The United Kingdom withdrew from membership in the European Union (EU) on Jan. 31, 2020. Prior to Brexit, as it is known, it was the most notable member nation of the European Union that elected not to use the euro. Rather, the U.K. continued to use the British pound sterling as its national currency.
What prevented the U.K. from shelving the pound for the euro?
Here, we take a look at the reasons why the country decided not to adopt the single currency while it was a member state of the EU.
Key Takeaways
- The euro was officially adopted by most member states of the EU in 2002.
- Proponents of the euro argue that the single currency reduces exchange rate risk and is better able to compete with other major world currencies.
- The U.K. government determined that the euro did not meet five critical tests that would have been necessary to adopt its use.
- The United Kingdom left the European Union on Jan. 31, 2020.
The Euro
The European Union was established as a result of the Maastricht Treaty and went into force on Nov. 1, 1993. The euro was adopted on Jan. 1, 2002, as 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 exchange-rate risk to businesses, investors, and financial institutions. Another argument in favor of the euro is 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 (ECB), which sets monetary policy for the euro. This reduces the ability of individual countries to react to local economic conditions.
Why the U.K. Never Used the Euro
When the euro was first proposed as a single currency system for the EU in 1997, Gordon Brown, then-Chancellor of the Exchequer, declared that there were five economic tests that must be met for the country to accept the euro, and it did not meet them.
Brown is credited with creating the five-test policy. This checklist was the main driver to decide whether the United Kingdom would abandon the pound for the euro.
5 Economic Tests
- Business cycles and economic structures in the eurozone as a whole must be compatible enough with those of the United Kingdom that it could live with eurozone interest rates.
- The system must have sufficient flexibility to deal with both local and aggregate economic problems.
- Adopting the euro must create conditions conducive to companies and individuals investing in the United Kingdom.
- The euro would enable the nation's financial services industry to remain in a competitive position internationally.
- 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.
20
Twenty EU nations have adopted the euro as their national currency. They include Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Denmark is an EU nation but has retained its own currency.
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 used to exchanging pounds for dollars or vice versa would have been forced to adjust to a euro exchange rate.
Here's another reason. The United Kingdom would have been forced to meet the euro convergence criteria before adopting the currency, which includes maintaining a debt-to-gross domestic product (GDP) ratio that would have constrained British fiscal policy.
Euro But Not EU
Some states have adopted the euro but are not members of the European Union. They include Andorra, Kosovo, Monaco, Montenegro, San Marino, and Vatican City.
Brexit
The term Brexit was coined as a reference to the U.K.'s decision in a June 23, 2016, referendum to leave theEU. The vote result defied expectationsand roiled global markets, causing theBritish poundto 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 had fully integrated itself into the eurozone economic system. That meant open borders, free trade, and free movement of labor within the zone. The reversal inevitably caused political and economic turmoil and a historically fast turnover in prime ministers.
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. She was succeeded by Boris Johnson, who assumed power the following month. Johnson was succeeded by Liz Truss, whose service as prime minister lasted 49 days. Truss was succeeded in July 2022 by Rishi Sunak.
Britain ratified a withdrawal agreement with the EU that was intended to avoid an even more chaotic no-deal exit. The country officially left the E.U. at 11 p.m. GMT on Jan. 31, 2020.
How Did the U.K. Decide to Leave the E.U.?
The U.K.'s decision for Brexit was the result of a binding public referendum conducted in June 2016. "Leave" won with 51.9% of the vote, "Remain" received 48.1%.
The outcome was an unpleasant surprise for then-Prime Minister David Cameron, who campaigned for the country to remain in the E.U. He resigned the next day.
What Is the Exchange Rate Between British Pounds (GBP) and the Euro (EUR)?
As of July 2, 2023, one GBP is equal to 1.16 EUR. Over the past five years, the exchange rate has fluctuated between around 1.06 and 1.21.
Can I Use Euros in England?
No. England and the rest of the U.K. use only British pounds as currency. Visitors to the U.K. from eurozone countries (or any other country) can exchange their local money for pounds at a bank or money exchange store before or after arriving, or can withdraw British pounds from an ATM in the U.K. using a bank card or a credit card, which will automatically add a fee for the currency exchange.
The Bottom Line
Nothing changed in the national currency system when the United Kingdom left the European Union in 2020. Among the issues was economic sovereignty. The government wanted to retain control over its own interest rate policy.
Not adopting the euro made at least one aspect of the transition out of the EU easier for the United Kingdom.
