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United Kingdom and the euro


United Kingdom and the euro

eurozone participation
  European Union member states (eurozone) – 18
  European Union member state in ERM II scheduled to join on 1 January 2015 – Lithuania
  European Union member states not in ERM II but obliged to join – 7
  European Union member state in ERM II with an opt-outDenmark
  European Union member state not in ERM II with an opt-out – United Kingdom
  non-European Union member states using the euro with a monetary agreement – 4
  non-European Union member states using the euro unilaterally – 2

The United Kingdom has not announced plans to adopt the euro to replace its currency, the pound sterling, in the foreseeable future. The pound sterling does not participate in the European Exchange Rate Mechanism, a prerequisite for euro adoption. The UK negotiated an opt-out from the part of the Maastricht Treaty of 1992 that would have required it to adopt the common currency, and the coalition government elected in May 2010 pledged not to join the euro for the lifetime of the parliament.[1] Polls show that the majority of British people are against adopting the euro.


  • History 1
  • Economics 2
    • Euro exchange rate 2.1
    • Convergence criteria 2.2
  • Non-economic factors 3
  • Sterling zone 4
  • Banknotes 5
  • Official use of euro in British overseas territories in Cyprus 6
  • Public opinion 7
  • References 8
  • External links 9


The United Kingdom entered the European Exchange Rate Mechanism, a prerequisite for adopting the euro, in October 1990. The UK spent over £6 billion trying to keep its currency, the pound sterling, within the narrow limits prescribed by ERM, but was forced to exit the programme within two years after the pound sterling came under major pressure from currency speculators. The ensuing crash of 16 September 1992 was subsequently dubbed "Black Wednesday". During the negotiations of the Maastricht Treaty of 1992 the UK secured an opt-out from adopting the euro.[2]

The government of former Prime Minister Tony Blair declared that "five economic tests" must be passed before the government could recommend the UK joining the euro and promised to hold a referendum on membership if those five economic tests were met. The UK would also have to meet the EU's economic convergence criteria (Maastricht criteria), before being allowed to adopt the euro. Currently, the UK's annual government deficit to the GDP is above the defined threshold. The government committed itself to a triple-approval procedure before joining the eurozone, involving approval by the Cabinet, Parliament, and the electorate in a referendum.

Gordon Brown, Blair's successor, ruled out membership in 2007, saying that the decision not to join had been right for Britain and for Europe.[3] In December 2008, José Barroso, the President of the European Commission, told French radio that some British politicians were considering the move because of the effects of the global credit crisis.[4][5] The office of the Prime Minister, Gordon Brown, denied that there was any change in official policy.[6] In February 2009, Monetary Policy Affairs Commissioner Joaquín Almunia said "The chance that the British pound sterling will join: high."[7]

In the UK general election 2010, the Liberal Democrats increased their share of the vote, but lost seats. One of their aims was to see the UK rejoining ERM II and eventually joining the euro,[8] but when a coalition was formed between the Liberal Democrats and the Conservatives, the Liberal Democrats agreed that the UK would not join the euro during this term of government.


The UK Treasury first assessed five economic tests in October 1997, when it was decided that the UK economy was neither sufficiently converged with that of the rest of the EU, nor sufficiently flexible, to justify a recommendation of membership at that time.

Another assessment was published on 9 June 2003 by Gordon Brown, when he was Chancellor of the Exchequer. Though maintaining the government's positive view on the euro, the report opposed membership because four out of the five tests were not passed. However, the 2003 document also noted the considerable progress of the UK towards satisfying the five tests since 1997, and the desirability of making policy decisions to adapt the UK economy to better satisfy the tests in future. It cited considerable long-term benefits to be gained from eventual, prudently conducted EMU membership.

Some believe that removing the United Kingdom's ability to set its own interest rates would have detrimental effects on its economy. One argument is that currency flexibility is a vital tool and that the sharp devaluation of sterling in 2008 was just what Britain needed to rebalance its economy.[9] Another objection is that many continental European governments have large unfunded pension liabilities. They fear that if Britain adopts the euro, these liabilities could put a debt burden on the British taxpayer,[10] though others have dismissed this argument as spurious.[11]

Some argue that as intra-European exports are 60% of the UK's total exports, a single currency would enhance the Internal Market by reducing the cost of exchanging currency for businesses and travellers, and reducing currency risk.[12] An interesting parallel can be seen in the 19th century discussions concerning the possibility of the UK joining the Latin Monetary Union.[13]

The entry of the UK into the eurozone would likely have a positive effect on trade with the other members of the eurozone.[14] It could also have a stabilising effect on the stock market prices in the UK.[15] A simulation of the entry in 1999 found that it would have had an overall positive, though small, effect in the long term on the UK GDP if the entry had been made with the rate of exchange of the pound to the euro at that time. With a lower rate of exchange, the entry would have had more clearly a positive effect on the UK GDP.[16] A 2009 study about the effect of an entry in the coming years found that the effect would likely be positive, improving the stability for the UK economy.[17]

One of the underlying issues that stand in the way of monetary union is the structural difference between the UK housing market and those of many continental European countries.[18] Although home ownership in Britain is near the European average, variable rate mortgages are more common, making the retail price index in Britain more influenced by interest rate changes.

The United Kingdom released new coin designs in 2008 following the Royal Mint's biggest redesign of the national currency since decimalisation in 1971. German news magazine Der Spiegel saw this as an indication that the country has no intention of switching to the euro within the foreseeable future.[19] It is however an unwritten convention that the coin designs should be changed every 40 years to keep the coinage fresh.[20]

Euro exchange rate

In June 2003, Gordon Brown stated that the best exchange rate for the UK to join the euro would be around 73 pence per euro.[21] On 26 May 2003 the euro had reached 72.100, a value not exceeded until 21 December 2007.[22] During the final months of 2008, the pound declined in value dramatically against the euro. The euro rose above 80 pence and peaked at 97.855p on 29 December 2008.[23] This compares with its value between March and October 2008, when the value of the euro was about 78 pence, and its value of about 70 pence between April 2003 and August 2007. With the impact of the Global financial crisis of 2008 on the British economy, including failing banks and plunging UK property values,[24] some British analysts stated that adopting the euro was far preferable to any other possible solutions for Britain's economic problems.[25] Some media discussion about the possibility of adopting the euro. On 29 December 2008, the BBC reported that the euro had reached roughly 97.7p, due to poorer economic forecasts. This report stated that many analysts believed that parity with the euro was only a matter of time.[26]

At that time, some shops in Historic Scotland.[29]

During 2009, the value of the euro against the pound fluctuated between 96.100p on 2 January and 84.255p on 22 June. In 2010 the value of the euro against the pound fluctuated between 91.140p on 10 March and 81.040p on 29 June. On 31 December 2010 the euro closed at 86.075p.[30] The weakness and the volatility of the pound have raised concerns for the costs it entails for British consumers at home,[31][32] and Britons living[33] or travelling abroad.[34] On the other hand, a report in Britain's Daily Telegraph has argued that the high euro has caused problems in the eurozone outside Germany.

Convergence criteria

Aside from approval in a domestic referendum, the UK would be required to meet the euro convergence criteria before being granted approval to adopt the euro. As of the last report by the European Central Bank in May 2012, the UK only met 1 of 5 of the criteria.

  Criterion fulfilled
  Criterion potentially fulfilled: If the budget deficit exceeds the 3% limit, but is "close" to this value (the European Commission has deemed 3.5% to be close by in the past),[51] then the criteria can still potentially be fulfilled if either the deficits in the previous two years are significantly declining towards the 3% limit, or if the excessive deficit is the result of exceptional circumstances which are temporary in nature (i.e. one-off expenditures triggered by a significant economic downturn, or by the implementation of economic reforms that are expected to deliver a significant positive impact on the government's future fiscal budgets). However, even if such "special circumstances" are found to exist, additional criteria must also be met to comply with the fiscal budget criterion.[52][53] Additionally, if the debt-to-GDP ratio exceeds 60% but is "sufficiently diminishing and approaching the reference value at a satisfactory pace" it can be deemed to be in compliance.[54]
  Criterion not fulfilled

  1. ^ The 12-months average for the annual HICP inflation rate must be no more than 1.5% larger than the unweighted arithmetic average of the similar HICP inflation rates in the 3 EU member states with the lowest HICP inflation. If any of these 3 states have a HICP rate significantly below the similarly averaged HICP rate for the eurozone (which according to ECB practice means more than 2% below), and if this low HICP rate has been primarily caused by exceptional circumstances (i.e. severe wage cuts or a strong recession), then such a state is not included in the calculation of the reference value and is replaced by the EU state with the fourth lowest HICP rate.
  2. ^ The annual average for the yield of 10-year government bonds must be no more than 2.0% larger than the unweighted arithmetic average of the bond yields in the 3 EU member states with the lowest HICP inflation. If any of these states have bond yields which are significantly larger than the similarly averaged yield for the eurozone (which according to previous ECB reports means more than 2% above) and at the same time does not have complete funding access to financial markets (which is the case for as long as a government receives bailout funds), then such a state is not be included in the calculation of the reference value.
  3. ^ The change in the annual average exchange rate against the euro.
  4. ^ Reference values from the ECB convergence report of May 2012.[42]
  5. ^ Sweden, Ireland and Slovenia were the reference states.[42]
  6. ^ a b c The maximum allowed change in rate is ± 2.25% for Denmark.
  7. ^ Sweden and Slovenia were the reference states, with Ireland excluded as an outlier.[42]
  8. ^ Reference values from the ECB convergence report of June 2013.[45]
  9. ^ a b Sweden, Latvia and Ireland were the reference states.[45]
  10. ^ Reference values from the ECB convergence report of June 2014.[48]
  11. ^ a b Latvia, Portugal and Ireland were the reference states.[48]

Non-economic factors

Some eurosceptics believe the single currency is merely a stepping stone to a unified European superstate which they strongly reject, or argue against it on other grounds. In December 2008, bookmakers were offering odds-on bets that the United Kingdom would adopt the euro by 2014.[55]

Sterling zone

If the United Kingdom were to join the eurozone, this would affect the South Georgia and the South Sandwich Islands do not have their own currencies and use the pound sterling.

When France adopted the euro, so did the French overseas departments and territories that used the French franc. The CFP franc, the CFA franc and the Comorian franc, that are used in overseas territories and some African countries, had fixed exchange rates with the French franc, but not at par – for various historical reasons they were worth considerably less, at 1 French franc = 18.2 CFP francs, 75 Comorian francs or 100 CFA francs. The CFA franc and the Comorian franc are linked to the euro at fixed rates with free convertibility maintained at the expense of the French Treasury. The CFP franc is linked to the euro at a fixed rate.

It has been suggested that the sterling zone territories therefore have four options:

  • Enter the eurozone as a non-EU member and issue a distinct national variant of the euro—just as Monaco and the Vatican have done. The EU has only allowed sovereign states to adopt this approach to date. Also, it has demanded that monetary agreements be entered into by non-EU members who wish to issue their own euro coinage, and has prevented Andorra from issuing their own coins until this is resolved. Such agreements, the EU has stated, must include adherence to EU banking and finance regulation.
  • Use standard euro coins issued by the UK and other eurozone countries. This may be perceived by some as losing an important symbol of independence.
  • Maintain their existing currency, but peg at a fixed rate with the euro. Maintaining a fixed rate against currency speculators can be extremely expensive, as the UK found on Black Wednesday. However, if the UK supports the keeping of the fixed rates of these small currencies, it would be so trustworthy that no speculation would take place.
  • Adopt a free-floating currency, or a currency fixed to another currency, as the Jersey government has hinted.[56]

Gibraltar is in a separate position, as it is within the EU (as part of the UK's membership). If the UK were to adopt the euro it might not be possible to implement an opt-out for Gibraltar. It is unclear whether Gibraltar would be subject to its own referendum or would be included in a UK referendum, since Gibraltar votes as a part of the UK in European parliamentary elections.


Currently, some private banks in Scotland and Northern Ireland print and issue banknotes of their own design. The Banking Act, 2008[57] amended the right of Scottish and Northern Irish banks to produce banknotes. This does not apply in Wales which uses Bank of England notes.

In November 1999, in preparation for the introduction of the euro notes and coins across the eurozone, the European Central Bank announced a total ban on the issuing of banknotes by entities that were not National Central Banks ('Legal Protection of Banknotes in the European Union Member States'). A move from sterling to the euro would end the circulation of sub-national banknotes as all euro banknotes have an identical design. However, as national variation is a requisite of euro coins, it remains an option for the Royal Mint to incorporate the symbols of the Home Nations into its designs for the British national sides of euro coinage.

Official use of euro in British overseas territories in Cyprus

The Sovereign Base Areas of Akrotiri and Dhekelia in Cyprus introduced the euro at the same time as Cyprus, on 1 January 2008. Previously, they used the Cypriot Pound. Since the independence of Cyprus, treaties dictate that British territories in Cyprus will have the same currency as the Republic of Cyprus. This is the only places under British control where the euro is legal tender. They do not issue separate euro coins.

Public opinion

The wording of the question may have varied, but the figures show that the majority of British people are against adopting the euro. British public opinion has consistently opposed joining the euro. Opinion polls in 2005 (57 percent opposed),[58] 11–12 December 2008 (59 percent opposed)[59] and 6–8 January 2009 (64 percent saying they would vote no to a change of currency)[60] demonstrate this opposition. In a poll taken for BBC Radio 4 between 19–21 December 2008, 71% of respondents said they would vote No while 23% of participants would vote Yes, and 6% were undecided. The economic recession in Britain and the fall in value of the pound have not contributed to a change in public opinion.[61] A poll conducted in early May 2009, showed increased opposition, with 75% of respondents pledging to vote against joining the euro.[62] However, an April 2010 YouGov poll, the percentage of those not wanting to join the euro decreased by 10%, the percentage of those wanting to join the euro decreased by 2% and the percentage of those unsure increased by 12%, compared with the ICM poll in the previous year. However two polls in 2011 found over 80% of respondents to be against joining the Euro.

Date YES NO Unsure Number of participants Held by Ref
November 2000 18% 71% N/A N/A BBC [61]
January 2002 31% 56% N/A N/A BBC [61]
9–10 June 2003 33% 61% 7% 1852 YouGov [63]
10–15 February 2005 26% 57% 16% 2103 Ipsos MORI [58]
11–12 December 2008 24% 59% 17% 2098 YouGov [59]
19–21 December 2008 23% 71% 6% 1000 ICM [61]
6–9 January 2009 24% 64% 12% 2157 YouGov [60]
1–4 May 2009 23% 75% 2% 1002 ICM [62]
17–18 April 2010 21% 65% 14% 1433 YouGov [64]
2–4 July 2011 8% 81% 11% 2002 Angus Reid [65]
9–12 August 2011 9% 85% 6% 2700 YouGov [66]
10 August 2012 6% 81% 13% 2004 Angus Reid [67]


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External links

  • HM Treasury – Official UK Treasury euro website
  • European Central Bank – Graph showing euro-sterling exchange-rate from 1999 to the present
  • The UK's five tests BBC
  • Reuters – Factbox – A look at sterling milestones as euro parity looms
  • What has Europe ever done for us? A humorous argument against Eurosceptics
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