Eminences grises' eminence grise

Harriet Swain talks to Charlie Bean, the LSE economist who has acted as tutor and adviser to Gordon Brown's Treasury team

Screens are turning red at the Stock Exchange in London. The faces of dealers in Hong Kong have lost any trace of inscrutability as prices plunge. Business leaders and opposition MPs are baying for clarity over the government's position on European Monetary Union. And here comes Charlie Bean, calmly cutting a path through the babble of lost international voices that is the London School of Economics at the start of term.

An economics professor at the LSE for the past seven years, well respected by colleagues inside and outside the institution as a pragmatic macro-economist, Bean was tipped to succeed Alan Budd as chief economic adviser to the Treasury. Now this appears unlikely to happen. Wiser money, he says, is on Gus O'Donnell, a Treasury insider and all round "affable chap who would be good for morale".

But if O'Donnell does get the job, Bean may not be too disappointed. With interest rate decisions now made by the monetary policy committee and most other business overseen by Gordon Brown's young, inner circle of advisers - particularly Ed Balls - the post is to be downgraded. And Bean, eminence grise to eminences becoming steadily less grises, may find himself enjoying more influence by remaining in the background.

He would not presume to know what a minister is thinking, he tells me. But having worked with Ed Balls, having taught both Balls's partner, the rising new MP Yvette Cooper, and another of Gordon Brown's right-hand men, Ed Miliband, and having been a full-time economic adviser at the Treasury, where he still spends two mornings a week and acts as head of the independent academic advisory panel, he must have a pretty good idea. Whatever the chancellor's thought is, somewhere along the line he probably helped put it there. He is a kind of spin doctor without the spin.

Indeed, his mornings at the Treasury are spent holding what he describes as economic doctor's surgeries - helping out civil servants, advisers and anyone else who chooses to come along. He suggests reading lists, checks through speeches or helps out with special projects. It is easy to imagine him leaning back in his chair, shrewdly assessing an array of well-chewed fingernails, and saying: "Well, Mr Brown, and what seems to be the trouble?" And Gordon Brown has had rather a lot of trouble lately. His set of advisers have spun themselves into a tangle over monetary union. Someone suggested to the Financial Times that the chancellor wanted in, asap. Then the chancellor himself told The Times "it is highly unlikely that Britain can join in the first wave". Brown repeated this as he formally launched the Stock Exchange's new electronic trading system, which promptly turned red behind him. Dealers speculated, Tories gesticulated and business leaders called for a clear statement. He eventually told Parliament that Emu entry would not happen this side of a general election. A collapse in share prices in Hong Kong had a knock-on effect on Wall Street and then in London, leaving white faces around the trading floor.

Not too much to worry about, says calm Professor Bean. Everyone expected the Hong Kong market to go off colour at some point and there was bound to be the odd shiver elsewhere but it was nothing too catching. As long as nobody panicked, a repetition of Black Monday remained a long way off.

Bean says it was inevitable that Britain would not join the Emu in 1999. Its economy is not in sync with the rest of Europe and business here is totally unprepared. But the chancellor's statement made the position further along the line much clearer. It now looks unlikely that Britain will be joining in 2002 either, when common notes and coins go into circulation. A referendum would have to take place at least a couple of years in advance so Brown's announcement seems effectively to have ruled out joining in 2002. If the referendum is held shortly after the next election it would mean an entry date for Britain of 2004 or 2005. Or the government may choose to wait to see how monetary union actually operates with its new coins before making a decision.

The effects of Emu are likely to take a while to sink in, says Bean, although hanging around too long may be difficult for Labour when it wants to look pro-European. "It is inevitable that the UK will join, just as it eventually joined the Economic Community", he says. "There is an argument for saying we might as well join sooner rather than later, once conditions are sufficiently in sync with the rest of Europe, which I would hope would be in three years or so. A 2002 date would be a perfectly feasible date from an economic perspective." But, politically, an early referendum may be hard to win.

Timing may not matter as much as either strong supporters or critics of early entry argue. While Britain may find itself marginalised in some of the coalitions likely to form after monetary union, Bean says key decisions about how monetary union will operate have already been taken. And the overall impact of Emu may also have been exaggerated. "My own view is that the costs and benefits of monetary union are small," he says.

Take unemployment, for example, one of Bean's particular interests. "If we stay outside, there is no reason to suppose we will have markedly lower or markedly higher unemployment than we currently have," he says. "Staying out or going in will have relatively little effect on living standards in this country." The only shivers likely will be short-term shifts in interest rates but these should settle down over time.

Of greater import for unemployment figures, he says, is the length of time people remain eligible for benefits. "While a minimum wage may affect employment rates, particularly among young people or the low skilled, there is no evidence that the level of unemployment benefits makes much difference - so long as they only last for a fixed time." Also important is the toughness of the work test; people must be able to demonstrate they are looking for work and not keep turning down jobs.

The welfare-to-work scheme, a pet project of his LSE colleague Richard Layard, offers the ideal stick and carrot system. "What welfare-to-work adds is the stick of saying that not only is an unemployed life going to be made even more painful than it is already but also that it is going to be made easier for people to get jobs because training is going to be offered or employers are going to be offered a subsidy."

Now is the ideal time to make reforms, he says, because, rather than in spite of, the fact that unemployment is falling. "Labour market reform is much easier in a booming market than a depressed market," says Bean. "When unemployment is 15 per cent it is difficult to cut benefits. If you institute these things when unemployment is low, then, when you get an adverse shock, self-corrective measures come into play and stop unemployment getting too big. If you had an unemployment system of the sort Labour is trying to introduce now, unemployment would not have gone as high as it did in the first place."

While Bean is not a political animal - or if he is, he hides it well, says one admirer - he cautiously approves of the present government. He worked as an economic adviser to the Treasury in 1981 but left because he became "fed up". "It is probably true to say this government is much more open to academic thought than the Conservatives were," he says. "The Conservatives did develop something of a bunker mentality under Thatcher. They weren't interested in advice."

He applauds the decision to give independence to the Bank of England for allowing ministers to concentrate their energies on other things like education and new tax systems. His only concern is the government's tendency sometimes to rush policy, although he says, "I hope they will learn from one or two of their less effective events recently". A prime example is the student loan and tuition fee issue. "David Blunkett dived in straight after the Dearing committee reported without perhaps fully thinking through the details of what the implications were," says Bean. Personally, he believes differential fees are inevitable. Huge cross-subsidy from the large number of foreign students at the LSE to home students is causing increasing tension. And he says temptation for the government to increase the level of fees is unavoidable.

Pressure is likely to come from two sides, he says. Students will start asking why they are not receiving the same level of education as at places like Oxford and Cambridge when they are paying the same money for it. On the other hand, some may want to pay less money for a lesser product. In this, Bean differs from the LSE's new director, Anthony Giddens, a more politically involved associate of new Labour, who has stressed his opposition to his institution charging top-up fees.

But it would take a brave man to ignore a Charlie Bean prescription. In the confusing and often volatile world of economics he has the assured air of someone who knows exactly what the matter is.