5.3 The UK and the euro

In the 1970s the UK was involved with the European Community's early attempts at currency stability and failed abjectly. The UK's experience of the Community's currency stability mechanisms in the early 1990s was no more positive. The UK joined the ERM (within 6% bands) in October 1990, only to be ejected on 16 September 1992.

The current British Government's policy is still formerly to join the euro "when the conditions are right" and in the late 1990s it launched a series of "changeover" plans. British membership of the euro is currently subject to a popular referendum.

The Treasury published its "5 tests" for euro membership in October 1997. They were:

• Cyclical: are business cycles and economic structures compatible so that we and others could live comfortably with Euro interest rates on a permanent basis?
• Flexibility: if problems emerge is there sufficient flexibility (labour and product markets) to deal with them?
• Investment: would joining EMU create better conditions for firms making long-term decisions about the UK?
• Financial services: what impact would entry into EMU have on the competitive position of the UK's financial services industry, particularly the City's wholesale markets?
• Employment and growth: in summary, will joining EMU promote higher growth, stability and a lasting increase in jobs?

In June 2003 the Chancellor concluded that 4 out of his "5 tests" had not been met. The City test, apparently, had been met. He also announced changes to the inflation target for the Bank of England.

A progress report on the Government's reform agenda since the June 2003 assessment was included in the 2005 Budget. Progress included:

• Introduction of the symmetric 2% inflation target as measured by the Consumer Price Index (CPI), replacing the 2½% inflation target as measured by the Retail Prices Index, excluding Mortgage Interest Payments (RPIX).
• Reforms to address both supply and demand in the housing market, following on from the Barker review on the housing market and the Miles review on the mortgage market.
• Reforms to enhance the flexibility of labour, capital and product markets.

RL, February 2007