The British and euro-zone economies are moving apart again after several years of convergence, according to a study published yesterday, which will heighten expectations Britain is not about to join the euro.

The twice-yearly EMU Convergence Index from consultants PricewaterhouseCoopers forecast the situation would remain static throughout next year and highlighted that important structural differences between the two economies remained.

Convergence between the economies is the most important of UK Chancellor Gordon Brown's five tests designed to establish whether it is in Britain's economic interest to join the euro.

Mr Brown will release an assessment of the tests within weeks and is expected to say that they are closer to being met than in 1997, the last time they were assessed, but not sufficiently to provide a clear and unambiguous case for joining.

"The latest movement in our convergence index suggests that the trend towards increased convergence between the UK and Euroland economies since 1998 has suffered a slight setback, with growth and short-term interest rates moving further apart," said Mr John Hawksworth, PwC's head of macroeconomics. "We have moved closer together but are not quite there yet."

The stalling euro-zone economy grew around 0.8 per cent last year and is expected to show a similar growth rate this year whereas the British economy grew 1.8 per cent in 2002 and is expected to grow by over 2.0 per cent this year.

Reflecting this, short-term interest rates in the euro zone have fallen to 2.5 per cent while Britain's are at 3.75 per cent.

"It seems likely that this divergence...will persist during the course of 2003, in which case the PwC index will show a decline in overall UK-Euroland convergence this year for the first time since 1998," said the report, which analyses the Maastricht criteria for joining the euro along with five indicators of real and cyclical convergence.

It also said significant structural differences remained, with much higher unemployment and government debt levels in the euro zone and much stronger consumer spending and house prices in Britain.

"These differences have been significant factors in the recent cyclical divergence of the UK and euroland economies and seem unlikely to change significantly over the next few years."

Pro-euro lobby group Britain in Europe, not surprisingly, was unimpressed by the report. "Britain's economy is sufficiently converged with the euro-zone's to benefit from joining the euro. Our long-term interest rates are almost identical, and the gap between our short-term interest rates is a mere one-and- a-quarter percentage points," said its chief economist Mr Philippe Legrain.

The "No" campaign, also unsurprisingly, welcomed the report.This is clear evidence that the convergence test is not met," said Mr George Eustice, the campaign's chief.

"Tony Blair should accept that the Treasury is right, rather than trying to derail the five economic tests because he doesn't like the results," he added, referring to the fact that Blair is keener on joining the euro than Brown. - (Reuters)