A:

England, as part of the United Kingdom, is the most notable member of the European Union that has elected not to use the euro. Rather, the United Kingdom uses the pound sterling as its national currency. When the euro was first proposed as a single currency system for the European Union, the Prime Minister of the United Kingdom, Tony Blair, declared that the were "five economic tests" that must be met for his country to accept the euro.

Five Economic Tests

Gordon Brown is credited with creating the "five-test" policy with regard to the United Kingdom and the euro. The tests are as follows:

1. Business cycles and economic structures must be compatible enough that the United Kingdom could live with Eurozone interest rates.

2. The system must have sufficient flexibility to deal with both local and aggregate economic problems.

3. Adopting the euro must create conditions conducive to firms and individuals investing in the United Kingdom.

4. The euro would enable the nation's financial services industry to remain in a competitive position internationally.

5. Adopting the euro must promote higher growth, stability and a long-term increase in jobs.

Many believe that the five economic tests, as constructed, set benchmarks so difficult to satisfy that a movement to the euro from the pound sterling can never be justified.

Other Reasons for Not Adopting the Euro

The British government has not wanted to abdicate control of its own interest rate policy, which would occur under a euro system. The system would also remove the current level of comfort with the pound sterling exchange rate; for instance, a British firm or investor who is used to exchanging pounds to dollars or vice versa would be forced to adjust to a euro exchange rate. Additionally, the United Kingdom would be forced to meet the "euro convergence criteria" before adopting the euro, which includes maintaining a debt-to-GDP ratio that limits British fiscal policy. As of 2014, the United Kingdom only met 20% of convergence criteria.

What Are Euros?

The euro is the official currency for most of the member states of the European Union. The geographic and economic region that uses the euro is known as the "Eurozone." Proponents of the euro believe that adopting a single currency over the European economic system reduces the exchange rate risk to businesses, investors and financial institutions. It is also argued that a currency with the backing of the Eurozone economy is better able to compete with the American dollar and other major world currencies. Detractors of the euro monetary system say that too much power is concentrated with the European Central Bank, which sets monetary policy for the euro. This reduces the ability of individual countries to react to local economic conditions.

RELATED FAQS
  1. What is the cost of living difference between the U.S and the U.K?

    Learn how consumers pay, on average, nearly 30 percent more for private goods and services in the United Kingdom than in ... Read Answer >>
  2. Why the British Pound Is Stronger Than the U.S. Dollar

    Learn why the British pound is stronger than the U.S. dollar, despite the U.S. economy being larger than that of Britain ... Read Answer >>
  3. How is the forex spot rate calculated?

    The forex spot rate is determined by supply and demand. Banks all over the world are buying and selling different currencies ... Read Answer >>
  4. Is there a world currency? If so, what is it?

    There is no such thing as a world currency. However, since World War II, the dominant or reserve currency of the world has ... Read Answer >>
  5. How do changes in national interest rates affect a currency's value and exchange ...

    Generally, higher interest rates increase the value of a given country's currency, but Interest rates alone do not determine ... Read Answer >>
Related Articles
  1. Insights

    Why These European Countries Don't Use the Euro

    The euro is a common currency of the European Union. Yet, many EU countries don’t use the euro. Investopedia explores why.
  2. Tech

    How Would The Euro Trade If If A Grexit Occurs?

    In the event of a Grexit, the euro could head towards parity with the USD.
  3. Investing

    Why Britain Withdrew From The ERM

    Britain may have dodged a bullet, but it certainly was not an innocent bystander and still managed to become collateral damage.
  4. Trading

    How You Can Benefit From A Weak Euro

    Things can change quickly in the foreign exchange market, so consumers might want to act quickly to take advantage of the falling euro.
  5. Insights

    Disbanding The Euro - A Worst-Case Scenario

    What would the fallout be if the world's second-largest currency disappears?
  6. Investing

    Here's What Will Happen if the Euro Fails

    What might happen if the European Union stopped using the euro or if the entire eurozone dissolved back into pre-EU nationalism.
  7. Trading

    Will The US Dollar Surpass The Euro?

    The euro is weakening as the European Union turns to quantitative easing to help its economic woes. Meanwhile, the U.S. dollar is strengthening.
  8. Trading

    Why Is The Euro Falling?

    We look at the reasoning behind the selling pressure on the euro, and see how this can impact the average consumer.
  9. Investing

    Best 3 England ETFs for 2016 (EWU, FKU, EWUS)

    Discover how beneficial ETFs are for investors looking for exposure to the English economy, and find information on three popular U.K. ETFs.
RELATED TERMS
  1. Euro

    The official currency of the European Union's (EU) member states. ...
  2. European Union - EU

    A group of European countries that participates in the world ...
  3. Conversion Rate

    The ratio at which one currency can be exchanged for another. ...
  4. Association Of British Insurers - ABI

    A trade association comprised of insurance companies located ...
  5. Eurozone

    A geographic and economic region that consists of all the European ...
  6. European Monetary System - EMS

    A 1979 arrangement between several European countries which links ...
Hot Definitions
  1. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an ...
  4. Salvage Value

    The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
  5. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  6. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
Trading Center