Why Won't the U.K. Join the Euro?

When the euro was born, there were some reasonably good economic reasons why the UK shouldn't be part of it from day one. Gordon Brown came up with his famous five tests, with the predictable (and desired) result that the UK to this day has retained the pound as its currency, even as the euro increases in scope and popularity. (There are now 15 full members of the eurozone, as well as nine more states and territories using the euro as their sole currency, and many others, like Poland, the Czech Republic, and the Baltics, obliged to join in the future.)

Today, the UK would pass the five tests with flying colors. Yet even as the euro becomes increasingly useful and powerful, the chances of the UK ever joining seem to get ever slimmer. So Willem Buiter pops the question on his blog: When will the UK wake up and join the Euro Area?

My feeling is that the time has passed. Tony Blair could have pushed it through at the beginning of his term in office, when he was flush with political capital, but he expended all of that capital, and then some, on the Iraq war instead. UK politicians like the fact that the euro is a non-issue right now, and have no incentive to open that particular political Pandora's box.

And so the UK will remain a monetary outlier, like Switzerland or Norway, and will remain at the mercy of international financial events. Here's Buiter:

To have a large, internationally active banking sector and financial system, your currency has to be a serious global reserve currency if you are to be able to provide the lender of last resort and market maker of last resort services required to minimize the risk of a bank run or market liquidity crunch bringing down large chunks of your banking system. You can decide to take the risk of running a large globally active financial sector with a local currency like sterling or the Icelandic krona, but you will be taking an unnecessary and costly risk. Sooner or later that risk will be reflected in your cost of capital and make you uncompetitive.

So, if the UK wants to remain the seat of the world's financial capital, there is only one choice: adopt the euro now, and wonder why you did not do so in 1999.

The Bank of England has managed to weather the current financial crisis so far: It's bruised and battered after the farcical bail-out of Northern Rock, but still more or less in one piece. But UK central bankers would be on much more solid ground if they had a much more solid currency. It won't happen while this crisis is ongoing, but it would be great if it were implemented before the next one hits. And, yes, a pony would be nice, too.

Comments

[bearfund:]

Agree completely; the UK should ditch sterling now before things really go to hell. But your comparison with CHF and NOK doesn't make much sense. Switzerland still has most of its gold, even if it no longer formally backs the Franc, and productivity is high even outside the banking sector. Norway has a resource economy centered around oil and the positive balance of payments that comes with it, plentiful hydropower, a highly educated and productive work force, and a fully-funded pension system. What does the UK have to "back" its currency? The gold is gone, manufacturing has cratered, fiscal policy is out of control, and what's left of the economy looks a lot like a less educated, less productive, and more troubled version of America: overpriced real estate and City banking. Big differences there. My test: which currency would I rather hold, one backed 4/5 by Germany and France and 1/5 by Romania and Italy, or one backed 100% by Norway, Switzerland, or the UK? You're right that the UK has plenty of reasons to adopt the euro, but I'd much rather hold NOK and probably even CHF than EUR.

2008 Jun 02 11:36 AM

[R. Richard ...:]

There are studies on the duration of monetary, unions, authorities and other such agreements. Historically, conditions have not allowed them to exist permanently.

And as to backing of "currency," what "backs" the Euro? Bonds (sovereign debt) of member nations, right? Thus resources are dependent on factors outside the issuer's influence, let alone control. But, most "money" is not "currency," it is credit, and Britain's retention of control over its own internal credit has a better track record than that of the ECB with its members.

Buiter is undeniably one of the best minds on this topic, but his views seem narrow historically.

Should the U S join? By treaty, of course!!

2008 Jun 02 02:14 PM

[huangjin:]

UK does not have the pension liabilities of the continent and it should not join at least until they've cleaned up their problems, otherwise British citizens will end up bailing out the French, Italians, Spanish, and even the Germans. The way European politics works, that means they will never join.

2008 Jun 02 04:19 PM

[moonbat1775:]

What is the weight of a pound note? For the sake of honesty, it should at least be renamed to reflect this. How about the "the gram"?

2008 Jun 02 06:08 PM

[User 255676:]

I cant understand why we havent joined the single currency already, and find it even more strange that as citizens we are told nothing, the government ignore the issue and we are all left wondering!

We were told once the 5 econimic tests were reached we would then join the currency, maybe now is the time to ditch the pound and make us much more competive as a country - especially now the pound is doing so crap against the euro and we get nothing exchanging our £s to €s for holidays now so why not.

The euro seems to be a much stable currency now its settled in, and seems to be doing a hell of a lot better during this global credit crunch than the £ has!!!!!!!!!!!!!!!!!!!

2008 Sep 04 10:06 AM

[User 260997:]

I'm Italian and I came in this country five years ago.
I still not understand how politics work here. Ok in Italy we have corruption and mafia as probably many people know, but at least hours politician where more clever in join the euro in 2003. Somebody said that :"if we join the euro we will end end up bailing out the French, Italians, Spanish, and even the Germans.This tell me how so little knowledge british people and politician have about the euro.
Probably not many people know that the 20% of the european found is used to keep the minim wage in this country.And not many people know that was 24% 4 years ago when blair was on power, but has been dropped from other european country because uk didn't join the euros.
Again no many people know the the interest rate is not controlled by bank on england but at first from the european bank.In this country is higher that other because the uk as decided to se it higher but if it gos up or down ,is because the europen bank.
There will be an ultimatum for this country to join the euro an it will be at some point next years.
I hope the brithis and the politics wake up and stop thinking like people living on an islans put the proud of the pound away and join a better economic future.

2008 Sep 12 05:39 PM