Economics - Will EMU fly?

(From Financial Director)

Byline: Dennis Turner, chief economist for HSBC.

The end of the first week of June is the deadline the Chancellor has set for announcing whether the UK has met the Five Tests for entry into the single currency. If the tests have been satisfied, and if parliament votes in favour, the final decision will rest with the public in a referendum.

So this is the year Britain decides if we are going to decide! Even if all the hurdles are cleared, entry is still some way off. The official Changeover Plan will be a transition process lasting 34-40 months once the decision had been made. So if the government wanted the referendum and the introduction of the euro to take place in the same parliament, July is about as late as the verdict on the Five Tests can be left.

Nonetheless, the prime minister has said that the economic advantages to the UK joining the single currency must be "clear and unambiguous" before the government could support entry. When the tests were originally applied in 1997, it was obvious that entry was not a realistic proposition, but since then much has changed. Both the europhiles and eurosceptics believe their cases have been strengthened by recent events.

Of the Five Tests, the first is the most important. Sometimes referred to as the 'touchstone' or acid test, it is concerned with whether the business cycles are sufficiently synchronised to make the 'one size fits all' monetary policy appropriate for the UK. Convergence, moreover, has to be sustainable, not just momentary.

In 1997, the economic cycles in the UK and Euroland were miles apart.