The five economic tests were the criteria defined by the UK treasury under

Gordon Brown James Gordon Brown (born 20 February 1951) is a British politician who served as Prime Minister of the United Kingdom and Leader of the Labour Party (UK), Leader of the Labour Party from 2007 to 2010. Previously, he was Chancellor of the Ex ...

that were to be used to assess the UK's readiness to join the

Economic and Monetary Union of the European Union The economic and monetary union (EMU) of the European Union is a group of policies aimed at converging the economies of member states of the European Union at three stages. There are three stages of the EMU, each of which consists of progressi ...

(EMU), and so adopt the

euro The euro (currency symbol, symbol: euro sign, €; ISO 4217, currency code: EUR) is the official currency of 20 of the Member state of the European Union, member states of the European Union. This group of states is officially known as the ...

as its official currency. In principle, these tests were distinct from any

political Politics () is the set of activities that are associated with decision-making, making decisions in social group, groups, or other forms of power (social and political), power relations among individuals, such as the distribution of Social sta ...

decision to join. The five tests were as follows: #Are

business cycle Business cycles are intervals of general expansion followed by recession in economic performance. The changes in economic activity that characterize business cycles have important implications for the welfare of the general population, governmen ...

s and economic structures compatible so that we and others could live comfortably with euro

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...

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 markets? #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 had to have met the

European Union The European Union (EU) is a supranational union, supranational political union, political and economic union of Member state of the European Union, member states that are Geography of the European Union, located primarily in Europe. The u ...

's economic

convergence criteria The euro convergence criteria (also known as the Maastricht criteria) are the criteria European Union member states are required to meet to enter the third stage of the Economic and Monetary Union of the European Union, Economic and Monetary Un ...

("Maastricht criteria") before being allowed to adopt the euro. One criterion is two years' membership of ERM II, of which the UK was never a member. Under the

Maastricht Treaty The Treaty on European Union, commonly known as the Maastricht Treaty, is the foundation treaty of the European Union (EU). Concluded in 1992 between the then-twelve Member state of the European Union, member states of the European Communities, ...

, the UK was not obliged to adopt the euro. When the Brown government was voted out of office in the 2010 general election, the tests ceased to be government policy.

History of the tests

The five tests were designed in 1997, shortly after the Labour Party replaced the

Conservatives Conservatism is a cultural, social, and political philosophy and ideology that seeks to promote and preserve traditional institutions, customs, and values. The central tenets of conservatism may vary in relation to the culture and civilizati ...

in government, by former

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and his then special adviser

Ed Balls Edward Michael Balls (born 25 February 1967) is a British former politician, broadcaster and economist. He served as Secretary of State for Children, Schools and Families from 2007 to 2010, and as Shadow Chancellor of the Exchequer from 2011 to ...

. 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 The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 191 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of las ...

deemed them to be "broadly consistent with the economic considerations that are relevant for assessing entry into a monetary union." The UK

Treasury A treasury is either *A government department related to finance and taxation, a finance ministry; in a business context, corporate treasury. *A place or location where treasure, such as currency or precious items are kept. These can be ...

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 The degree of labour market flexibility is the speed with which labour markets adapt to fluctuations and changes in society, the economy or production. This entails enabling labour markets to reach a continuous equilibrium determined by the inters ...

, 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

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and flexibility were sufficient. # The

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, 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, 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

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, the debate on the

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and subsequent

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upstaged that on the euro. Gordon Brown, in his first press conference after succeeding

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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,

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, the

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, averred, saying that UK leaders were seriously considering the switch due to the

2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...

. 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.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

History of the tests

See also

References

External links