Why the U.K. Doesn’t Use the Euro

The U.K. left the European Union (EU) on Jan. 31, 2020. As such, it’s no longer a member state. But prior to its exit, it was the most notable member 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. But 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.

The Euro

The euro was officially introduced on Jan. 1, 2022, as the official currency for most of the member states of the European Union. The EU was established as a result of the Maastricht Treaty and went into force on Nov. 1, 1993.

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.

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 his country to accept the euro, which it did not end up meeting.

5 Economic Tests

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. 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 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 limited British fiscal policy.

Brexit

Brexit is an abbreviation for Britain’s exit from the EU. The term was coined as a reference to the U.K.’s decision in a June 23, 2016 referendum to leave the 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 integrated 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. She was succeeded by Boris Johnson, who assumed power the following month. 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.

The Bottom Line

Nothing changed in the national currency system when the United Kingdom left the European Union in 2020. Among the reasons why the nation decided to continue using the pound when it first joined the EU was its economic sovereignty. Its leaders wanted national businesses to be able to compete on a global scale. The U.K. government also wanted to retain control over its own interest rate policy. But not adopting the euro made at least one aspect of the transition out of the EU easier for the United Kingdom.