Euro veto 'will cost UK £35bn a year'

Gordon Brown's decision to keep Britain out of the euro will cost the economy £35bn a year, the National Institute of Economic Social Research said yesterday. The institute, one of the country's leading think-tanks, criticised the use of the housing market as a barrier to entry and warned the City of London could decline as "footloose" banks fled to Frankfurt.

Martin Weale, its director, said: "For it to be sensible to stay out forever, the sum of the costs of joining must exceed £35bn a year.

"This is unlikely unless one believes that membership would permanently damage Britain's growth potential."

The institute, which believes Britain should join for economic reasons, attacked the Chancellor's five economic tests. Referring to the Government's insistence that the tests' verdict be "clear and unambiguous", Professor Ray Barrell, from the institute, said: "The tests were designed to be not clear and unambiguous for political reasons".

On Monday, Mr Brown said Britain was not ready to join the euro but would review the progress towards meeting the tests in next year's Budget. Asked about the chances of a "yes" then, Professor Barrell said: "If the tests continue to be used, it will be to ensure the political and economic rhetoric are in line with each other".

He said that while Britain's reliance on variable rate mortgages meant changes in interest rates had more effect on spending than in eurozone states, the impact on German investment was higher. "The Chancellor may just have been looking for a hook," he said. "If he wanted a reason, then there was the housing market."

Professor Philip Davis, a member of the institute and an adviser to the Treasury on the financial services test, said he believed the City would suffer from staying outside the euro. "The City will continue to have an important role in global financial business but will be missing out by having a declining share as it is not taking footloose business in the eurozone," he said.