Why the U.K. Doesn't Use the Euro

Why Doesn't the U.K. Use the Euro?

Since the U.K. left the European Union on Jan. 31, 2020, the simple reason that the U.K. does not use the euro is that it is not a member state of the E.U. But prior to its exit, England, as part of the United Kingdom, was the most notable member of the European Union that elected not to use the euro. Rather, the United Kingdom used 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.

Key Takeaways

  • The United Kingdom left the European Union on Jan. 31, 2020.
  • The United Kingdom, while it was part of the European Union, did not use the euro as its common currency.
  • The U.K. kept the British Pound because the government determined the euro did not meet five critical tests that would have been necessary to adopt its use.

Understanding Why the U.K. Never Used 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 were 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 could never be justified.

Other Reasons for Not Adopting the Euro

The British government did not want to abdicate control of its own interest rate policy, which would have occurred under the euro system. The system would have also removed a level of comfort with the pound sterling exchange rate. For instance, a British firm or investor who was used to exchanging pounds to dollars or vice versa would have been forced to adjust to a euro exchange rate.

Additionally, the United Kingdom would have been forced to meet the "euro convergence criteria" before adopting the currency, which includes maintaining a debt-to-GDP ratio that would have limited 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.

What Was 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 exchange rate against the U.S. 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 U.K. 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.

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 then officially left the E.U. at 11 p.m. GMT on Jan. 31, 2020.

Article Sources
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