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Evaluating the UK’s macro performance outside of the Euro Zone


  • Decision made in 2003 that the UK would remain outside of the single currency
  • UK remains a full member of the single market
  • Supportive of further EU enlargement but distanced from deeper fiscal / banking intregration

Crucial question both in the short and medium term is whether non-participation in the Euro makes a significant difference to key macro outcomes

  • Real GDP growth, estimated Trend growth (LRAS)
  • Core CPI inflation and inflation expectations
  • Employment and unemployment rates
  • Trade balances (with EU and beyond)
  • Trends in relative productivity and per capita incomes


Life Outside of the Euro – Evaluation

1. Economy boosted by depreciation of sterling 2007-09 – benefit of having a floating exchange rate, improvement in competitiveness, possible re-balancing of C+I+G+X-M.  Struggling countries inside Euro Area do not have this option, rely more on structural reforms and internal devaluation (e.g. lower wages) to improve competitiveness.


  • a. But impact of weaker sterling limited by external factors and financial fragility
  • b. UK growth has been weak, output well below the 2008 peak, triple-dip
  • c. Cost too of higher inflation in the UK – has averaged 3% since 2008 – cutting real incomes
  • d. Floating exchange rate might be a factor limiting FDI in the medium term e.g. non-EU TNCs choosing Euro members as base for their EU FDI projects

2. Autonomy for the Bank of England to set policy rates at levels appropriate to domestic problems e.g. quicker reaction than the ECB to the financial crisis, freedom to introduce and expand the QE programme, and latterly the Funding for Lending scheme. Real interest rates negative, helping to avoid a depression. Flexible interpretation of the inflation target


  • a. Criticisms of the Bank’s record, too lax on CPI inflation, QE storing up problems, unintended consequences of ultra-low interest rates including rising inequality
  • b. ECB cut policy rates too, monetary policy environment similar to the UK

3. UK government able to ignore fiscal stability rules of being inside the Euro – has run larger budget deficits – Keynesian fiscal stimulus to boost demand. 10 year bond yields remain at historic lows, FP has helped to stabilise demand. UK less exposed to covering the cost of bail-outs. Emergency funding for countries such as Greece and Ireland.

  • a. AAA bond rating has little to do with being outside of the Euro
  • b. UK unable to avoid fiscal austerity, damaging to growth – may last longer than members of Euro Area
  • c. UK banks and trading sector remains heavily exposed to Euro crisis even if outside of the currency bloc – there are mutual benefits from the Euro project working – risks of disorderly default are hug


Longer term issues

  1. UK perhaps missing out on some FDI inflows into the EU (strong competition from new EU entrants including some who have joined the Euro), gains from a single currency (lower transactions costs accrue every year – they are not one-offs).
  2. Being outside the Euro did not prevent the asset price bubble and bust in 2007-2010
  3. It is possible to be a member of the Euro and enjoy sustained growth and rising prosperity – Germany, Holland etc
  4. Easy to make contrasts with struggling countries such as Greece, Spain - but the UK is a different economy in many ways
  5. The Euro Area is far from being an optimal currency area – the risks of Euro participation rise because of the lack of real convergence between participating nations



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