The five economic tests
The assessment process: There is a need for a serious and indepth analysis which will allow the Government to take a properly considered and researched decision on the economic consequences of joining the euro. But an economic analysis is not a mechanistic exercise and there will inevitably be an element of judgement involved. It will be difficult for the results of the assessment to be totally unambiguous. Nonpublication of the supporting studies will have reduced the opportunity for informed public debate before the Government becomes committed to a particular judgement.
The 5 tests and supporting studies: The assessment must examine not just the economic effects of joining but also what the effects would be of not joining. The assessment, unlike the previous examination in 1997, will have evidence of the track records both of the euro itself, and of the post1997 arrangements for control of monetary and fiscal policy in the UK.
The individual tests: The Committee does not form a view as to whether individual tests have been passed (though it notes a greater degree of convergence than in 1997), but identifies a number of issues the tests should be seen to have examined. These include: the implications of the recent imbalances in the economy for achieving convergence; how the UK would react to changes in eurozone interest rates; the effects of any increased volatility versus the dollar; the response to pressures for tax harmonisation; the real significance of current inward investment statistics; the impact of the SGP on public investment; UK influence on EU financial regulation; and the impact of the current ECB reforms. The Committee welcomes the forthcoming examination of the take up in the UK of fixed rate mortgages (which are more common in the eurozone).
Timing and negotiation of entry
The Committee notes a number of issues relating to the process of entry including: the Government's current policy towards keeping within the 3% Treaty limit for the budget deficit; the setting of the entry level for the exchange rate (the Committee notes that a number of witnesses regard the present level as close to what is appropriate); and whether the UK needs to rejoin a form of the Exchange Rate Mechanism. There may currently be a 'window of opportunity' for influencing debate on reforms within the euro system, which may close if the UK decides not to join.
The Committee summarises a range of policy options now facing the Government. There are political implications to each option, but the economic case should be made before any decision to enter is taken.
Engaging the public in the debate
The Committee has examined how the public is to be informed about the issues and encouraged to participate in any referendum. All concerned should be seeking to promote as full a debate as possible. There is a shortage of objective information on the economic issues: the Committee suggests that the Government and the Electoral Commission should address this. The Commission could be given power to provide objective information to each household in the form of a leaflet addressing the main issues of public concern.