Five economic tests facts for kids

The five economic tests were a set of rules created by the UK government. They were designed to help decide if the United Kingdom was ready to join the euro. The euro is the common currency used by many countries in Europe. These tests were meant to be purely about economics, not politics.

The five tests were:

1. Are the UK's business cycles and economic structures similar enough to other euro countries? This would help the UK manage interest rates if it joined.
2. If economic problems happened, would the UK's economy be flexible enough to deal with them?
3. Would joining the euro encourage businesses to invest more money in Britain for the long term?
4. How would joining the euro affect the UK's financial industry? This includes important areas like London's financial markets.
5. Overall, would joining the euro lead to more economic growth, stability, and more jobs in the UK?

Besides these tests, the UK also had to meet other rules set by the European Union. These were called the "Maastricht criteria." One rule was to be part of something called ERM II for two years. The UK never joined ERM II. The Maastricht Treaty also meant the UK didn't have to adopt the euro if it didn't want to.

When the government changed in 2010 United Kingdom general election, these tests were no longer official policy.

How the Tests Started

The five tests were created in 1997. This was shortly after the Labour Party took over from the Conservatives. Gordon Brown, who was the Chancellor of the Exchequer (like the finance minister), and his advisor Ed Balls designed them.

The UK's Treasury department was in charge of checking these tests. They first looked at them in October 1997. At that time, they decided the UK's economy was not ready. It was not similar enough to the rest of Europe, and not flexible enough.

The government promised to check the tests again later. They published a new report in June 2003. This report was very long and included many detailed studies.

What the Tests Showed

The 2003 report had similar findings to the first one. The Treasury said:

• There had been some progress since 1997, but there were still big differences. For example, the housing market in the UK was very different.
• The UK's economy had become more flexible, but they weren't sure it was flexible enough.
• Joining the euro could increase investment, but only if the economy was similar enough and flexible enough.
• London's financial centre would benefit from being in the Eurozone.
• Growth, stability, and jobs would increase, but again, only if the economy was similar enough and flexible enough.

Because of this report, the government decided in 2003 that the UK would not join the euro during that time. Later, in 2007, when Gordon Brown became Prime Minister of the United Kingdom, he said that not joining the euro was the right decision for Britain.

One main reason for the difference was the UK's housing market. Many people in Britain have mortgages where the interest rate can change. In many European countries, fixed-rate mortgages are more common. This means interest rate changes affect British households more directly.

See also

• Economy of the United Kingdom
• Economy of the European Union
• Euroscepticism
• Eurozone
• No Campaign
• Pro-European