England, as part of the United Kingdom, is the most notable member of the European Union (at least, until 2019) 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 in 1997, the then-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
Blair's Chancellor of the Exchequer, Gordon Brown, is credited with creating the "five-test" policy with regard to the United Kingdom and the euro. The tests are as follows:
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 the 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 currency, 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 U.S. dollar and other major world currencies. Detractors of the euro 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.