Analysis - The chancellor's Herculean task.

So the election is over at last! As expected. the Conservatives tried to make the euro the main issue of the campaign.

The problem for William Hague was that the euro was at the bottom of everybody else’s list of important political issues, at least during the election.

One look at the Sunday papers shows that has now changed. Europe and the euro are suddenly top of the political agenda, not least because the timetable for joining before the next election is relatively tight.

That means the political positioning before a possible referendum has already started. But it doesn’t necessarily mean there will be one and the euro isn’t the only economic issue the government has to worry about.

While the election was in full swing we took our eyes off the economy, but its future is not as rosy as it could be. The slowdown in the US is continuing and there are now obvious signs it is hurting Europe.

Germany and France are beginning to feel the heat and so are we. Output by British manufacturing industry dropped by 0.9% in April. The old adage that when the US sneezes the rest of the world catches a cold is the kind of thing that keeps politicians awake at night. Labour has admitted this election result, although impressive, won’t be easily repeated unless it delivers on improving services. That is expensive.

The NHS, schools and crime soak up money; any major slowdown in the economy is going to make finding that money an even more difficult task.

Also Gordon Brown is an ambitious man. His long-term aim is to increase the growth rate of the British economy by improving the efficiency of industry. That on its own is a Herculean task and could keep the government pretty busy for the next four or five years. We should find out how Labour intends to go about it in the Queen’s speech.

Unemployment and inflation have hardly been mentioned at all in the last few weeks but they never go away. The jobless rate may start to rise again if the economy slows too much. Trying to stop that happening is the government’s job but inflation is now the responsibility of the Bank of England. That raises problems for the government if it wants to go into the euro.

The pound is far too high to go in now. At about 3.2 against the deutschmark it is well above the level at which sterling was dumped out of the ERM in 1992. The foreign exchange markets know that full well, and the pound started to fall against the euro and the dollar as soon as a Labour victory looked inevitable.

But there is still a long way to go and no matter how welcome that will be for manufacturing industry it will start alarm bells ringing at the Bank of England.

A falling currency normally means an increase in inflation. The bank has only one weapon to fight that with, higher interest rates. So we may be faced with the dilemma of a currency that starts to fall and needs to fall further but with rising interest rates working in the opposite direction.

There are of course plenty of other factors that come into play when considering whether and when we should join the single currency. There aren’t many people who have been impressed with the European Central Bank recently and handing over the management of our interest rates to such an organisation when the Bank of England has a high reputation will take some courage.

The single market could do with improvement, for instance there are far too many national restrictions on the opening up of utility industries.

And technically the pound may have to join the ERM again before being allowed into the euro itself.

Management of the economy matters to this government a very great deal.

It has secured a full second term by not making a mess of things, something no previous Labour government has managed. If it decides that the British economy hasn’t yet met the five tests set out by the chancellor and that, therefore, we can’t join the single currency in this parliament, it has plenty of other things to be getting on with.

More from Jonty Bloom on page 15.