Divining Britain's policy on the euro would defy the most committed Kremlinologist. On paper, there is little to separate the official positions of the Labour government and the Tory opposition.

However, until recently, the "mood music" emanating from Whitehall suggested that the government was leaning towards a referendum on the single currency shortly after the next general election, i.e. no later than 2002. That assumption has come under pressure over the past few weeks. The government will only hold a referendum if it feels confident of winning, and that victory seems increasingly unlikely.

Britain's euro policy has been vague at best, and opaque at worst. Chancellor Gordon Brown laid out five economic tests that would have to be satisfied before Britain could join the single currency.

These five tests are deliberately so woolly that the government could declare them satisfied at a time of its own choosing.

They are: whether Britain's economy has converged with the 11 countries of the euro zone; whether there is sufficient flexibility to cope with economic change; what effect entry would have on investment; how the financial services industry would be affected, and whether it would be good for employment.

After some infamous confusion following a front-page report in the Financial Times in September 1997 wrongly suggesting early entry into the euro, Mr Brown let it be known that any referendum would follow the next general election. In recent weeks, Mr Stephen Byers, the Trade and Industry Secretary tried to have his cake and eat it by reassuring business that policy had not changed, but nodding in the direction of euro-sceptics by insisting that the government would not "bounce" the electorate into a referendum too close to the general election.

Funnily enough, it has been one test that Mr Brown did not apply - the level of sterling against the euro - that has been causing all the problems recently. The euro has breached parity with the dollar for the second time.

When this is examined as sterling against the deutschmark, the key component in the euro, sterling reached a staggering 3.24 deutschmarks, some 20 per cent above its widely accepted "fair" value. British industry is making it clear that it would not want to join at these levels.

European Central Bank (ECB) officials have not helped. Mr Otmar Issing, the bank's chief economist, has acknowledged that the British government's decision to grant the Bank of England the power to set Britain's short-term interest rates in May 1997 "has weakened the case for joining".

In an interview in the Observer last month, Mr Issing's boss, bank president, Mr Wim Duisenberg, insisted that the ECB would not collude in any pre-entry devaluation of sterling. "Britain would have to demonstrate that it had an inflation rate and interest rates over the years that were not more than a certain percentage different from the euro area," he said, adding, "And the pound would demonstrably have had to have been stable vis-a-vis the euro; it would not have depreciated in the two years ahead of entry."

It did not appear overly to trouble Mr Duisenberg that this would impose great demands on Britain. He declared: "It's the price you pay for staying out."

In case people had not got the message, Mr Duisenberg told the BBC's Money Programme on Sunday that Britain's membership of the single currency would create problems for the ECB, adding: "If ever the UK were to decide to join you are talking about a moment in time which is years away from today."

Foreign Secretary, Mr Robin Cook, considered to be the British Cabinet's leading europhile, has tried to play down the significance of such remarks, but he appears to be fighting a lonely battle.

The problem for the europhiles is that, whatever about the economic tests, the decision to join the euro will, as in the 11 states of the euro zone, be as much a political as an economic decision. Not that the economic case is cut-and-dried.

Leaving the first test to one side, most observers agree that it would not be disastrous for Britain to join, judging on the remaining four criteria.

British economists are generally contented that the British economy is flexible enough to cope with economic change, but are less sure about their continental counterparts. At the World Economic Forum in Davos this week, Prime Minister Mr Tony Blair took the chance to lecture his fellow Europeans on the need for increased labour-market flexibility.

Opinion is divided on the outlook for investment. Britain is the second-most popular destination for foreign direct investment after the US. In 1998, investment soared by 90 per cent to £38.6 billion (€49 billion), and the signs are that such growth is accelerating. However, some observers fear that foreign investors assume that Britain will shortly join the euro. Indeed, companies such as Toyota, Komatsu and Sony have suggested that they may invest less if Britain does not join.

The City fathers are much less worried than they were a year ago that being outside the euro would herald the demise of London as Europe's leading financial centre. Indeed, Lord Levene, last year's lord mayor, who had initially called upon the government to join for the sake of the City, admitted that the City had thrived outside it.

On the fifth test - whether the euro would be good for employment - few analysts are worried at present, because Britain is close to full employment. Moreover, it is assumed that if the other tests were satisfied, that employment would follow.

Most controversy still rages over the first test: how much has Britain converged with the euro zone. True, Britain is much more in sync than it has been in the past. Even still, Britain has just avoided a recession, and, following almost two decades of restructuring, its unemployment and interest rates are near 30-year lows.

In contrast, both Germany and Italy are struggling. Moreover, Britain's short-term interest rates are around twice levels in the euro zone. In a country where home ownership is so widespread, short-term interest rates have a huge effect on economic activity and economic confidence.

Britain's euro-sceptic press takes an uncharacteristic pleasure in alluding to the Republic's booming economy, if only to note the danger of overheating due to low interest rates. Proof, they claim, if proof were needed, of the dangers of a "one size fits all" interest-rate policy.

Mention of Britain's euro-sceptic press helps to explain the government's dithering. From the Sun, which equates the loss of the monarch's head on the coinage to regicide, to the Daily Telegraph, whose Canadian proprietor seems to think that Britain should become the 51st state of the Union - Britain's press is almost exclusively euro-sceptic. This scepticism affects the politicians, especially those as acutely populist as the New Labour government, and explains the oblique nature of public pronouncements.

The lack of government leadership has, in turn, affected business opinion, which has always been split. The Institute of Directors, which broadly represents small business, has been hostile to the euro, while the Confederation of British Industry, the voice of big industry, was, under its urbane former director-general, Mr Adair Turner, broadly supportive.

However, in recent weeks, the CBI has adopted a more neutral stance. In an apparent dig at his predecessor, a McKinsey management consultant, the new director-general, Mr Digby Jones, a "real" businessman, said this week: "I don't think the interests of business are best served by continuing this, some would say sterile, debate on whether this country joins the euro." The next stage has "got to be a lead from the politicians".

And the public is not much keener. Despite the opprobrium heaped on Tory leader, Mr William Hague, by the party's elder statesmen for his euro-sceptic stance (that the Conservatives would not campaign for entry at the next election - not that different in effect from the government's position), the Tories trounced Labour at last summer's European elections.

Nor has public opposition to the euro softened. A poll conducted by ICM for the BBC this week showed 69 per cent of voters opposed to replacing sterling with the euro, and just 22 per cent in favour. Even more astonishing, 34 per cent were against Britain remaining in the European Union, with just 59 per cent in favour.

What this shows is how the complicated economic questions about the euro are bound up in the public's mind with broader questions about the European Union.

In contrast to the Republic, British people are not enthusiastic about the European Union. For one, Britain is a net contributor. Moreover, many Britons resent the influence of Brussels on social policy. Recently, passions have been aroused by the French unilateral decision to ban British beef, against EU guidelines.

On Tuesday, Mr Hague appointed Mr Michael Portillo, the standard-bearer of the Tory-right, as shadow chancellor. With Mr Portillo at his heels, chancellor Gordon Brown's innate caution about the euro can only harden. Sterling will not be cashed in for some time yet.

Margaret Doyle is finance correspondent with The Economist.