The United Kingdom and the Euro, February 2003

Background

The United Kingdom is one of three EU Member States not at present part of the eurozone - those countries who have adopted the euro as their currency. The UK, under Protocol No 11 of the Maastricht Treaty of 1992, exercised its right not to participate in economic and monetary union (EMU) from 1 January 1999. The UK government's opt-out allows it to take a separate decision on the transition to a single currency.

In October 1997 the Chancellor of the Exchequer Gordon Brown outlined five Economic Tests by which the cabinet would judge whether the British economy would benefit from joining the euro.

The UK government is committed to completing an assessment of these 'Five Economic Tests' by June 2003. Should it be decided that it is in our economic interest to join the euro, Parliament would need to be consulted and then a referendum would be put to the British people.

The Government's Policy on Economic and Monetary Union

Prime Minister Tony Blair, speaking of his government's policy towards the euro in his New Year message on 1 January 2003, confirmed that he accepts a political case for joining:

'We see no constitutional bar to joining, and the political case for entry is overwhelming. But ultimately it is an economic union, and it is an economic case that must be made. The judgment must be whether it is good for British jobs and industry, and for the living standards of the British people. We will publish our assessment by June and if it is positive, put the case for entry in a referendum. The British people will have the final say.'

The determining factor underpinning any Government decision on membership of the single currency is the national economic interest. The economic aspect of the Government's policy on membership was set out by the Chancellor of the Exchequer in the House of Commons in October 1997. Five Economic Tests will define whether a 'clear and unambiguous' economic case can be made:

• whether the UK has achieved sustainable convergence with the economies of the single currency
• whether there is sufficient flexibility in the UK economy to adapt to change and other unexpected economic events
• whether joining the single currency would create better conditions for business to make long-term decisions to invest in the UK
• the impact membership would have on our financial services industry
• whether joining the single currency would be good for employment.

The Government has said that the Treasury will complete an assessment of these Five Tests within two years of the start of this Parliament (i.e. by June 2003). Eighteen separate studies are underway, covering issues such as trade, the effect on the housing market, on business investment, the capital markets, the flexibility of the European economy and the British economy. These studies will help the final assessment, when the Government will take a decision on whether the Five Tests have been met. If the Government recommends UK entry, it will be put to a vote in Parliament and then to a referendum of the British people.

Treaty of Maastricht's convergence tests and the Stability and Growth Pact

As well as the Chancellor's five tests, the UK will need to satisfy the Treaty of Maastricht's convergence tests before it can join the single currency. Five convergence criteria, which must be met by each Member State before it can take part in the third stage of EMU, were devised to ensure that the sustainable convergence required for the achievement of economic and monetary union comes about. The Commission and the European Central Bank draw up reports to check whether the criteria are being met.

The criteria are:

• the ratio of government deficit to gross domestic product must not exceed 3%
• the ratio of government debt to gross domestic product must not exceed 60%
• there must be a sustainable degree of price stability and an average inflation rate, observed over a period of one year before the examination, which does not exceed by more than one and a half percentage points that of the three best performing Member States in terms of price stability
• there must be a long-term nominal interest rate which does not exceed by more than two percentage points that of the three best performing Member States in terms of price stability and finally,
• the normal fluctuation margins provided for by the exchange-rate mechanism on the European Monetary system must have been respected without severe tensions for at least the last two years before the examination.

The Treasury's July 2002 Sixth Report on Euro Preparations estimates that it would take between 24-30 months between a positive referendum and the introduction of euro notes and coins in the UK. Page 118 states that:

'Within this 24-30 month period the UK would formally join the single currency. The speed with which the UK could join would depend on a number of factors including:

• The Commission and the European Central Bank would need to report to the Council on whether the UK had achieved a high degree of sustainable convergence with the euro area. These reports would form the basis of a decision on whether or not the UK met the necessary conditions to join. The Council would also need to take other decisions necessary to enable the UK to proceed to membership; and
• The UK would also need to legislate to ensure that the statutes of the Bank of England met the requirements of the EC Treaty.'

The Stability and Growth Pact (SGP), adopted at the Amsterdam European Council in June 1997, builds on and strengthens the convergence criteria used to assess which countries would qualify for Stage 3 of EMU.

The SGP requires those Member States not adopting the single currency, including the UK, to present, annually, updated convergence programmes to the Council and the Commission. The UK Government's annual Convergence Programmes contain:

• information on the medium-term objective for the budgetary position of close to balance or in surplus, and the adjustment path towards this objective
• the main assumptions about expected economic developments and important economic developments
• a description of budgetary and other economic policy measures being taken, or proposed, to achieve the objectives of the programme, and
• an analysis of how changes in the main economic assumptions would affect the budgetary and debt position.

The most recent Convergence Programme submitted in line with the EU Stability and Growth Pact [pdf] produced by the Treasury was published in December 2002 and the Commission's assessment of this 2002 update was published on 30 January 2003. The most important points are:

• 'Macroeconomic projections are somewhat optimistic in the short term but broadly in line with the Commission's calculations regarding the trend growth assumptions.'
• 'Having regard to the UK's very low debt ratio and overall sustainable public finance position the Commission considers that a 'small' deviation from the 'close to balance or in surplus' requirement of the Stability and Growth Pact could be envisaged for the UK.'
• ' budgetary developments could lead to a deficit that could potentially approach the 3% of GDP Treaty threshold and consequently would not be in line with the medium-term requirement of the Stability and Growth Pact.'

With regard to this latter point, Commissioner Pedro Solbes reinforced the warning on Britain's budget deficit at a press conference on 30 January 2003 to unveil the Commission's report:

'UK public finances are overall judged to be in a sound position. This is an important element when assessing the programme under the eyes of our Communication of last November. However, as I mentioned earlier, the 3.0% of GDP threshold has to remain 'untouchable'. In the Commission's view, an underlying deficit of around 1½ % of GDP coupled with a nominal deficit of 2.2 % in 2003-04 may in adverse cyclical circumstances cause the nominal deficit to approach this threshold. '

Preparations

Preparations are underway, both in government and in the financial, business, retail and public sectors for a possible UK entry.

The Treasury's government's Euro Preparations Unit was set up in 1997 to 'complete the necessary planning and preparation to enable UK entry early in the next Parliament, if that is what the government, parliament and people decide'. Since then, this Treasury Unit has led a process of consultation and cooperation with key stakeholders across the whole UK economy. Preliminary conclusions were set out in the Treasury's National Changeover Plan (NCP), launched in February 1999 and updated in March 2000. These changeover plans cover the practical aspects of possible UK entry.

Since these plans were published a series of Treasury Euro preparation reports provide an update on the planning work being undertaken to ensure that the UK would be in a position to make a smooth and cost effective changeover.

The latest, the Sixth Report on Euro Preparations was published in July 2002. It:

• provides an explanation of what government and its partners are doing to raise awareness of the potential impact on business;
• gives an update on planning for possible UK entry, on-going progress in both the public sector and in the rest of the economy;
• and sets out what help and support there is for businesses that want to start making preparations for possible UK entry.

On possible timings, based on the experiences of the initial launch of the euro in January 2002, the Sixth Report has revised the timings originally published in the Changeover Plans. The latest estimates:

• assume that it would take about four months from a Government decision to join, to organise a referendum. Legislation would need to be taken through Parliament to enable the referendum to be held and to set the question and the date of the poll. The referendum would be held in accordance with provision of Part VII of the Political Parties, Elections and Referendums Act 2000.
• in the event of a positive referendum result, set a period of between 24 and 30 months before the introduction of UK euro cash to replace sterling
• assume that the dual circulation period for sterling and euro cash will be two months or less.

The Bank of England has responsibility under the NCP for co-ordinating, where necessary, planning in the financial sector for possible UK entry into EMU. To assist in this process, the Bank has established a City Euro Group with broad representation across the City. It meets roughly three times a year, and progress of the work of this Group is reported in Practical issues arising from the euro, and in particular in Part II of the November 2002 edition - City Guide to a UK euro changeover [pdf].

This City Guide [pdf] also sets out how the changeover would be expected to be handled, in the event of UK entry. Many decisions on the changeover in sterling financial markets have not yet been taken so the responsibilities for taking these decisions are summarised in a box at the end of the guide. Some decisions would be subject to legislation which, though not yet drafted, would be expected to be broadly similar in nature for the UK as for the first wave of eurozone entrants.

The British Bankers Association (BBA) welcomed the publication of the first National Changeover Plan in February 1999:

'The outline plan is a helpful step forward in providing a review of the practical issues arising from possible UK entry into the single currency and an indication of the overall time scale that might be involved in the process. A good deal more work will, or course, be needed to refine the analysis.

The role of the banking system would be critical if the UK was to join EMU. For the containment of risk for the economy, the key issue is that the industry should have sufficient lead time to UK entry to progress the major systems investment that would be required.'

The BBA and the Association for Payment Clearing Services (APACS) have published a blueprint reflecting current banking thinking on key issues arising from a possible euro changeover in the UK (APACS Outline euro blueprint - executive summary [pdf].)

Business and public opinion

If, after a vote in the UK Parliament, the government should decide to recommend UK adoption of the euro, a referendum would be held. Opinion in the UK towards membership has varied considerably with business divided, and public opinion opposed. Recent polling has shown a tendency towards an increased majority against the euro.

Among the general public, hard-line opponents of the single currency outnumber supporters by two to one. In the latest Eurobarometer, the public opinion poll carried out on behalf of the European Commission, the Standard Barometer no 58 Highlights [pdf] carried out during Autumn 2002 (page 7) shows that 61% of the UK population is now opposed to the single currency (up 9% since Spring 2002). Those in favour of the euro have fallen 3% since Spring 2002 to 28%. Support in the UK for the euro has fallen since a peak of 36% in Autumn 1998.

A MORI survey carried out in October 2002 for the British Chambers of Commerce has shown that, irrespective of the outcome of the five tests, business remains nervous of what entry to the single currency would really mean.

• Two thirds of the businesses surveyed responded that they had made no preparation for using the euro as a possible future UK currency.
• 49% of the businesses in the UK want the government to wait and see how the euro develops before deciding to join the single currency, even if the five economic tests were satisfied
• The organisation's survey found that 35% would support joining the euro if the tests were met.
• 13% did not want to be part of the single currency under any circumstances.

A recent 'Captains of industry' survey reported in the Financial Times (20.01.03) seems to confirm this swing to euro-scepticism, according to an influential poll by MORI. Its survey of 164 chairman and chief executives drawn from the country's top 500 companies show that 50 per cent do not 'support the principle of British participation', against 42 per cent who do. This is the first time the annual Captains of Industry study has shown a majority against the euro since the question was first asked in the 1997 poll, when nearly 70 per cent were in favour.

However, the anti-euro sentiment is not universal. In another poll organised by the German-British Chamber of Industry and Commerce, 78 per cent of the parent companies said that the UK's remaining outside the euro would have no impact on investment decisions. From the same poll, more than 80 per cent of the businesses surveyed said they thought the UK's inclusion in the currency in the next three to five years would be beneficial, either from their own companies' perspective or for the economy as a whole. (German investors appear unfazed by wavering on euro membership Financial Times 15.01.03).

The Confederation of British Industry in its Policy statement on EMU published in July 1999 states that it is 'in favour in principle of UK entry into European economic and monetary union once key conditions for success are in place. The CBI's present policy is not committed to a specific entry date.'

Trade union leaders remain positive about UK membership of the euro. A Financial Times article (Join single currency to end crisis in industry, unions urge) on 3 January 2003 describes John Edmonds, leader of the GMB general union, as calling for membership of the euro 'as soon as possible', warning that manufacturing would remain in crisis as long as uncertainty lingered over Britain's position. In the same article, Roger Lyons, Amicus' joint general secretary, is reported as saying: 'In order to put our manufacturing industry back on a competitive active footing within Europe we need to join the euro sooner rather than later.'

Pressure groups in favour of joining the euro and those against are mobilising support in their respective camps, in order to be ready to campaign, should a referendum be announced:

Britain in Europe, launched in 1999 by Tony Blair, Gordon Brown, Ken Clarke, Michael Heseltine and Charles Kennedy, is campaigning for a strong Britain in a strong Europe and putting the case for the single currency. Pro-Europeans fear that staying out of the euro is causing the UK to lose out on foreign investment, jobs and business competitiveness and to face a declining influence over the way the EU institutions are run.

Those against joining the euro have concerns regarding the creation of a European superstate where the UK would, in their view, lose a great deal of its national sovereignty to foreign, unelected bankers within the European Central Bank. In September 2000, Business for Sterling and New Europe formed the no-euro campaign - a non-party political campaign that represents British public and business that believes Britain should remain a member of the European Union and keep the pound.

In the House of Commons, the Treasury Select Committee is investigating the UK and the euro ahead of the Treasury's decision on whether its five economic tests for entry have been met. The press release announced in July 2002 its intention of conducting an enquiry into EMU to:

• review the workings of EMU since January 1999 with particular reference to the Stability and Growth Pact and the European Central Bank, and examine the implications for United Kingdom membership of the Single Currency; and
• examine the basis for the Chancellor's current assessment of the five economic tests

A BBC News summary in January 2003 of recent evidence presented to the Committee from business leaders gives an indication of the dichotomy of opinion:

'Sir Martin Jacomb, a former director of the Bank of England and prominent anti-euro campaigner, told the Treasury committee the euro was 'punishing' those countries which had adopted the currency. But Mike Rake, international chairman of accountancy firm KPMG and a member of the Britain in Europe group, said the UK was losing out by being outside the euro.'

Details of further witnesses appearing before the Committee and progress of the enquiry are available in the Committee's press releases. The Treasury home page has links to the minutes of evidence presented to the Committee.

Further information within European Sources Online

European Sources Online: Topic Guides:
	Economic and Monetary Union
	Information on European countries: United Kingdom

European Sources Online: In Focus:
	The European Commission and the European Central Bank issue the Convergence Reports 2000, 3 May 2000 + the first Brussels Economic Forum, 4-5 May 2000
	Launch of euro notes and coins in the eurozone, 1 January 2002
	Greece and the euro, August 2002
	Reforms to the Stability and Growth Pact, November 2002
	Sweden: the next eurozone member
	Denmark to hold a referendum on the single currency in 2003 or 2004

European Sources Online: European Voice
	12.09.02:	Labour leader urges Blair to push on Europe

European Sources Online: Financial Times
	07.05.02:	Minister begins phase one of euro campaign
	27.06.02:	Banks 'must be ready for euro before referendum'
	28.06.02:	Treasury may need more euro studies
	19.07.02:	£37,000 a day spent on joining the euro
	07.09.02:	Treasury to investigate impact of the euro on prices
	19.09.02:	Holidays fail to drum up support for euro
	24.09.02:	Party will aim pro-euro fire at chancellor
	30.09.02:	Blair set on holding euro referendum before next election
	01.10.02:	Brown hints at case for delaying euro entry
	02.10.02:	Poll uncertainty deters pro-euro lobby donors
	11.10.02:	Leader makes anti-euro stance clear
	16.10.02:	Lobby group sets out economic case for joining euro
	19.10.02:	Inventor urges bolder stance on euro entry
	21.10.02:	Brown steps into euro pact debate
	23.10.02:	Ford warns of euro isolation
	24.10.02:	Body warns on delaying euro
	28.10.02:	Industry shows sharp rise in backing for euro
	29.10.02:	Euro campaign hails MacShane promotion as referendum sign
	30.10.02:	Minister admits damage of not being in euro
	05.11.02:	Euro membership rests in Chancellor's hands
	18.11.02:	MPs face further delay to euro enquiry
	30.11.02:	Euro referendum: reality or charade?
	30.11.02:	Nissan chief in eurozone warning
	30.11.02:	Treasury casts doubt on euro entry
	02.12.02:	Heading for a collision over the euro
	05.12.02:	Brown offers Blair olive branch over euro
	05.12.02:	Brown aide sets warm tone on euro entry
	10.12.02:	The high cost of resisting the euro
	11.12.02:	Bank doubts on eurozone convergence
	18.12.02:	Euro entry opposed by nearly half of voters
	30.12.02:	Nobel economists cast doubt on Treasury's euro-entry tests
	30.12.02:	Euro entry tests cloaked in ambiguity
	02.01.03:	Danish euro move adds to pressure on Blair
	03.01.03:	Join single currency to end crisis in industry, unions urge
	06.01.03:	Joining the euro needs more than faith
	09.01.03:	Most businesses 'oppose early entry to euro'
	10.01.03:	Joining euro would be boon for British business, says Hewitt
	15.01.03:	German investors appear unfazed by wavering on euro membership
	20.01.03:	Captains of industry turn against euro entry
	20.01.03:	UK 'will join euro by 2010' despite public opposition
	24.01.03:	Pro-euro campaigners face difficult task to win support for single currency, says report
	27.01.03:	Outside the euro
	13.02.03:	Euro 'consequences' to be spelt out

Further information can be seen in these external links
[NB Long-term access to these links cannot be guaranteed]

EU Institutions

EU bodies

Council of the European Union
	Convergence programmes (table showing by country including updates and Council opinions)
	Council opinion on the United Kingdom [pdf]
European Central Bank
	Home page
	The euro
European Commission
	Euro: one currency for Europe (archive)
European Commission: DG Economic and Financial Affairs
	Economic and monetary affairs
	Euro essentials

European Commission: DG Press and Communication: RAPID: Press releases
	30.01.02:	Commission assesses the 2001 update of the United Kingdom convergence programme (2000-01 to 2006-07)
	30.01.02:	Commission assesses the 2002 update of the United Kingdom convergence programme (2001-02 to 2007-08)
	30.01.03:	Pedro Solbes ... assessment ... of the convergence programmes for Denmark and the United Kingdom

European Commission: DG Press and Communication: ScadPlus
	Convergence criteria
	Economic and Monetary Union
European Commission: Eurobarometer
	Home page
	Standard Barometer no 58 Highlights [pdf] Autumn 2002
European Commission: EUR-OP: EUR-LEX
	Treaty on European Union (Maastricht)
European Commission: Glossary: institutions, policies and enlargement of the European Union
	Convergence criteria
European Commission: Representation in the UK: Background Briefings
	The euro: notes and coins

Organisations in the United Kingdom

Association for Payment Clearing Services
	Home page
	Outline euro blueprint - executive summary [pdf]
	Tracking of business attitudes to the euro - the first year after its launch [pdf] March 2000

Association of British Insurers
	The ABI and the Euro

Bank of England
	Home page
	The Bank of England and the Euro
	Practical issues arising from the euro
	Themes in practical issues - preparations for UK entry
	November 2002 issue
		Title, contents and foreword [pdf]
		Part I The UK's performance as a euro financial centre [pdf]
		Part II City Guide to a UK euro changeover [pdf]
	The euro, the UK and the City of London, speech by John Townend, Director of Europe, January 2002
	Internet addresses for information on the euro

Britain in Europe [a pro-euro organisation]
	Home page
	Why Britain should join the euro [pdf] October 2002

British Bankers Association
	Home page
	Costs to Business of Possible UK Membership of the Euro Memorandum to the Trade and Industry Committee July 2000

British Chambers of Commerce
	Home page
	Five tests not enough on single currency 08.01.03, press release

British Retail Consortium
	The Euro

Confederation of British Industry
	The CBI and EMU
	CBI policy statement on EMU July 1999
	CBI members reaffirm support for EMU membership in principle (press release) 20.07.99
Department of Trade and Industry
	Economic and Monetary Union
	Europlanner (preparing your business for the euro)
European Foundation [an anti-euro organisation]
	European Journal has links to the following:

United Kingdom:House of Commons: Library
	The eurozone Research Paper 00/34 [pdf] March 2000
	The eurozone Research paper 02/45 [pdf] July 2002
United Kingdom: House of Commons: Select Committee on Trade and Industry
	What would the euro cost UK business? 14th report Session 1999/2000 November 2000

United Kingdom: House of Commons: Select Committee on the Treasury
	Home page
	Press releases

		Vol. 1 Report and proceedings July 2000;
		Vol. 2 Minutes of evidence and appendices August 2000 8th report Session 1999/2000 HC 573
		The government's response to the 8th report on economic and monetary union 10th special report November 2000

	09.07.02:	Enquiry on economic and monetary union (press release)
	08.01.03:	Uncorrected Evidence presented by Mr Anatole Kaletsky, Mr William Keegan, Mr Hamish McRae and Mr Andreas Whittam-Smith on 12 December 2002.

United Kingdom: House of Lords: Select Committee on European Union
	How is the euro working? 18th report Session 1999/2000 HL 124 November 2000

Institute of Economic Affairs
	Should Britain join the euro? the five tests examined (2002) [pdf] Occasional paper no 126, October 2002

National Institute for Economic and Social Research
	Press release site contains links to articles in Economic Bulletin, including:
		The stability and growth pact is not an obstacle to UK membership of the euro area [pdf] September 2002
		Have UK and eurozone business cycles become more correlated? [pdf] October 2002

No Euro campaign [an anti-euro organisation]
	Home page
	Business for Sterling
	New Europe Advisory Council

United kingdom: Scottish Parliament: European Committee
	Report on preparation for, and policy implications of, the single currency: a contribution to the euro debate in Scotland 8th report 2001, 12.11.2001

Trades Union Congress
	The Euro

United Kingdom: HM Treasury
	Home page
	Newsroom and speeches
	The Government's Policy on Economic and Monetary Union
	Chancellor's House of Commons statement on economic and monetary union 27 October 1997
	Chancellor's Speech at the Mansion House 20th June 2001
	Chancellor's Speech to the CBI 4th November 2001
	Chancellor's Speech at the Mansion House 26 June 2002
	Paper for the Treasury Select Committee on the Treasury's approach to the preliminary and technical work 6 September 2002
	Speech by the Chief Economic Adviser to the Treasury, Ed Balls at the 2002 Cairncross lecture 4 December 2002
	Paper for the Treasury Select Committee on the Stability and Growth Pact 13 January 2003
	Paper for the Treasury Select Committee on the European Central Bank 13 January 2003
Supporting Documents
		UK membership of the Single Currency: An Assessment of the Five Economic Tests [pdf] October 1997
		Preliminary and Technical Work to Prepare for the Assessment of the Five Tests for UK Membership of the Single Currency [pdf] November 2001
		The Pros and Cons of EMU [pdf] by David Currie July 1997 (updated summary of a report by the Economist Intelligence Unit)
Convergence programmes
		Delivering Economic Stability - Convergence Programme, submitted in line with the EU Stability and Growth Pact [pdf] December 2000
		Maintaining Economic Stability - Convergence Programme, submitted in line with the EU Stability and Growth Pact [pdf] December 2001
		Sustainability for the Long Term - Convergence Programme submitted in line with the EU Stability and Growth Pact [pdf] December 2002
Euro preparation reports
		Euro preparation reports
		Lessons from the Changeover in the Euro area: A summary of Reports by Private Sector Organisations in the UK [pdf] July 2002
		Fifth report on Euro preparations [pdf] November 2001
		Sixth report on Euro preparations July 2002
Euro Information: The Official Euro Treasury Resource
	Business Impact
	Euro Area Country Information
	Information resources
Changeover plans Links to:
	Euro Area Country Information
	Factsheets, including:
		What should I do if my business ... exports?
		What should I do if my business ... Imports?
		Where to go for help and information

News Organisations

BBC News Online
	UK and the euro
	Q&A: Euro basics
	The UK's five tests
	The UK and referendums
	10.03.02:	The great euro debate (Panorama)
	Economics
	Politics
	26.11.02:	Labour's long euro conversion
	10.12.02:	Portugal's leader warns Britain on euro
	30.12.02:	Euro entry conditions in doubt
	16.01.03:	MPs hear business verdict on the euro
	31.01.03:	The UK euro question (in depth)

Compiled by: Rohan Bolton
European Sources Online Researcher
February 2003

Detailed analysis of the UK government's position on the European single currency.