Contrary to general opinion, the issue of British membership of European Monetary Union has become less important

For well over a decade there has been a ceaseless political battle over whether Britain ought to join the Euro. The introduction of Euro notes and coins at the beginning of this year has raised the decibel level of the controversy, but has not in the least helped to resolve it. The Euro has in fact existed for three years, during which currencies such as the franc or the mark or the lira have simply been local names for a single European money.

The main economic value to the UK of European Monetary Union at one time was that it looked the most feasible route to an independent central bank. But once Gordon Brown surprised financial opinion immediately after the 1997 general election by establishing operational independence for the Bank of England - and still more since the Monetary Policy Committee established its credibility - this particular advantage has all but disappeared.

Indeed the eurosceptics argue that the performance of the European Central Bank has been less impressive than the UKs own MPC. But the difficulty of formulating a single policy for 12 different countries has been correspondingly greater. It would have been harder to establish the independence and integrity of the ECB if it had followed the counsel of those critics who wanted the votes and minutes of its 17 member Governing Council (representing 12 different countries} to be published. The weak performance of the Euro economy is due mainly to the rigidities of European labour markets, which would not have been much affected by a more expansionary ECB monetary policy.

The economic question for the UK now comes down to weighing the advantages of exchange rate stability for half of British trade against the disadvantages of trying to establish a one size fits all monetary policy for the whole Euro area.One of the amusing aspects in the recent debate has been the fuss generated by the admission of the Treasury’s most senior permanent economic official, Gus ODonnell, that there was no hard and fast scientific basis for saying whether or not EMU membership would benefit the UK. Ironically he is the very same adviser that Tony Blair unsuccessfully sought to recruit to Number Ten. Politicians expect a far greater certainty from economic investigations than economists themselves, the more sensible of whom realise that their subject is far from a hard science. The use of mathematics and statistics no more makes it into one than kit does with meteorology, which also makes use of advances in computational techniques.

The one aspect on which economists ought to be able to pronounce on professionally is a negative one. There are certain exchange rates at which it would be disastrous for the UK to enter. But even here it would be vain to look for too much precision. It does not take profound economic analysis to see that the present sterling exchange rate of 0.61 to the Euro is probably too high. But beyond that there is a wide range of economic opinion on what would be tolerable. A Financial Times survey came up with a range of 0.65 to 0.74, which the financial markets do not expect to see touched until after 2007 . A responsible referendum question would ask the electorate to approve the intention to negotiate entry but still leave open the possibility of staying out if agreement could not be reached on an entry rate.

The British Government view is that there would be great political gains from joining EMU, but no one has spelt these out convincingly. Unfortunately the prime minister Tony Blair has surrounded himself with Foreign Office and Cabinet office types who are obsessed with establishing British influence - by which they mean their own influence - at some top table of their imagination. In any case I agree with Michael Saunders of Schroder Salomon Smith Barney that the odds are 2 to 1 against British membership by 2003-05.

A couple of years ago I suggested that Tony Blair should give the whole subject a rest for five years, as endless discussion had not achieved anything and merely distracted attention from more important issues. Even further back I suggested that the most likely way for the UK to adopt the Euro would be the parallel currency one, that is through its creeping use in ordinary business - or as it is sometimes called membership by osmosis.

This still seems to me the most attractive route. It also has a rather interesting political and intellectual history. Towards the end of the 1980s, Margaret Thatcher suddenly announced that the UK would develop its own approach to monetary union as an alternative to the plans for launching the Euro. This was an off the cuff remark which so astonished one permanent secretary that he nearly drove his vehicle into a tree when he heard it on his car radio .

The then Chancellor, Nigel Lawson came up with the idea of competition among national currencies. This had originally been put forward by an economist, the late Friedrich Hayek , who had in mind competition among private enterprise currencies. But British officials found it quite difficult to translate even competition between official currencies into a specific proposal. Part of the problem was that Hayek had long been considered an outrider by establishment economists and his works were only considered if politicians pushed them down their throats.

There was also a specific problem. There is nothing in British law to prevent contracts being made in any medium to which the parties agree - whether sterling, dollars, euros or cowrie shells. Legal tender is a formality which only applies if the currency of the contract is not clearly stipulated. The question then arose of why there was not already more currency competition and what if anything governments could do to stimulate it.

The next stage came when the British government under John Major took up a second version of the currency competition idea. The vehicle for that competition in that version was supposed to be the hard ECU, which was based on a basket of EU currencies which had previously served mainly as a unit of account for some official transactions. There were at most three people in the UK who understood the full subtleties of the idea. But some officials were attracted by it because it involved new institutions and procedural detail which they thought would make it appeal in EU circles. If so, they were many years too late. For most EU members had already determined to merge their own currencies into the Euro and the hard ECU proposals were hardly given the time of day. On the other hand the earlier idea of competition between existing currencies still has a great deal going for it.

The acid test of Euro penetration will be whether it came to be used for domestic wage payments. This will not be easy to achieve. The Canadian dollar shows little sign of being relegated despite a 3,000-mile frontier with the US and the fact that most Canadians live within 50 miles of that border.

Nevertheless there is a strong case for wage contracts in euros in companies highly dependent on exports to Europe. If sterling rose then wages would be automatically be trimmed without the hard choice between negotiated wage reductions and job losses which now exists. If sterling fell workers in such companies would automatically share in the corporate gain without having to engage in difficult pay negotiations.

It would be quite legitimate for a Eurosceptic government to leave events to take their course, and for one, such as Tony Blairs, which is more favourably disposed to try to encourage the use of the Euro. The most important single step would probably be to allow the Euro to be used for settling tax bills. This would require a formula to establish the date at which the currency conversion would be made in a each financial year. It might also make a symbolic difference if the Euro were declared legal tender - or best of all if the whole concept of legal tender, which is an archaic survival, were abolished.