UK and the euro: Chancellor says ‘Not yet’, June 2003

The UK Chancellor, Gordon Brown, announced on 9 June 2003 that the UK is not yet ready to join the European single currency but that the government remains committed to the principle of joining the euro in the future when the economic conditions are right.

Shortly after taking up office in 1997, the Labour government set five economic tests which the UK would have to meet before it could consider joining the single European currency. In essence, these tests are designed to establish whether or not the UK's economy is close enough to those of the eurozone countries for them to be irreversibly linked by a single currency. The Chancellor insists that meeting these tests is essential to avoid economic problems, such as those seen a decade ago when the UK was forced out of the EU's Exchange Rate Mechanism (ERM).

The five economic tests are:

• Convergence: The UK economy must converge with the eurozone economy in a 'sustainable and durable' way, capable of adapting to change and unexpected economic events.
• Flexibility: The UK's workforce and businesses would need to be flexible and able to easily adjust to change because of the loss of domestic control over monetary policy.
• Investment: The UK economy would need to have successfully converged with the eurozone economy for forms to be prepared to make long-term investment in the UK
• Financial Services: Since this sector would be the one most affected by entry into the eurozone, the Treasury believes that the sector would have to be fully prepared for the introduction of the euro and that joining the single currency would have to be advantageous for the sector.
• Employment and growth: Described by the Treasury as 'the fundamental test', this test focuses on whether or not joining the euro would promote higher growth, stability and a lasting increase in jobs

According to the treasury's assessment of the five economic tests, only the one concerning financial services passes. However, Mr. Brown told MPs that passing two other tests - convergence and flexibility - would lead to the remaining two - investment and jobs - being satisfied. On this basis, the Chancellor has said that the government will report back on progress towards meeting the tests in the 2004 Budget and dependent on those conclusions it will decide whether to assess the tests again.

In the meantime, the government will unveil a referendum bill in Autumn 2003, paving the way for a possible referendum in 2004. However, many observers believe that the Labour government will not risk holding a referendum on joining the euro until after the next general election, because of a lack of public support for the idea. In an attempt to boost the image of the EU and the euro in the UK, Tony Blair and Gordon Brown will launch a campaign publicising the advantages of the UK's membership of the European Union and the potential benefits of joining the euro.

In his House of Commons Statement, Mr Brown told MEPs that joining the euro could bring about a growth in national income, higher living standards, lower prices, a reduction in transaction costs for businesses and a possible increase in trade between the UK and the eurozone of up to 50% in 30 years. But the two biggest factors preventing the UK from joining the euro concern the housing market and inflation. The nature of the UK's housing market is particularly different to that on the continent with many more people possessing much larger mortgages. This means that any significant changes in interest rates could seriously affect home-owners and there is also the risk of a housing boom followed by a bust.

The pro-Europeans have waned that the government's postponement of a decision on the euro will further weaken its position in Europe at a crucial time when the EU's Member States are deciding on the future of the organisation and a possible EU constitution. However, the general reaction from the EU has been positive. Neil Kinnock, Vice President of the European Commission, called the Chancellor's verdict 'practical and sensible' and the German Finance Ministry said it fully understood the UK's decision, but called on the UK to hold a referendum next year. Only the anti-euro campaigners in Sweden felt able to claim a victory, saying that the UK's decision to postpone its verdict would strengthen its cause to keep Sweden out of the euro when a referendum is held in September 2003, because the country would not be isolated if the UK remained outside the eurozone.

However, there is every indication that whilst the timing might not yet be right, the Labour government is committed to taking the UK into the eurozone in the future. According to Mr Brown:

'So I can today confirm the principled case: our view that membership in a successful single currency would be of benefit to the British people as well as to Europe is strengthened by the results of our assessment. While we argue the case in principle for joining, there are those who rule out joining the euro forever as a matter of dogma even if it were shown to be in the best economic interests of the country. That cannot be right for the future of Britain'.

Links:

HM Treasury:
	Homepage
	The UK government's policy on Economic and Monetary Union [EMU]
UK Prime Minister's Office:
	09.06.03:	Press Release: Chancellor's euro statement in full
	09.06.03:	Press Release: UK not ready to join euro
European Sources Online: Financial Times:
	10.06.03:	Euro rows to go on as Brown puts off verdict
	10.06.03:	Brown wins battle but Blair seems keen on return match next year
	10.06.03:	EU partners put a positive spin on disappointment
	10.06.03:	Tides of history that must inevitably sweep Britain across great divide
	10.06.03:	Big effort to sell commitment to Europe
	10.06.03:	Delay in UK spells trouble for Swedish Yes campaign
BBC News Online:
	09.06.03:	The UK's euro verdict
Britain in Europe:
	Homepage
	09.06.03:	The euro game is on - Marshall
No-euro campaign:
	Homepage
	06.06.03:	Euro roadmap - back to square one
European Sources Online: In Focus
	The United Kingdom and the Euro, February 2003

Helen Bower

Compiled: Tuesday, 10 June 2003

UK Chancellor, Gordon Brown, announced on 9 June 2003 that the five economic tests on whether the UK should join the single currency had not yet been passed. Keywords: The United Kingdom and the euro; Britain and the euro