Five Economic Tests

five economic tests for the UK to Join the Euro

The economic tests specified by the current UK Labour government that must be satisfied before a decision to join the euro can be made. In theory, these tests will be distinct from any political decision to join.

1. Are business cycles and economic structures compatible with European interest rates on a permanent basis?

2. If problems emerge, is there sufficient flexibility to deal with them?

3. Would joining the euro create better conditions for firms making long-term decisions to invest in Britain?

4. What impact would entry into the euro have on the UK's financial services industry?

5. Would joining the euro promote higher growth, stability and a lasting increase in jobs?

History of the tests

It is alleged that the five tests were dreamt up by then shadow Chancellor Gordon Brown and his assistant Ed Balls in the back of a taxi during a visit to the United States. Despite this uncertain pedigree, the IMF deemed them to be "broadly consistent with the economic considerations that are relevant for assessing entry into a monetary union"[1] (http://www.imf.org/external/np/ms/2001/121101.htm).

The UK Treasury is responsible for assessing the tests. It first did so in October 1997, when it was decided that the UK economy was neither sufficiently converged with that of the rest of the EU, nor sufficiently flexible, to justify a recommendation of membership at that time. The government pledged to reassess the tests early in the next Parliament (which began in June 2001), and published a revised assessment of the five tests in June 2003. This assessment was much weightier (at least literally) than its predecessor, running to around 250 pages and backed up by eighteen supporting studies, on subjects such as housing, labour market flexibility, and the euro area's monetary and fiscal frameworks.

The conclusions, though, were broadly the same; the Treasury argued that

1. There had been significant progress on convergence since 1997, but there remain some significant structural differences, such as in the housing market.

2. While UK flexibility has improved, we cannot be confident that it is sufficent.

3. Euro membership would increase investment, but only if convergence and flexibility were sufficient.

4. The City would benefit from Euro membership.

5. Growth,