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The World at One's Nick Clarke reports
Test one: Convergence
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Tuesday, 26 December, 2000, 18:15 GMT
Test one: Convergence

The World at One examines the chancellor's first precondition for the UK joining the euro - convergence.

Gordon Brown's number one condition requires the convergence of the UK economy with that of Europe's, so that we can live comfortably with euro interest rates on a permanent basis, as he explained when he unveiled his five tests:

Our economy is reasonably convergent with that of biggest economies of the Eurozone and has been for a year or two

Former chancellor Kenneth Clarke
"That convergence must be capable and likely to be sustained - in other words we must demonstrate a settled period of convergence," he said.

There is no question that Britain has been out of gear with continental Europe for some years.

We came out of recession years earlier, achieving growth rates which countries like France and Germany have only just begun to match.

Currently, the comparison is 3% in Britain - probably about to decline - and 2.7% in Euroland, and still rising.

Gordon Brown's five economic tests
Can there be sustainable convergence between Britain and the Euro-zone?
Is there sufficient flexibility to cope with economic change?
What will the effect be on UK investment?
What will be the impact on our financial services?
Is it good for employment?
And interest rates? The gap has narrowed steadily - but rates are still 6% here compared to 4.75%.

Those factors are enough to convince the former chancellor, Kenneth Clarke, who believes convergence is the most important test of the five laid down.

"Our economy is reasonably convergent with that of biggest economies of the Eurozone and has been for a year or two," he says.

"I test convergence by growth rates and we've been pretty parallel with Germany for the last two or three years."

There are other facts to encourage enthusiasts: even though UK inflation is lower - 1%, according to the standard EU measure, while the euro average is nearly 3% - inflationary pressure is not thought to be that threatening because Euroland still has room for growth.

The problem is that cycles will keep on moving.

Maintaining convergence

Sir Peter Kemp, a former senior Treasury civil servant, believes it is the sustainability of convergence that is the important thing.

"It's no good saying at this moment in time we can stick a pole through the bicycle wheels and lock it because it will move on after that," he says.

Pushing sticks into spokes causes accidents - that might seem to be an argument for staying well away.

Charles Goodhart
Charles Goodhart: "Going in at the present exchange rate would be [like] committing suicide"
But the same point, turned on its head, is enthusiastically taken up by those who want to see the euro on British High Streets.

Those like John Edmonds, General Secretary of the GMB union, say the very act of joining would be the surest way of achieving convergence.

He is unhappy with about what he sees as government policy over the last two years - waiting for convergence to happen.

"I think we'll never be in a fit state unless we work towards achieving the five tests - or a measure of convergence we are comfortable with," he says.

He argues that convergence shouldn't really be a condition of entry - instead it will be a happy result of scrapping the pound.

Black Wednesday

There is another great oddity about the Chancellor's first condition - the things it doesn't say.

Remember the ERM? On October 6th 1990, we entered the Exchange Rate Mechanism - a sort of training ground for hopeful members of a single currency.

But on 'Black Wednesday' in September 1992, we were summarily ejected. The problem was that we joined at the unsustainable rate of 2.95 DM to the pound.

That experience rings loud bells with Charles Goodhart, Professor of Banking and Finance at the London School of Economics.

"We could not go in at the present exchange rate. It would be equivalent to committing suicide for our manufacturing industry and the whole of our tradeable goods sector, including agriculture," he says.

Mr Goodhart is formerly a member of the Bank of England's Monetary Policy Committee - which would of course lose its power to set interest rates if we joined the euro. That fact is one of the main underlying concerns of Gordon Brown's condition number one.

Add to all that the widely divergent views of economists, and the reasons for caution are becoming clear.

The OECD in Paris thinks we're more or less ready to join, the IMF in Washington can see no real advantage at present, and the Institute of Directors here in London says convergence is a myth between economies that 'pass like ships in the night.'

And the uncertainty fuels the case of those opposed to entry like David Lascelles, who runs a city think-tank.

"The test Gordon Brown has set is quite strict and I don't think at that structural level we are there yet," he says.

The British economy is a much more open economy depending on financial markets, it is more sensitive to interest rates, it depends on more translatlantic trade than other European countries, and has a strong services sector, he explains.

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