The economic conditions for Britain to join the euro could be in place in two years' time, according to the latest British Treasury thinking.
The assessment endorses this week's view from the Paris-based Organisation for Economic Co-operation and Development that the British and continental European economies are converging.
The view in the Treasury is that a continuation of the trend would open the possibility of a referendum on British participation in the euro by autumn 2002.
Britain's finance minister Mr Gordon Brown, has strongly resisted any public comment on whether the British economy is likely to converge with the euro-zone, insisting the judgment will be made only after the next election.
But inside the Treasury, there is now a guardedly optimistic view of the pace of convergence. A big question mark, however, remains over the path of sterling.
Sterling has fallen from a brief high of the equivalent of 3.40 deutschmarks to DM3.09. Senior Treasury figures believe DM2.80DM3 might be a reasonable rate to enter the single currency, though this would be a politically sensitive judgment and would involve difficult negotiations with the 11 euro-zone countries. On interest rates, the gap with the euro-zone narrowed this week when the European Central Bank raised borrowing costs by half a point to 4.25 per cent, compared with 6 per cent in the UK.
Standard Life Bank's decision to launch a mortgage capped at 6.25 per cent for 25 years is seen as a significant indicator of future interest rate stability.
Fixed rate mortgages would remove a big element of volatility from the British economy hitherto judged to be a significant obstacle to euro entry. The average standard variable rate over the past 25 years was 10.8 per cent.
The Treasury believes entry in the past three years would have been disastrous, leaving the UK with a more serious inflationary problem than the Republic.
But by 2002 travellers to the continent will be bringing back euro notes and coins and "will see that the sky has not fallen in on the euro-zone economies," one insider said.
If the economies are judged to have converged, Mr Brown would have to decide whether the convergence was sustainable one of his five tests. The others are: whether there is sufficient flexibility in the economy, whether joining would create better conditions for long-term decision making, whether joining would be good for jobs, and the impact on financial services.
It would then be up to Tony Blair to make a political decision about whether a referendum was winnable.
The Treasury's upbeat assessment of convergence prospects comes as Mr Stephen Byers, trade and industry secretary, intensified his pro-euro rhetoric.
Senior ministers say Mr Byers is being encouraged by Downing Street to signal to business that the government remains committed to joining.
Yesterday, Mr Byers told a business conference in Yorkshire that government and business should `continue our active preparations to give the UK the genuine option to join the euro early in the next parliament".
