary policy and it is certainly irresponsible for Ireland to run an inflationary fiscal policy, but it is perfectly entitled to do that," he says.

"The Maastricht process was extremely vigorous . . . but Ireland is well within the Maastricht limits, its deficit runs at 30 per cent GDP and debts are below 60 per cent GDP and it is perfectly entitled to go ahead with such policies." The campaign group, Business for Sterling, whose anti-euro slogan is "Europe Yes. Euro No", believes that the Conservatives could make political capital of Ireland's argument with Brussels, but only by properly focusing on the subject.

Campaign director Mr Dominic Cummings says if the Tories organise an effective anti-euro argument during a referendum campaign then the party could link the Dublin-Brussels row with the issue of tax harmonisation.

"The Tories will say this row is not just about giving away control over interest rates, but fiscal control," says Mr Cummings.

Mr Kitty Ussher, chief economist at Britain in Europe, the pro-EMU campaign group, says high inflation in Ireland is not a cause for concern and is not a sign that the euro is failing.

"Ireland has an open economy and I think bust is unlikely because Ireland is a price taker," she says. Media comment on today's showdown in Brussels has been limited. Commentators interpreting Mr Blair's statement last week on the euro - in which he said the crucial assessment of whether Britain should join the single currency would be made within two years of a Labour party election victory - have only briefly turned their attention to the possibility of the EU imposing moral sanctions over Ireland's latest Budget.

The Guardian warned last week that the European Commission's decision to pick a fight with one of the euro-zone's most successful economies could backfire. As one of the few EU member states planning to hold a referendum to ratify the Nice Treaty, Irish people were expected to offer an enthusiastic endorsement of euro membership. "But if they feel they are being bullied and misunderstood they may turn hostile," the newspaper's economics correspondent, Mark Atkinson, wrote. "And that could spell trouble for the currency the Commission is trying to protect."

Writing in the London Times, the commentator, Anatole Kaletsky, suggested that the Commission's action against Ireland was at least a cautionary tale for British and Swedish Europhiles.

Even the threat of sanction clearly demonstrated "that the Commission and the European Central Bank really are determined to exercise control over national fiscal policies".

If Ireland's problems with the Commission encourage the view among Euro-sceptics in Britain that joining the euro can increase difficulties with Europe, then the Tories could have found a new weapon in their campaign to keep sterling.