Five Economic Tests - History of The Tests

History of The Tests

The five tests were designed in 1997 by former British Labour Party Chancellor Gordon Brown and his then special adviser Ed Balls, allegedly 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 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.

The conclusions 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, the government ruled out UK membership of the euro for the duration of the 2001 Parliament. Since Labour 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 as British Prime Minister (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, Jose Manuel Barroso (the European Commission President) stated differently; that UK leaders were seriously considering the switch amidst the 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.