UK will meet Brown test for euro entry before election, says report

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Britain will pass the Chancellor's five economic tests for entry to the euro before the next general election, an authoritative report said yesterday.

Britain will pass the Chancellor's five economic tests for entry to the euro before the next general election, an authoritative report said yesterday.

The UK is poised to converge with its mainland European neighbours, according to an analysis based on the Treasury's economic model.

The report, by the Item Club model run by accountants Ernst & Young, is the latest in a war of claim and counter-claim on the euro issue.

The Item Club report, to be published this weekend, says that Europe is fast catching up with the UK, with falling unemployment, rising investment and a political shift towards free market economics. "With doubts about the European economy removed, this will leave the economic assessment hanging on the cyclical convergence criterion," it said.

"While the Government's criteria for joining are highly subjective, whatever way you look at it, they will have been fulfilled come election time."

The five tests set by the Chancellor in October 1997 were: no harm to employment, prosperity and growth; no harm to the City; sufficient flexibility; benefit to industry; and sustainable economic convergence.

Obstacles to euro membership, such as the different nature of the housing markets, had weakened, the Item Club report said. British house owners were moving towards long-term fixed interest rate mortgages, removing the risk of a sudden shock if our rates fell to the European level.

British and European interest rates were converging, with the financial markets pricing in a rate of about 5 per cent in both economies by 2004, it said.

The National Institute for Economic and Social Research supported the research, saying it believed the UK would be in the euro-zone by 2005.

The Item Club economic model also found there would little stimulus to the UK economy as a result of joining the euro that might threaten an inflationary boom. "On the basis of available data, the UK now appears to be tracking the European cycle much more closely," it said.

The report echoes a similar study by the Organisation for Economic Co-operation and Development last month that found the UK was "as close, or even closer to the economic centre of gravity of the euro area" as some countries that were already members.

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