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Lies, damn lies and statistics ...

The Treasury announced the five tests in 1997, which it would apply in determining whether there should be a referendum on joining the euro.

At the time, these test were christened: ‘National Economic Variations End Relentlessly’, the acronym to which is ‘NEVER’.

Two questions needed answering. Is it correct that we have not achieved sustained economic convergence with eurozone? Is it likely that such convergence could be achieved in time for a referendum before the next election? Economic convergence between the two economies is easily measured numerically.

On these measures, the UK is currently significantly divergent from eurozone.

The UK inflation rate (on the eurozone measure) is 1.5%, while the eurozone is 2.1%. Insofar as output gaps are concerned then, we currently estimate the UK has a negative output gap of 1.3%, while eurozone has a negative output gap of 3.8% (both are producing below capacity).

Convergence has clearly not been achieved. Moreover, there have been significant average divergences on the above two indicators in the past year (0.9% on inflation and 1.8% on the output gap), two years and three years.

  • Maurice Fitzpatrick, head of economics at Numerica Business Service.

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