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 of the Bank of England as its national currency.

When the euro was first proposed as a single currency system for the European Union in 1997, the then-Chancellor of the Exchequer, Gordon Brown, declared that there were "five economic tests" that must be met for his country to accept the euro, which it did not end up meeting.

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:

  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 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.

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.

Key Takeaways

  • The United Kingdom, while part of the European Union, does not use the euro as a common currency.
  • The UK has kept the British Pound because the government has determined the euro does not meet five critical tests that would be necessary to use it.
  • With Brexit looming, the pound looks like it is here to stay, but the UK leaving the EU will have financial and economic consequences on both sides.

What Is Brexit?

Brexit is an abbreviation for "British exit," referring to the U.K.'s decision in a June 23, 2016 referendum to leave the European Union (EU). The vote's result defied expectations and roiled global markets, causing the British pound to fall to its lowest level against the dollar in 30 years.

Former Prime Minister David Cameron, who called the referendum and campaigned for Britain to remain in the EU, announced his resignation the following day. While the UK did not adopt the euro as its common currency, it did integrate itself into the Eurozone economic system of open borders for free trade and commerce and movement of labor.

All of this will cease without individual agreements once Brexit takes place. This could have large effects on both the UK and EU economy, on employment, and on financial flows.

Theresa May, who replaced Cameron as leader of the Conservative party and prime minister, stepped down as party leader voluntarily on June 7, 2019, after facing severe pressure to resign. Boris Johnson took over in July of 2019. Britain had to ratify a withdrawal agreement with the EU before leaving to avoid a chaotic "no-deal" exit. A withdrawal agreement was reached in October 2019. The country is currently in a transition period. New rules will take effect on January 1, 2021.