Five economic tests
Encyclopedia
The five economic tests were the criteria defined by the UK treasury under Gordon Brown
that were to be used to assess the UK's readiness to join the Economic and Monetary Union of the European Union
(EMU), and so adopt the euro
as its official currency. In principle, these tests were distinct from any political decision to join.
The five tests were as follows:
In addition to these self-imposed criteria, the UK would also have to meet the European Union
's economic convergence criteria
("Maastricht criteria") before being allowed to adopt the euro. One criterion is two years' membership of ERM II, of which the UK is currently not a member. Under the Maastricht Treaty
, the UK is not obliged to adopt the euro.
As the Brown government was voted out of office in the 2010 United Kingdom general election, the tests are no longer government policy.
Gordon Brown
and his then assistant Ed Balls
, allegedly in the back of a taxi while Brown was in the United States. Despite this uncertain pedigree, the International Monetary Fund
deemed them to be "broadly consistent with the economic considerations that are relevant for assessing entry into a monetary union."
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 ran to around 250 pages and was 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 were broadly similar; the Treasury argued that:
On the basis of this assessment, the government ruled out UK membership of the euro for the duration of the 2001 Parliament. Since Labour has been re-elected in 2005, the debate on the European Constitution and subsequent Treaty of Lisbon
upstaged that on the euro. Gordon Brown, in his first press conference as British Prime Minister (2007), ruled out membership for the foreseeable future, saying that the decision not to join had been right for Britain and for Europe. However, in late 2008, Jose Manuel Barroso (the European Commission President) stated differently; that UK leaders were seriously considering the switch amidst the financial crisis. Brown later denied this.
One of the underlying issues that stand in the way of monetary union is the structural difference between the UK housing market and those of many continental European countries. Although home ownership in Britain is near the European average, variable rate mortgages are more common, making the retail price index in Britain more influenced by interest rate changes.
Gordon Brown
James Gordon Brown is a British Labour Party politician who was the Prime Minister of the United Kingdom and Leader of the Labour Party from 2007 until 2010. He previously served as Chancellor of the Exchequer in the Labour Government from 1997 to 2007...
that were to be used to assess the UK's readiness to join the Economic and Monetary Union of the European Union
Economic and Monetary Union of the European Union
The Economic and Monetary Union is an umbrella term for the group of policies aimed at converging the economies of members of the European Union in three stages so as to allow them to adopt a single currency, the euro. As such, it is largely synonymous with the eurozone.All member states of the...
(EMU), and so adopt the euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
as its official currency. In principle, these tests were distinct from any political decision to join.
The five tests were as follows:
- Are business cycleBusiness cycleThe term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...
s and economic structures compatible so that we and others could live comfortably with euro interest rateInterest rateAn interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s on a permanent basis? - If problems emerge is there sufficient flexibility to deal with them?
- Would joining EMU create better conditions for firms making long-term decisions to invest in Britain?
- What impact would entry into EMU have on the competitive position of the UK's financial services industry, particularly the City's wholesale marketsWholesale bankingWholesale banking is the provision of services by banks to the likes of large corporate clients, mid-sized companies, real estate developers and investors, international trade finance...
? - In summary, will joining EMU promote higher growth, stability and a lasting increase in jobs?
In addition to these self-imposed criteria, the UK would also have to meet the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
's economic convergence criteria
Convergence criteria
The euro convergence criteria are the criteria for European Union member states to enter the third stage of European Economic and Monetary Union and adopt the euro as their currency...
("Maastricht criteria") before being allowed to adopt the euro. One criterion is two years' membership of ERM II, of which the UK is currently not a member. Under the Maastricht Treaty
Maastricht Treaty
The Maastricht Treaty was signed on 7 February 1992 by the members of the European Community in Maastricht, Netherlands. On 9–10 December 1991, the same city hosted the European Council which drafted the treaty...
, the UK is not obliged to adopt the euro.
As the Brown government was voted out of office in the 2010 United Kingdom general election, the tests are no longer government policy.
History of the tests
The five tests were designed in 1997 by former British Labour Party ChancellorChancellor of the Exchequer
The Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called the Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...
Gordon Brown
Gordon Brown
James Gordon Brown is a British Labour Party politician who was the Prime Minister of the United Kingdom and Leader of the Labour Party from 2007 until 2010. He previously served as Chancellor of the Exchequer in the Labour Government from 1997 to 2007...
and his then assistant Ed Balls
Ed Balls
Edward Michael Balls, known as Ed Balls, is a British Labour politician, who has been a Member of Parliament since 2005, currently for Morley and Outwood, and is the current Shadow Chancellor of the Exchequer....
, allegedly in the back of a taxi while Brown was in the United States. Despite this uncertain pedigree, the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
deemed them to be "broadly consistent with the economic considerations that are relevant for assessing entry into a monetary union."
The UK Treasury
HM Treasury
HM Treasury, in full Her Majesty's Treasury, informally The Treasury, is the United Kingdom government department responsible for developing and executing the British government's public finance policy and economic policy...
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 ran to around 250 pages and was 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 were broadly similar; the Treasury argued that:
- There had been significant progress on convergence since 1997, but there remained some significant structural differences, such as in the housing market.
- While UK flexibility had improved, they could not be confident that it is sufficient.
- Euro membership would increase investment, but only if convergence and flexibility were sufficient.
- The City of LondonCity of LondonThe City of London is a small area within Greater London, England. It is the historic core of London around which the modern conurbation grew and has held city status since time immemorial. The City’s boundaries have remained almost unchanged since the Middle Ages, and it is now only a tiny part of...
, Britain's financial centre, would benefit from Eurozone membership. - Growth, stability and employment would increase as a result of euro membership, but only if convergence and flexibility were sufficient.
On the basis of this assessment, the government ruled out UK membership of the euro for the duration of the 2001 Parliament. Since Labour has been re-elected in 2005, the debate on the European Constitution and subsequent Treaty of Lisbon
Treaty of Lisbon
The Treaty of Lisbon of 1668 was a peace treaty between Portugal and Spain, concluded at Lisbon on 13 February 1668, through the mediation of England, in which Spain recognized the sovereignty of Portugal's new ruling dynasty, the House of Braganza....
upstaged that on the euro. Gordon Brown, in his first press conference as British Prime Minister (2007), ruled out membership for the foreseeable future, saying that the decision not to join had been right for Britain and for Europe. However, in late 2008, Jose Manuel Barroso (the European Commission President) stated differently; that UK leaders were seriously considering the switch amidst the financial crisis. Brown later denied this.
One of the underlying issues that stand in the way of monetary union is the structural difference between the UK housing market and those of many continental European countries. Although home ownership in Britain is near the European average, variable rate mortgages are more common, making the retail price index in Britain more influenced by interest rate changes.
See also
- Economy of the United KingdomEconomy of the United KingdomThe economy of the United Kingdom is the sixth-largest national economy in the world measured by nominal GDP and seventh-largest measured by purchasing power parity , and the third-largest in Europe measured by nominal GDP and second-largest measured by PPP...
- Economy of the European UnionEconomy of the European UnionThe economy of the European Union generates a GDP of over €12,279.033 billion according to the International Monetary Fund , making it the largest economy in the world...
- EuroscepticismEuroscepticismEuroscepticism is a general term used to describe criticism of the European Union , and opposition to the process of European integration, existing throughout the political spectrum. Traditionally, the main source of euroscepticism has been the notion that integration weakens the nation state...
- EurozoneEurozoneThe eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
- No Campaign
- Pro-EuropeanPro-EuropeanPro-European is a subjective term applied to a person who supports the idea of European unification and generally supports further 'deepening' of European integration, specifically in the context of political argument over the current and future status of the EU and its policies.-The Pro-European...
External links
- HM Treasury - Official UK Treasury euro website
- European Central Bank - Graph showing euro-sterling exchange-rate from 1999 to the present
- BBC News - The UK's five tests
- The Guardian - Special Reports - British business, taking sides
- The Independent - Britain has passed five economic tests for single currency entry, says report