These are the five economic tests on UK entry to the euro as outlined by The Treasury in 1997.
The Treasury sees the first test, the need for the UK economy to come together with the eurozone economy, as the “touchstone” towards a successful single currency.
And it says it must converge in a “sustainable and durable” way.
It says that to be passed, the UK economy must:
- have converged with Europe
- be shown to have converged
- show convergence capable of being sustained
have sufficient flexibility to adapt to change and unexpected
In the past, the UK’s economic cycle has been both more volatile than others in the EU, reflecting different economic policies, oil price rises and German unification.
and others could live comfortably with euro interest rates on a permanent basis?
This also been affected by differences in the UK economy such as trade patterns, oil, company finance and the housing market.
Setting out the five tests, the government said a period of stability – via low inflation and controls on spending – would be needed in order to promote sustainable and durable convergence with the rest of the European Union.
The Treasury says the success or otherwise of the euro depends on business and the workforce being flexible.
The economy, it says, must have “the ability to adjust to change”.
It says this is because of the “inevitable loss of domestic control over monetary policy” and the risk of future economic turbulence.
Firms would need to be flexible in terms of pricing and margins, and in their business strategy.
Wage bargaining in the labour market must be “realistic and take account of developments in productivity”.
Employees would need to increase their skills in order to adapt to change in the job market.
The Treasury believes that a successful single currency would:
decisions to invest in Britain?
- create an attractive area – with low inflation and stability – for firms to invest
- be a complement to the Single Market, boosting competition and
providing new opportunities for companies
The Treasury says the euro could, if successful, help to reduce the risk of poor investment performance by reducing instability.
Investment could be boosted by the reduction of transaction costs and exchange rate uncertainty, it says.
And more transparent pricing – with companies able to compare prices between countries much more easily – could also encourage investment.
But the Treasury says entering the single currency before the UK economy has sufficiently converged with the eurozone would discourage investment.
The Treasury says joining the euro would affect the financial services industry “more profoundly and more
immediately” than other sectors of the economy.
of the UK’s financial services industry?
It says whether the UK joins the euro or not, the City of London’s strengths “should help it to thrive”.
The test centres on whether the introduction of the euro would be advantageous for the sector and whether the sector is fully prepared for the introduction of the single currency in the UK.
Employment and growth
This is the “fundamental” test, says the Treasury.
lasting increase in jobs?
Joining the euro could “enhance both growth and employment prospects”.
But without sufficient convergence and flexibility, “the resulting turbulence could considerably damage them”.
The Treasury will have to decide as it assesses the tests the potential effect on jobs and growth from joining the euro.