When the Euro was first launched in 1999, Tony Blair served as the British Prime Minster (he ran from 1997 to 2007). While it was not his decision alone not to use the Euro and instead keep the Great British Pound as the national currency, he did have a lot of influence in the decision.
The extensive guide below includes all the information you need to know about the Euro and why Britain opted out of joining it.
What is the Euro?
The Euro is the official currency of 19 of the 28-member countries of the European Union. These countries are known as the Euro area, or the Eurozone and consists of approximately 343 million people who all use this single currency.
It’s the second largest used currency worldwide after the United States Dollar and it’s estimated that more than €1.2 trillion is currently in circulation; one of the highest combined values of banknotes and coins in the world.
It is denoted by the ‘€’ symbol and consists of both notes and coin denominations.
Reasons Britain didn’t adopt the Euro
One of the major reasons why Britain didn’t adopt the Euro was that the British government didn’t want to relinquish control of its own interest rate. Under the Euro area system, Britain wouldn’t have been able to control their interest rate as everything is determined and monitored by the European Central Bank.
Another reason why Britain didn’t join the Euro is that the country would have been forced to meet the ‘Euro convergence criteria’ before they would be allowed to use the currency. This involves maintaining a debt-to-GDP ratio that would limit Britain’s fiscal policy. They would have also had to keep their annual budget deficits less than 3% of their gross domestic product.
Furthermore, joining the Euro would remove the level of comfort with the Great British Pound exchange rate. For example, instead of using the exchange rate for British pounds to US dollars, they would now be forced to adjust to the Euro exchange rate; thus meaning they could lose out on profit.
Many people feared that if Britain adopted the Euro, there could be severe liabilities placed upon the British taxpayer. This is because many European governments have large, unfunded pension liabilities, meaning that the UK would likely have to adopt the same policies.
There were also issues regarding the difference between the UK housing market and the markets within other Euro-using countries.
One of the biggest factors that was considered when discussing whether Britain should join the Euro was what would happen to British Overseas Territories who had their own local currency, but that was measured against the British Pound Sterling.
For example, in the Crown Dependencies of Gibraltar, Isle of Man and Jersey, their pounds share the same ISO 4217 code, which means that the pounds of these countries are fixed against the sterling pound. Joining the Euro could have caused significant issues within these overseas territories.
Five economic tests
During the time when the Euro was starting to come into fruition with numerous countries within the European Union, the Prime Minster of Britain, Tony Blair, declared that “five economic tests” must be passed for the government to even consider whether the UK should join the Euro.
If those five economic tests were met, then a referendum would be held in order to determine whether Britain would use the Euro. However, after the Brexit vote in 2016 concluded that the UK were to leave the EU, there is now a very slim to no chance of them joining the Euro.
The five economic tests were as follows:
- Adopting the Euro must promote higher growth, stability and long-term increase in jobs
- Economic structures and business cycles must be sufficiently compatible so that the United Kingdom could live without the Euro area interest rates
- The Euro would have to enable the UK’s financial services to remain in a competitive position
- Adopting the Euro must create conditions that are conducive to firms and individual investing in the United Kingdom
- The system must have enough flexibility to deal with both local and aggregate economic issues
When Gordon Brown succeeded Tony Blair as Prime Minister in 2007, he ruled out any chance of membership and claimed that Britain had made the right decision not to join the Euro.
Advantages of the Euro
It is thought that joining the Euro could have given the UK several advantages; find out some of the benefits that the UK could have enjoyed if they’d joined below.
- Lower transaction costs
- Predictability and often stability of exchange rates within Europe
- Greater investments due to the stability in trade
- It would have been easier for customers to compare prices between competitors as there would be price transparency
Disadvantages of the Euro and the reasons why they didn’t join
Despite some of the obvious economic and social advantages of joining the Euro as listed above, the UK decided not to join it for many other counteractive reasons.
- The UK economy was said to be doing well even without using the Euro
- They didn’t want to risk being involved in a Euro debt crisis (like the one in 2011 and 2012)
- They’d lose independent monetary policy, meaning that they couldn’t set their own interest rates
- The UK was at different stages of the trade cycle
- There would be no bond yields. If the UK were in the Euro, they wouldn’t be able to use the Bank of England as a lender of last resort if there was a temporary shortfall in the UK economy
- It would prove to be difficult to get out of a recession
- The UK had a unique housing market that wouldn’t be suitable with the interest rates as set out by the European Central Bank and the Euro
European Central Bank
The European Central Bank (ECB) is the central bank that holds prime responsibility for monetary policy of the 19 European member countries who use the Euro as their currency. It’s also one of the most important central banks in the world and is one of the 7 institutions of the European Union as listed in the Treaty on European Union.
The main goal of the ECB is to maintain price stability and to help preserve the purchasing power of the Euro. The European Central Bank make decisions about key interest rates, monetary objectives and the supply of reserves in the Euro area.
Tasks of the European Central Bank
There are numerous tasks that the ECB must carry out in order to achieve its main mission of maintaining price stability and purchasing power of the Euro. Find out some of its most important tasks below.
- Banking supervision
- Outlining and implementing monetary policies
- Financial stability and carefully maintaining policies
- Managing foreign exchange operations and negotiations
- Issuing banknotes (member states can issue their own coins, but they must be approved by the ECB first)
- Maintaining the payment system to ensure the financial market infrastructure runs smoothly
- International cooperation and agreements
- Consulting on any national or EU legislation that is relative to the European Central Bank
- Collection and establishment of statistics
Conclusion – Why Does Britain use the Pound and Most other countries in Europe use the Euro?
In short, Britain decided not to use the Euro and instead remain with the Great British Sterling Pound as it made the most sense for the people of Britain at the time.
The UK housing market was unique, the economy was doing just fine on its own and people such as Gordon Brown and Tony Blair didn’t want to upset the current economic climate.
Whether it was the right decision for Britain or not remains largely as individuals’ personal opinions. However, despite various economic crashes and recessions, the UK has proven to have survived perfectly well without being involved in the Euro. Even if they did wish to join the Euro at a later stage, it would prove to be almost impossible now due to Brexit negotiations.