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Britain: Report Says 'Five Tests' Passed For Euro Entry

  • Kathleen Moore

The United Kingdom is one of only three European Union countries that does not have the euro as its currency. The government says it will only consider holding a referendum on euro entry when the British economy has passed five tests set by the Treasury. Now, an influential think tank -- whose economic forecasting model is used by the Treasury -- says the U.K. has passed those tests.

Prague, 3 May 2002 (RFE/RL) -- Divisions over how closely Britain should integrate with Europe -- including whether it should adopt the single euro currency -- helped tear Britain's last Conservative government apart, at one point even prompting then-Prime Minister John Major to call a party leadership contest. Major won that contest, only to lose a general election two years later to Labour Party leader Tony Blair.

Only Britain, Denmark, and Sweden are not in the euro-zone. Recent polls show the topic is still volatile among Britons. Opponents of the single currency outnumber its fans by around two-to-one. So it's not surprising that Blair, as Major did before him, has adopted a "wait-and-see" approach on whether to join European Monetary Union (EMU).

At the core of the Blair government's approach are Chancellor Gordon Brown's five economic tests. Only once they're met does the government say it will consider a public referendum on adopting the single currency. Brown believes that before Britain enters EMU, it must be proven that it will have a positive impact on foreign investment, the financial services industry, and employment, and that it be proven that Britain has converged with the euro-zone economies, and that those economies are flexible enough to cope with economic change.

The Treasury is expected to present its assessment of the five tests by June 2003. A study out this week, however, argues that they've already been met.

Ray Barrell is the author of that report. He's a senior research fellow at London's National Institute for Economic and Social Research, an influential think tank: "We can say clearly that we're round about the same point in the business cycle as they are. Our inflation rate is pretty similar. Our interest rates are pretty similar. And so on that basis we've converged."

Barrell concludes that joining EMU will bring Britain more foreign investment and boost output. He says that the monetary and fiscal institutions in both the U.K. and the euro-zone are flexible, and that their objectives are the same.

Joining the euro would mean ceding control of monetary policy to the European Central Bank. Barrell argues that this will lead to lower interest rates and improve prospects for growth, income, and jobs. And he says adopting the euro will also make it easier for people in Britain to compare prices in other euro-zone countries, which should boost competition.

The relative strength of Britain's pound has been cited as an obstacle to euro membership. There were reports last month that Chancellor Brown believes the pound would need to be devalued by around 30 percent before joining the euro, which would spark inflation and could destabilize the economy. But Barrell says Britain could join at the current exchange rate of around 1.61 euros to the pound. This is only slightly stronger than what he calls a "wise" exchange rate at entry of around 1.50.

Asked if his study strengthens the case for euro entry, Barrell says: "I would say so, yes. The balance of evidence is, we think, in favor of entry into the euro area for the U.K. However, that must be a political decision. It can't be made on economic grounds alone."

But that political decision -- and when to call a referendum -- is a risky venture for the Blair government, given divided public opinion.

The pro-euro camp says rising levels of investment are just one reason to sign up. It would also eliminate the huge administration costs of converting currencies, which they say amount to nearly 4.5 billion pounds a year. And it would boost cross-border trade.

The anti-euro camp says joining the euro would jeopardize Britain's economic successes. Britain has a much lower unemployment rate than many euro-zone countries, and taxes are generally lower, too.

They say there are also too many differences between the U.K. and euro-zone economies. Britain has a much more flexible labor market, and trades much more with the U.S., so any big change in the dollar exchange rate would hit Britain much harder. The U.K. is also a net exporter of oil and has a more developed system of private pensions.

RFE/RL spoke to George Eustice, campaign director of Britain for Sterling. His response to Barrell's study is simple. He points to another study, also released this week, which boosts the arguments of the anti-euro camp.

That study -- conducted by the Oxford Economic Forecasting on behalf of Britain for Sterling -- highlights the risks of joining EMU at what it calls an "inappropriate" exchange rate.

"The great difficulty is that because of the structural differences between our economy and the euro-zone economy, it's very hard to pick an exchange rate that's going to be right and sustainable in the long term."

Eustice says he doesn't think Blair's government will be able to argue effectively that it is in Britain's interests to join the single currency: "We don't think that they'll be able to make the case that the tests are met in a clear and unambiguous way. Certainly, the majority of economists are of the view that there are important structural differences between our economy and the euro-zone's, and actually that's not going to go away in the short term."

Still, Barrell's report could boost euro supporters within the government. A poll earlier this year suggested that public support for the euro would grow if Blair simply announced that the tests had been met.

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