Is the UK on the verge of joining the euro?

Euro notes

The UK is "closer than ever before" to joining the euro, the president of the European Commission José Manuel Barroso has claimed.

Speaking on French radio yesterday, Barrosso said that some British politicians were considering signing up to the single currency in a bid to beat the effects of the global economic crisis.

He said: "We are now closer than ever before. I'm not going to break the confidentiality of certain conversations, but some British politicians have already told me, 'If we had the euro, we would have been better off.'"

Although Barrosso conceded that the majority of people in the UK were still opposed to the idea, he said that there is a period of consideration under way and “the people who matter in Britain are currently thinking about it.”

Speculation immediately mounted that Peter Mandelson, who was recently appointed as the new business secretary, was one such MP. Speaking at the recent Labour's Progress conference he said: "I hold to the view that our aim, our goal, should be to enter the single currency."

However the government was quick to play down suggestions that the UK is about to adopt the euro. "Our position hasn't changed. We have no plans to join the euro,” a spokesperson for Number 10 said.

Over the past year the value of the pound has plummeted against both the dollar and the euro. £1 will now only buy you $1.48 or €1.16, compared with last December when it would have bought $2 or €1.33.

Economic tests

When Labour came to power in 1997, the then chancellor Gordon Brown said that the UK’s entry into the single currency would depend on the passing of five economic tests.

The key test is how well the UK’s economy would fare from EU membership, such as if it was compatible with interest rates being set by the European Central Bank, based in Frankfurt. The second is if it was flexible enough to cope with the change.

The other main tests include if joining the euro would lead to more firms investing for the long-term in Britain, the impact it would have on the financial centre of the City of London and if it would lead to higher growth, stability and an increase in jobs.

A review of the tests in 2003, conducted by the Treasury, concluded that the UK’s economy, particularly its housing market was not compatible with Euro membership.

So, could signing up to the single currency help beat the effects of the global credit crisis? Howard Archer, chief UK and European economist at Global Insight, doesn’t think so.

“Many of the problems that are facing the UK economy, such as high inflation and rising unemployment are facing the Eurozone too,” he says. “In addition there are problems that are specific to the UK that need to be solved, such as the overextension of its housing market and the problems created by its reliance on the financial sector.”

And with the trend of home ownership much higher in the UK than in Europe, Archer explains that the housing markets are just too different to make ever joining the euro a possibility.

“When the Treasury conducted its review five years ago, one of its main conclusions was that lower European interest rates were just not compatible, especially with the housing market," he says. "Should the UK have joined then it would have expanded at a much faster rate than it did – just look at Ireland and Spain.”

However Dr Stephen Barber, head of research at Selftrade, believes that it could help: “Being part of a big single currency means that the UK would be better placed to handle big global shocks. But there are also more longer-term reasons why the UK should adopt the euro, and soon.

“In the long-term joining the euro should help bring down prices and increase transparency. In fact you could say that not being in it imposes an additional tariff on the UK consumer in the form of the exchange rate mechanism.”