Outlook: Britain drifts further offshore as eurozone cuts interest rates

The great day is almost upon us, and like so many others, I can hardly wait. The most exhaustive economic analysis ever undertaken by a British government is about to be published, all 2,000 pages of it, complete with 18 "background" papers, yet, regrettably, I cannot say that the suspense is almost killing me.

The great day is almost upon us, and like so many others, I can hardly wait. The most exhaustive economic analysis ever undertaken by a British government is about to be published, all 2,000 pages of it, complete with 18 "background" papers, yet, regrettably, I cannot say that the suspense is almost killing me.

This is because we already know the answer to the Treasury's assessment of the five economic tests. The outcome is not only wholly predictable; it has also been widely leaked. Two of the tests fail utterly, two are marginally against and only one, the curiously particular question of whether the City might benefit from being part of the single currency, is unambiguously passed.

The upshot is that voters and markets alike will be left no nearer knowing whether Britain will or will not be joining the euro than they were before work on the tests began. The Chancellor claims to be pro-European and genuinely open minded about the euro, and I believe him, yet the tests always were little more than a way of avoiding a difficult political decision.

I won't say that the detail of the tests will be for anoraks only, for it will no doubt make fascinating reading for anyone interested in economics and markets, but nor will it change anyone's mind one jot. There is virtually no one out there saying "I won't make up my mind about the euro until I've read the five economic tests". Nearly everyone already holds an entrenched position, and the two sides in the debate will take from the assessments whatever they think necessary to support their case.

Yesterday seemed to bring further evidence of why Britain is not yet ready to join the euro, with the Bank of England leaving short-term interest rates unchanged at 3.75 per cent but the European Central Bank cutting by half a percentage point to 2 per cent. What's more, Wim Duisenberg, president of the ECB, hinted strongly that there were further rate cuts to come. With sterling now seriously weakened against the euro, sparking inflationary pressures which the strong pound has hitherto kept in abeyance, no one would bet on lower rates for the UK any longer.

The differential between euroland and Britain is growing wider, not narrower, so here's one instance of where the two economies are unconverging again. Goodness knows where that would leave the UK economy if we entered the euro tomorrow, goes the argument. Short-term interest rates would almost halve from current levels, making the present house price bubble look like a mere statistical blip compared with the great surge in prices that would follow. Boom would be followed eventually and inevitably by bust, demand would collapse, and there would be no way of restimulating it with further rate cuts, as these would be set for the eurozone as a whole, not just the UK.

The problem with this argument is that it makes the case for never joining the euro. The truth is that economically there is no perfect time to enter the single currency. The convergence argument is a red herring, for the mere declaration of an intention to join at a set date would force the necessary degree of convergence before entry occurred. Without such a declaration, perfect convergence will never happen.

As it is, we are probably as near economic convergence as we'll ever be. Short-term interest rates are diverging, but long-term rates are virtually the same. Economic growth is a little bit higher, but both Britain and the eurozone are growing well below trend. The business cycle is pretty much harmonised. Unemployment in Britain is much lower than in Germany and France, but no one suggests it is necessary for Britain to converge to Continental levels of unemployment before it could realistically join the euro, or indeed that the eurozone needs to become more like us before we would deign to join it.

Even the institutional barriers to entry are being dismantled. The ECB has moved to something close to the Bank of England's symmetric inflation targeting approach to monetary policy, Britain is about to move to the Continental measure for inflation, HICP, for inflation targeting purposes, and the mooted reforms to the growth and stability pact will make it not so dissimilar to the Chancellor's own golden rule for governing the public finances. In other words, convergence is a lot more apparent than the divergence. To delay the euro decision further risks a degree of divergence developing that really would make it economically very difficult for Britain to join the single currency.

The depreciating pound is an early example of such divergence. Eventually it will require the Bank of England to raise interest rates, choking off consumption just as if begins to rise again on the Continent. Immunity to the present cycle of interest rate and currency shocks is one of the most important economic arguments for joining the euro, yet the five tests seem to approach the issue from the other end of the spectrum by assuming that independence of currency and interest rate movements allow for adjustments that deliver a greater degree of economic stability. Nothing could be further from the truth.

In the end, the only important question about the euro is whether Britons would on balance be better off in than out in terms of living standards and quality of life. None of the tests properly address this issue, which is why I'm not exactly wetting myself in anticipation of Monday's lorry-load of gobbledegook.

Hutchison/3

Hutchison, the Hong Kong-based conglomerate, is like the inveterate gambler who having made a fortune at the tables doesn't know when to stop and carries on playing until he's not only lost the lot but bankrupted himself in the process. Having made a fortune out of Orange, Hutchison thought it could repeat the trick with 3. It's not proving so easy second time round, and yet unwilling to lose face (the other main partner in 3 is Japan's DoCoMo), it doesn't seem to know how or when to quit.

Hutchison paid approximately £4.4bn for its 3G licence in the UK and it may have to spend as much again building its network, of which £1.5bn has been spent already according to outside estimates. The model is Orange, which from a standing start came from behind to grab nearly 30 per cent of the UK mobile phone markets. One of the reasons Orange was so successful was that it started with a clean slate and was therefore able to build the most modern and reliable network on the block, giving it a reputation for quality and service the incumbents couldn't match. Hutchison believes 3 has some of the same advantages.

However, there are some key differences. Orange paid nothing for its original licence and it was launched into the explosion in mobile telephone use and penetration that followed the switch from analogue to digital. There is no sign of 3G generating anything like the same degree of excitement. The handsets are expensive, quality is unreliable for its main selling point, video calling, and there are no other killer apps to make 3 obviously more attractive as a service than the four existing operators.

What's more, it quite plainly cocked up its pricing on launch by failing to offer significant discounts on voice telephony to attract customers from rivals. Since then, there has been a clear-out of top management, while yesterday the company announced two new pricing packages which it claims undercuts competitors by 50 per cent. Buying customers in this manner is incredibly expensive, even if they can be persuaded to graduate on to more expensive 3G services later, and with just 25,000 customers so far in the bag, 3 stands no chance whatsoever of meeting its target of one million customers by the end of the year. Hutchison has fared little better in Italy, where it also has a licence.

Other mobile operators have either written off most of the value of their 3G licences, or delayed the launch of 3G services, or both. No one can accuse Hutchison of cowardice, but it is hard to see how its massive gamble on 3G can ever be made to pay off. Buying mm02 would be a less expensive way of acquiring the subscriber base 3 seeks than the present approach, which looks like money down the drain.

jeremy.warner@independent.co.uk