Ed Balls: The political economy of the euro

From the Cairncross lecture by the chief economic adviser to the Treasury, in Oxford

In 1997 we concluded that, on the basis of a detailed assessment of the five tests, it was not in this country's interest to join the first wave of EMU. It is an understatement to say that the five tests are controversial. Some, who would rule out membership of the euro on constitutional grounds, say that this assessment of the national economic interest is, therefore, irrelevant. Others argue that the political case for membership is so compelling that the historical moment should be seized regardless of economics. And all too often, commentators, doubting whether economics can rise to the challenge of the five tests, fall back to the easy view that the decision will inevitably be made on political, not economic grounds.

I believe that Sir Alec Cairncross would have rejected the idea that economics and economic policymakers cannot rise to this challenge. He would have argued, I am sure, that a decision of such magnitude has to be got right. But he would also point out that we do not have a good track record of making these decisions over the past century. Central to these past failures has been that politicians and policymakers paid insufficient attention to the economics, and then paid a heavy economic and political price when it all went wrong.

The reason why the five tests are so important is because they ensure that a proper, long-term assessment of the national economic interest will precede an irreversible decision of great economic, and therefore political, significance.

As Sir Alec reflected, past decisions were not made "as a result of a careful assessment of the pros and cons and a review of the likely consequences". This time we are doing that careful economic assessment of the pros and cons. That is why we have the five tests.