Why Won't the UK 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.

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