The Government negotiated an entirely neutral option, so that the UK is able to join as it chooses, subject to satisfying the Maastricht Treaty’s four convergence criteria.

The Labour Government’s policy on membership was set out by the then Chancellor of the Exchequer, Gordon Brown, in a statement to Parliament in October 1997.

In principle, it was in favour of joining and considered that there were no constitutional barriers. But central to the Government’s approach was the notion that membership must be justified in terms of the national economic interest, and that the benefits needed to be ‘clear and unambiguous’.

To this end, the Chancellor set out five economic tests in the summer of 1997 and, on the basis of a brief assessment of these tests, it was decided in October of that year that the UK would not join during the lifetime of the 1997-2001 Parliament.

The Government subsequently committed itself to undertake a second assessment of the five economic tests within the first two years of the next Parliament.

The formal announcement was made on 9th June 2003, with the assessment being accompanied by some 1,800 pages of supporting studies.

As was widely anticipated, it was again decided that the tests had not been met, and that there would not be a referendum.

While the tone of the assessment was more positive, it was nonetheless decided that only one test – that relating to the UK’s financial services sector – had been passed. Gordon Brown held out the prospect of re-running the assessment process again in June 2004, but in the end decided not to go ahead.

The whole issue has now been kicked firmly into the proverbial long grass, and is unlikely to make a comeback any time soon.

Test 1: Convergence

Are business cycles and economic structures compatible so that we and others could live comfortably with euro interest rates on a permanent basis?

The range of issues dealt with in making a judgement about convergence is such that, if this test is passed, it is hard to imagine the remaining tests, apart from that relating to financial services, also not being met.

Test 2: Flexibility

If problems emerge is there sufficient flexibility to cope with them?

A necessary adjunct to convergence is flexibility, particularly in labour and product markets. Since joining the euro involves a loss of domestic control over monetary policy, flexibility is necessary to deal with problems that might arise and which have a disproportionate impact on the UK.

Test 3: Investment

Would joining EMU create better conditions for firms making long term decisions to invest in Britain?

For this to happen, the euro area must be a zone of macroeconomic stability, with low inflation, low interest rates and exchange rate stability.

Test 4: 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?

This is an industry in which the UK has a strong and long-standing competitive advantage, with the City of London making a significant contribution to the balance of payments.

Test 5: Growth and jobs In summary, will joining EMU promote higher growth, stability, and a lasting increase in jobs?

A positive response to this test again depends on convergence and flexibility.

Satisfying the tests

It should be apparent that these tests are hard to ‘prove’ statistically and are subject to a significant element of judgement. When was anything in economics ever ‘clear and unambiguous’?

A more cynical interpretation would be that the tests will be satisfied when it suits the Government to say that they have been satisfied.

Since the second assessment was made in 2003 the whole issue of the UK’s membership of EMU has virtually disappeared off the political radar. The tortuous process of negotiating and ratifying the Lisbon Treaty has only served to highlight the ingrained suspicions of the British public towards anything European.

In any case, the burgeoning public sector deficit caused by the deep economic recession and the cost of bailing out the financial system will make membership impossible until after 2015. Not only is the budget deficit likely to reach nearly 12.5% of GDP in 2009 and 2010, but the ratio of outstanding debt will inevitably climb well above the 60% of GDP mark.

In order to satisfy the Maastricht convergence criteria, the deficit would need to be back under 3%, and the debt to GDP ratio would need to be heading back down towards 60%.