Economic tests - convergence

By Virginia Eastman

The Chancellor is due to deliver his verdict on the five economic tests for Euro entry within three weeks.

Meeting these criteria is crucial before the government puts the decision about joining the Euro to the British public.

One of the key tests is over the UK economy converging sufficiently with the rest of Europe.

Different directions?

For the last five years the British engine has been chuffing along very nicely with low inflation and steady growth.

But today the picture is not quite as clear.

The last time the Chancellor examined the convergence issue, we were heading in the same general direction as Europe, but we and the Americans seemed to be going one way and the Europeans another.

Five years on, and the differences seem less exaggerated. John Higgins, Economist with Nomura says that the UK is now more in tune with Europe than we were.

"There's an element of convergence but it's still not convincing" says John

"I still wouldn't say we are closer to the EU than we are to America," says John.

"There are large discrepancies within Europe and the ways that the countries are performing. Germany is stagnant while Spain has been growing faster even than the US.

There's an element of convergence but it's hardly convincing."

So if we are converging with Europe, albeit slowly, are we close enough to benefit more by being in the Eurozone - or should we continue a bit longer on our own?

"The growth rates between our economies are narrowing but in the UK we have a more flexible labour force, lower levels of taxation. The structure of our economy is fundamentally different."

Business cycles

The convergence test isn't just about speed and direction. It's also about cycles.

The Chancellor wants the UK business cycle to be closer to those on the continent before he will say we have converged. So what do the signals finally show?

"I think he's on amber at the moment, he's definitely not on red," says John Higgins.

"There has been some convergence, the exchange rate is there but there are still structural economic differences and until they are solved, we're not going to go to green."

Better out than in?

While the European village is an attractive prospect economically - there's no doubt the UK has done very well being on the outside over the last few years.

Convergence is one of the most important tests and as we don't quite make the grade yet the grass is probably greener where we are.

Many thanks to the Bekonscot model railway village where we filmed this piece