Pound could soon strengthen the euro

Remarkable as it may seem the UK could be little more than a year away from joining the euro, an event that the European Central Bank believes would strengthen the European single currency.

The Sunday Times noted this week that November and March are the two most likely times for the Treasury to publish its assessment of the criteria for the UK to enter the euro. Public opinion polls are already moving in favor of the euro, and it would make sense for the UK to join the currency in advance of the enlargement of the European Union in two years' time.

Euro bulls think that the America's $400 billion plus current account deficit is already weighing down on the greenback. And analysts at Credit Suisse point out the dollar's tendency to move in seven year cycles. But the injection of sterling into the euro zone could prove a real downer for the dollar.

The problem for Euro bulls is that recent history has proven them wrong on so many occasions and the strength of the US economy has always ridden to the rescue of the dollar. Indeed, recent productivity figures for the US in the first quarter suggest that help could yet be on hand for the beleaguered dollar.

But what would sterling's entry to the euro zone mean for investors in UK assets?

For one thing low interest rates and inflation would become fixed in the United Kingdom, encouraging long term investment in fixed capital and to a lesser extent property. That would make UK equities and other assets more attractive after euro entry. It could be that the pound's accession to the euro is therefore a signal for a sustained stock market recovery.

Of course, a lot depends on the exchange rate at which the pound joins the euro zone. And although there has been some convergence, the pound is still generally seen as rather overvalued against the euro.

This risk then is a re-run of the early 1990s' experience when the pound was pegged at too high a rate to the deutschemark. That would not be an experience that many investors would want to see repeated, only it would be worse this time because there would be no way to devalue the pound which would no longer exist.

Bare in mind that the UK is running a current account deficit proportionately as large as the US, and this scenario is quite a possible outcome, and one the UK authorities will have to consider before recommending the euro.