8.6.2The uk and the euro

As part of the negotiations leading up to the signing of the Maastricht treaty in 1991,

the UK government had obtained an opt-out, allowing it to choose not to be an

initial member of the monetary union. Technically, it was not eligible to join the

euro area at the beginning of January 1999 because sterling had not been a mem-

ber of the exchange rate mechanism of the European Monetary System for at least

two years immediately prior to the establishment in 1998 of the membership of

the monetary union (sterling had been in the EMS’s exchange rate mechanism only

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from 1990 to 1992). In practice, sterling would almost certainly have been granted

membership from January 1999, but the government chose to exercise its opt-out

and remain outside, together with Sweden and Denmark. Greece had always wished

to join but was not granted membership until January 2001 because of its failure to

meet other conditions for membership set out in the Maastricht treaty.

The question was then whether the UK would join in the future and, if so,

when. In 1998 the government indicated its willingness to join in principle but said

that it would not recommend UK membership until the economic case for doing so

was ‘clear and unambiguous’. The factors to be taken into account in making that

decision were expressed in the ‘ve economic tests’ set out by the Chancellor of the

Exchequer, Gordon Brown, in July 1997. The ve tests were:

l	Are business cycles and economic structures compatible so that we and others could live comfortably with euro interest rates on a permanent basis?

l	If problems emerge, is there sufcient exibility to deal with them?

l	Would joining EMU create better conditions for rms making long-term decisions to invest in Britain?

l	What impact would entry into EMU have on the competitive position of the UK’s nancial services industry, particularly the City’s wholesale markets?

l	In summary, will joining EMU promote higher growth, stability and a lasting increase in jobs?

The Treasury began a detailed study of the ve tests, with the Chancellor promis-

ing an evaluation of them by June 2003. There was always a problem with the tests

since the issues involved were so complex and the uncertainties so great that no one

could ever claim that the economic case for joining was ‘clear and unambiguous’.

Major economic and political decisions never are. Thus, despite the detailed technical

work done, there remained great scope for interpretation of the data. In the event,

the June evaluation conrmed the general feeling – stemming in part from Gordon

Brown’s personal scepticism towards euro area membership – that the answer would

continue to be ‘yes, but not yet and perhaps not for quite a long time’. Nothing

has occurred in the intervening three years to bring future British membership any

closer. Indeed, the continued poor performance of the economies of some single

currency members, notably of France and Italy, relative to the British economy, the

possibility of Gordon Brown becoming the next British Prime Minister and the con-

tinued opposition to membership of the euro by the principal opposition party have

all added to the feeling that British participation in the European single currency is

a very distant prospect.