Five economic tests

History of the tests

The five tests were designed in 1997, shortly after the Labour Party replaced the Conservatives in government, by former Chancellor Gordon Brown and his then special adviser Ed Balls. A popular story about the circumstances of Brown's and Balls' development of the tests, which has since been discredited, is that it took place 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's 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.

Conclusions

The conclusions of the 2003 assessment were broadly similar; the Treasury argued that:

1. There had been significant progress on convergence since 1997, but there remained some significant structural differences, such as in the housing market.
2. While UK flexibility had improved, they could not be confident that it is sufficient.
3. Euro membership would increase investment, but only if convergence and flexibility were sufficient.
4. The City of London, Britain's financial centre, would benefit from Eurozone membership.
5. 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, in May–June 2003, the government ruled out UK membership of the euro for the duration of the Parliament. Since the Labour government was 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 after succeeding Tony Blair as Prime Minister of the United Kingdom in 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, José Manuel Barroso, the President of the European Commission, averred, saying that UK leaders were seriously considering the switch due to the 2008 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.

References

References

1. HM Treasury - [http://www.hm-treasury.gov.uk/euro_assess03_repexecsum.htm GOVERNMENT POLICY ON EMU AND THE FIVE ECONOMIC TESTS] {{webarchive. link. (2009-12-09)
2. International Monetary Fund - [http://www.imf.org/external/np/ms/2001/121101.htm United Kingdom: 2001 IMF Article IV Consultation; Concluding Statement of the Mission] 11 December 2001
3. (2016-03-17). "How the Blair government decided against the euro".
4. (2003-05-15). "UK 'not ready' for euro".
5. Times online - [https://web.archive.org/web/20100525121519/http://www.timesonline.co.uk/tol/news/politics/article2127640.ece Puritanism comes too naturally for 'Huck' Brown]
6. EUobserver - [http://euobserver.com/?aid=27203 Britain closer to euro, Barroso says]
7. AFP - [https://archive.today/20130124224045/http://www.google.com/hostednews/afp/article/ALeqM5ieUiScklfMN2vCWN3uguenxrklEw Britain says no change on euro after EU chief's claim]
8. MacLennan, D., Muellbauer, J. and Stephens, M. (1998), ‘Asymmetries in housing and financial market institutions and EMU’, Oxford Review of Economic Policy, 14/3, pp. 54–80