Five economic tests

In October 1997, the newly-elected Labour government of Tony Blair stated that British entry into stage three of Economic and Monetary Union (EMU) – involving the pooling of monetary sovereignty and the adoption of the single currency – would depend on the United Kingdom meeting not only the formal convergence criteria set down in the 1992 Maastricht Treaty, but fulfilment of five economic tests, set and judged by the government domestically. These tests, announced by the Chancellor of the Exchequer, Gordon Brown, involved assessment of whether: i) the business cycles and economic structures of the UK and eurozone were compatible, so that the eurozone interest rate could be permanently adopted by Britain; ii) there was sufficient ‘flexibility in the system’ to deal with (undefined) problems that might arise within the eurozone; iii) membership would encourage business to make long-term decisions to invest in Britain; iv) membership would enhance the competitive position of the country’s financial services industry; and v) membership would, overall, ‘promote higher growth, stability and a lasting increase in jobs’ in the UK. The application of these tests, the Chancellor said, would involve ‘the most robust, rigorous and comprehensive work the Treasury has ever done’.

The five economic tests – allegedly drafted by Brown with the aid of his then special adviser, Ed Balls, in the back of a car in New York- were designed to make UKentry into EMU stage three, to which the government was committed in principle and which Blair wanted to advance in practice, significantly more difficult to achieve. Although the UKmet all the Maastrichtconvergence criteria, except two-year membership of the narrow band of the Exchange-Rate Mechanism (ERM) of the European Monetary System (EMS), Brown immediately used the new tests to close down the option of euro membership during the 1997-2001 Parliament. A second assessment by the Treasury in June 2003, backed by a 250-page report and 18 accompanying studies, resulted in the same outcome for the 2001-05 Parliament, in effect ending the prospect of entry under a Labour government. When Brown himself replaced Blair as prime minister in June 2007, he quickly ruled out entry for the ‘foreseeable future’ and made no moves in that direction during his three years in office.

September 2012

Copyright: Anthony Teasdale, 2012

Citation: The Penguin Companion to European Union (2012), additional website entry

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