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For Britain's Blair, Ireland Will Be A Hard Act To Follow


International Business: BRITAIN

FOR BRITAIN'S BLAIR, IRELAND WILL BE A HARD ACT TO FOLLOW

A cooling economy and EMU pose thornier problems

The 71% "yes" vote in favor of the Northern Ireland peace deal on May 23 was in many respects a triumph for British Prime Minister Tony Blair. Participants in the peace talks say that Blair's role was decisive in obtaining the agreement in the first place. And the Prime Minister's personal appeals for the trust of the province's Protestants were crucial in shoring up sagging support for the pact. His approval rating, in the 70% range, is near a record high. Says Robert M. Worcester, chairman of the London-based MORI polling organization: "Blair walks on water."

Well, not quite--although Blair's first year in office has been remarkably successful. The cautious Blair would be the first to warn his troops that the next couple of years may be considerably tougher. While he deserves credit for prudent fiscal moves and for the progress he has helped achieve on Northern Ireland, the rest of Blair's agenda is not so far along.

Since taking office last May, Blair has staked out ambitious goals. He wants to help the chronically unemployed, decentralize power to Britain's regions, and restore his country to leadership in Europe. But first Blair will have to weather an economic slowdown. The government's hope is that Britain will get a soft landing. Indeed, the consensus among private economists is that growth will slow from last year's 3.1% to around 2% this year and 1.5% next.

Still, the next few months will be nail-biters. If the Bank of England, independent for only a year, doesn't get monetary policy right, Britain could slip into recession, raising the odds against welfare-to-work and other Blair initiatives. And lower tax receipts would present Blair with much starker choices between fiscal responsibility and pledges to improve education and health care.BUYING TIME. Economists are divided on whether short-term rates, now at 7.25%, are high enough. Hawks such as the central bank's chief economist, Mervyn King, worry about record-low 4.8% unemployment and February's 4.9% wage hikes. But Alison Cottrell, chief economist at PaineWebber in London, says that with underlying price increases running at only 2.2%, the inflation dragon may be dead. "The bank may be fighting the last war," she says.

Managing Britain's relations with Europe could be even trickier than overseeing the domestic economy. It is now assumed that Britain has no choice but to join European Monetary Union, but Blair doesn't seem rushed. He wants the Continental powers to cut taxes and bring their labor policies more in line with Britain's. Otherwise, he worries, membership in EMU could be disastrous for British competitiveness.

Blair also wants to avoid a bitter political fight. According to polls, Britons' antagonism to EMU seems to be softening. But it is still hard to imagine the island nation giving up sterling without a struggle. Another worry is that aligning Britain so closely with the Continental agenda could put the country's extensive ties outside Europe, including those with the U.S. and the Commonwealth, at risk. "Joining EMU is a bigger step for us than for others," says Michael Hughes, a director at Baring Asset Management in London.

So Blair may have to play for time until he sees the right opportunity to join. In the interim, he must convince his Continental partners and foreign corporations that Britain is still part of the European mainstream. Otherwise investment in Britain could dry up, and the City of London's preeminence in finance could drift across the Channel. He must also cooperate with the central bank to manage the increasingly volatile pound. Too low an exchange rate against the new euro could produce a protectionist backlash on the Continent, while if the pound moves too high, it puts pressure on British exporters. The current rate of 2.90 Deutschemarks per pound has already sent the British manufacturing sector into recession.

None of this is beyond Blair. The message from his performance on Northern Ireland is that he can take big risks when the timing is right.

But the stakes are higher in Europe. Blair will ultimately gamble his political career on the hope that an emerging generation of European leaders will eventually push the European Union more in Britain's direction. And he will try to water down the long-term Continental goal of political union for all Europe. Some supporters envision Blair, 10 or 15 years from now, as the Grand Old Man of a vastly changed European Union. In the meantime, he has plenty to do on his own turf.By Stanley Reed in London


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