Britain uses the pound sterling and never adopted the euro. This is frequently assumed to be a consequence of Brexit; it is not. The decision was taken while Britain was a full and active EU member, and it was effectively settled by 2003.
Black Wednesday
The story really begins on 16 September 1992. Britain had joined the European Exchange Rate Mechanism, a precursor to the euro requiring member currencies to stay within a band against the Deutsche Mark. Sterling had entered at a rate widely regarded as too high.
Under sustained pressure from currency speculators — George Soros among them, who reportedly made around a billion dollars — the Treasury spent billions of reserves and raised interest rates from 10% to 12% and then announced 15%, all in a single day, trying to hold the line. It failed. Britain left the ERM that evening.
The episode destroyed the Conservative government’s reputation for economic competence, from which it did not recover for a decade, and it left a deep and lasting scepticism in the Treasury about tying sterling to a European exchange rate.
The opt-out
Britain had already secured a formal opt-out from monetary union in the Maastricht Treaty of 1992, negotiated by John Major. Unlike other member states, it was under no obligation ever to adopt the euro, and Denmark obtained a similar exemption.
The five tests
When the euro launched in 1999, the Labour government was formally in favour in principle. Tony Blair wanted to join. His Chancellor, Gordon Brown, set five economic tests that would have to be met first:
- Sustainable convergence between the British and euro-area economies.
- Sufficient flexibility to cope with economic change.
- A positive effect on investment.
- A positive effect on the financial services industry.
- A positive effect on growth, stability and employment.
In June 2003 the Treasury concluded that only one — the financial services test — was clearly met. Membership was ruled out for that Parliament, and the question never seriously returned. The tests are generally understood to have been designed to produce exactly that answer.
The economic argument
The substantive objection was the loss of independent monetary policy. Inside the euro, Britain would have no ability to set its own interest rates or let its exchange rate adjust, and its economic cycle — particularly its housing market, which is unusually interest-rate sensitive — has historically diverged from Germany’s and France’s.
The eurozone crisis from 2010 was widely taken in Britain as vindication, as countries such as Greece, Spain and Ireland faced severe adjustment without the option of devaluing.
The emotional argument
Sterling also carries real symbolic weight. It is the oldest currency in continuous use in the world, the monarch’s head is on the notes and coins, and opposition to abolishing it was consistently strong in polling throughout the period when joining was under discussion.
The question is now entirely closed. No major British party proposes joining the euro, and it did not feature in the Brexit referendum for the simple reason that it had already been decided.