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The World at One's Nick Clarke reports
Test five: The effect on employment
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Thursday, 28 December, 2000, 13:11 GMT
Test five: Employment

The World at One examines the chancellor's fifth precondition for the UK joining the euro - the effect on employment.

In his speech setting out the five economic tests, Gordon Brown noted that for many the most practical question is whether membership of the single currency would be good for jobs.

This is one of the more frivolous of Gordon's five tests.

Former chancellor Kenneth Clarke
"The Treasury's assessment is that our measures to create employment and for welfare state reform must accompany any move to a single currency," he said.

"Ultimately whether a single currency is good for jobs in practice comes back to the question of sustainable convergence."

The chancellor sometimes describes this test as a summary of all the rest, and says that the key to his decision to recommend joining the euro will be jobs.

Yet it's a test which induces in his predecessor Kenneth Clarke a wry smile.

Gordon Brown's five economic tests
Can there be sustainable convergence between Britain and the Eurozone?
Is there sufficient flexibility to cope with economic change?
What will the effect be on UK investment?
What will be the impact on the City and the financial services sector?
Is it good for employment?
"This is one of the more frivolous of Gordon's five tests.

"I've never known a government do anything that it didn't believe would be good for employment and the idea that it's ever going to do anything bad for employment is faintly ridiculous," he says.

The facts are that Britain already has an unemployment rate of around 5% - while the average in Euroland is 8.9%.

It's hard to see how joining the euro could improve that, although long-term unemployment here is somewhat higher - 5.5% against 4.2%.

The pro-euro lobby likes to point out that about 2.7m jobs are dependent on trade with Europe - although the implication that those jobs are at risk has not yet struck a political chord.

But even enthusiasts like John Edmonds of the GMB union accepts that - in or out - there are risks involved.

"It is a gamble and in the end of course we are talking about a political decision," he says. "I personally feel the inevitability about our greater integration in Europe is so strong that we just better get on with it.

"All this sort of British hanging around on the edges and hoping that things will kind of turn out in some nice way is not a very good way of planning policy," he says.

Risk 'not worth taking'

Those opposed to British membership, such as David Lascelles, say the risk isn't worth taking and, what's more, there's a missing element in the fifth test.

"What we find unsatisfactory about these tests is they don't take account of whether the euro is actually working.

"There should be a question which says: 'Is the euro actually delivering benefits to members of the Eurozone?'"

His answer? "Not that we see at the moment."

Sir Peter Kemp
Sir Peter Kemp: Mr Brown will takes a view based on "the economy and society as a whole"
Ironically, the health of the euro is very much on the minds of strong supporters of Monetary Union, like Kenneth Clarke - but for rather different reasons.

"I think our economy is now convergent with that of the Eurozone. We're in a position to benefit from joining the single currency but for one very big problem - which is that we couldn't conceivably go in at the present exchange rate vis--vis the euro as our transitional exchange rate.

"We're running at about DM3.20 to the pound. That's far too high and is causing vast damage to farming, manufacturing and a great deal of European trade-based industry and commerce in this country," he says.

When it boils down to it - pro or con - assessing the possible performance of the euro, let alone its effect on growth, stability and jobs, will involve yet another group of economists making an educated guess - as they do all the time, often with startling inaccuracy.

Political or economic?

Charles Goodhart, Professor of Business and Finance at the London School of Economics, feels it is a political rather than an economic issue.

"It is not clear whether one can assess with any clarity in advance whether it would be beneficial or adverse for jobs.

The fundamental issues are political rather than economic

The LSE's Charles Goodhart
"Probably on balance it wouldn't make a great deal of difference - or at least it would be impossible to demonstrate that it has made a great deal of difference," he says.

"You can call the economics either way. So the fundamental issues are actually political rather than the economic issues that the Chancellor continually goes on about."

Sir Peter Kemp, a senior civil servant at the Treasury for many years, goes further:

"I think he will take a view on everything - his gut feeling, his feeling for the politics of the thing, what other members of government think, what the papers seem to say where it's going - and he'll start getting a feeling whether this is a right thing in reality both from the point of view of the economy, and society as a whole.

"Then I think he'll almost work backwards to look at these tests and to check up whether they work out in this way."

Our survey so far has indicated strongly that although Mr Brown's tests do relate to the real economy, they're too speculative, and subjective, to have so much emphasis placed upon them.

Charles Goodhart
The LSE's Charles Goodhart: "Most economists view the five tests with a considerable degree of cynicism"
Logical arguments can be made for answering yes or no to all of them. And most depend on proving a negative - that giving up the pound will not harm our economy.

Charles Goodhart comes to the conclusion that the chancellor is using the tests as a defence against having to take the most difficult political decision of modern times - until he and Tony Blair are good and ready.

"Most economists view the five tests with a considerable degree of cynicism," he says.

"It is using economics as protection against the deeper political issues."

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