Sterling may not have to enter ERM to join euro

Pedro Solbes, European monetary affairs commissioner, yesterday said there could be "margin for manoeuvre", suggesting that the rules might be bent to accommodate Britain.

The government said it was the first time it had heard a commissioner say in public that the strict rules for euro entry set in the Maastricht treaty might not apply to Britain.

Gordon Brown is adamant that sterling will not go back into the ERM, following Britain's bruising experience of membership of the currency grid between 1990 and 1992.

Mr Solbes said there had been some flexibility in the past when assessing whether Italy and Finland met the exchange rate criteria.

Treasury officials say the treatment of Finland and Italy, which were both ERM members but not for two years, is a precedent for a flexible interpretation of the Maastricht Treaty.

Asked if European Union countries such as Sweden and Britain had to be members of the ERM for two years before they could join the euro, Mr Solbes said the treaty stated countries had to be ERM members for two years on the basis of the normal band of flotation.

"As a consequence of the different analysis we have done in the context of the euro, this interpretation has been that we take into consideration the period of being members of the ERM but also the period before, and this has given us a certain margin for manoeuvre in the cases of Italy and Finland," he said.

Ministers yesterday repeated their determination not to rejoin the currency grid, nor to pursue policies to devalue the pound.

But they dodged the question of what would be a suitable exchange rate for the pound, widely considered to be 5-10 per cent overvalued, to join the euro.

In a parliamentary debate Ruth Kelly, economic secretary to the Treasury, hinted that the current rate was unacceptable but refused to say what would be appropriate.

"I don't think ... the government should try artificially to massage down the level of the exchange rate. The exchange rate at which sterling would enter the single currency zone would need to be consistent with economic fundamentals ... and compatible with sustainable convergence between the UK and other euro area economies," she said.

"The government has no intention of rejoining any exchange rate mechanism."

Ms Kelly reiterated the government line that a proper assessment of the five economic tests to determine whether the pound will join the euro had not yet started and only preliminary technical work was in train.

However, a BBC poll found that Labour backbenchers were growing impatient with the government dragging its heels on the issue. Of the 100 MPs surveyed by BBC Radio 4's Today programme, more than half wanted a referendum by autumn 2003.

Today contacted 265 Labour MPs. Of the 100 who responded, 34 said they wanted a referendum by this autumn; 13 by spring 2003; eight by autumn 2003; and 22 by the next election. Only 16 did not want a referendum in the life of this parliament, while seven did not know.

Clive Soley, MP and former chairman of the parliamentary Labour party, said: "I think most people would like to get on with the referendum and do it sooner rather than later.

"In many respects most people feel, and I think this is becoming the view slowly in the country, that it would be better to go in than stay out."