The British stance on the euro is said to be based on economic theory butis really a political fudge, writes Cliff Taylor, Economics Editor
Just as Harry Potter's train for Hogwarts famously left from Platform 9¾ at King's Cross, the latest British position on the euro is straight from 10½ Downing Street. Tony Blair and his next-door neighbour, Gordon Brown, have cobbled together what might politely be called a compromise, otherwise known as a fudge.
From the point of view of Ireland's economic interest, this does not remove a key uncertainty which faced us when we signed up for the euro. Will Britain join?
The conditions are not yet right for the British economy to join, Mr Brown told the Commons. However he added that it is moving in the right direction - and he will announce with next year's budget whether enough progress has been made to trigger a re-examination of the "five tests" for membership.
The "tests" were failed this time and Mr Brown's "not yet" decision was based on a voluminous economic assessment. Some 1,700 pages of analysis published by the Treasury meant that what was at heart a political compromise was presented as resting on pure economic theory, much of which related to work on so-called "optimal currency areas".
Central to this theory is that single currency areas should be reasonably integrated (or converged, in the jargon) and that the constituent parts are sufficiently flexible to adjust. A key element of the decision not to hold a vote now were perceived risks from membership to British inflation and to the British housing market, which - like Ireland's - has a high percentage of home ownership and a tradition of variable rate mortgages. This, the Treasury says, is an area where Britain was noticeably different to the rest of Europe and would make Britain more susceptible to instability from membership and the consequent loss of control over interest rates. The studies also found that the British economic cycle is still more closely aligned with the US than with Europe. ( It also, unsurprisingly, showed little correlation of the Irish business cycle with our euro zone partners).
However the potential benefit in terms of extra trade with other euro zone members - and the higher growth that would result - are plus points in the analysis, as is the assessment that the financial services sector would benefit from joining.
For the Republic, the positive news from yesterday's announcement is that the British government may be making some attempt to board the "Euro express". The chancellor struck a positive tone in yesterday's Commons speech and a referendum later in this parliament is possible - even if it looks unlikely that the tests could be met next year.
British membership of the euro zone would make life easier for importers and exporters to what is still our largest market - and a dominant outlet for smaller, indigenous firms. It would also give a significant boost to cross-Border trade. Ever since the link was broken with sterling in 1979, the swings of the British currency on the foreign exchange markets have caused uncertainty and, from time to time instability, in the Republic's economy.
However sterling's entry level to the euro would be a key issue for Ireland and here yesterday's announcement will cause some concern. The British Treasury published a range of documents yesterday examining various issues around possible membership. One, by Professor Simon Wren-Lewis of the University of Exeter, estimates that the equilibrium exchange rate for sterling to join the euro would be around 73p sterling.
It is important to realise that this is not a rate which is now part of British government policy If sterling joined at this rate - which is not far from the current trading level of 71p sterling - it would probably be "manageable" for Irish exporters, according to Mr Austin Hughes, chief economist at IIB Bank. However the study also put forward another method, which showed a range of exchange rates for possible entry from around 75p to around 85p sterling. And its tone suggests that joining at a more competitive rate would be more advisable than joining at one which would hit British exporters.
This opens the prospect of Britain joining at a rate of 80p or above. As 80p would equate to parity with the now extinct Irish pound, this could create competitiveness problems for Irish industry. How this plays out in the currency markets over the next couple of years will be important for the Republic and much will depend in the interim on the trends in the US dollar.
Mr Hughes also points out that there is a risk of instability in the run up to possible British membership, as currency markets try to bet on the likely entry rate and British interest rates possibly adjust downwards, closer to euro zone levels.
Over the next year the foreign exchange markets will be examining every nuance of what Mr Brown and Mr Blair say on the subject (so what's new !) And the key question that investors and business will be asking is whether yesterday's announcement is the start of a genuine attempt to prepare the way for membership, or merely a face-saving compromise between neighbours, which leaves the direction unclear.