When we talk about the euro, we usually don’t consider the United Kingdom as a dominant presence in the discussion. After all, despite being a member of the Eurozone group, London has opted to keep the Pound Sterling as her local currency. When it came to the latest ongoing Greek crisis, nary a word was heard from voices at the City of London financial center.
Looks are deceiving however. London’s dominance of the $5.3 trillion-a-day foreign exchange market exists in force and surprisingly the financial center sees more activity in buying and selling euros than the whole 19 member Eurozone together and more dollars than the U.S.
Brexit Possible
All this may change. The U.K. is now under pressure from many of its leaders to leave the EU, a move that would drop its position as the king of foreign exchange which it has dominated for more than two decades and hit at the heart of post-imperial Britain’s position in Europe.
Jim Rogers, co-founder together with George Soros of the Quantum Fund in 1973 believes that “If the UK left the European Union, London’s dominance of foreign exchange including euro trading would gradually decline and then end as the flows moved to Asia and other European centers.”
London has the deepest pockets in the time zone between Asia and the United States and reigns as the ruler of global business in terms of luxury property, education, property rights and cultural renewal that is unmatched anywhere else. But a Brexit from the euro would move foreign trading to the continent and beyond and leave London to fend for itself.
Although Britain had joined the European Economic Community in 1973, it chose to stay out of the euro when the currency was put into place in January 1991. There are several reasons why it elected to do so.
At the time, the British government was worried about relinquishing control of its own interest rate policy which would have been necessary under a euro system. In addition, London would have been forced to meet the "euro convergence criteria" before adopting the euro, which included maintaining a debt-to-GDP ratio that limited British fiscal policy.
Past Referendum Proposals
There have been times during the last few years when London considered opting out of the euro but all proposals to put the vote to the people in a referendum failed, including the last one put out by Tony Blair in 2011. During the last election campaign in Britain, however, Britain's exit (or a "Brexit") from the EU became a real possibility with David Cameron, the prime minister, promising an in/out referendum vote on Britain’s EU membership by the end of 2017.
Many prominent figures believe that Britain would have been better off joining the euro years ago and that staying part of the Eurozone now is still the best move. Pointing to Greek finance ministers and their continued battle to prevent Greece from crashing out of the euro, Sir Richard Branson, founder of the Virgin Group, claimed recently that British exports to the continent would be stronger if London had ditched the pound way back. He warned that “leaving the European Union (at this point)would be catastrophic” and said that Britons should be 'proud' of being Europeans and remaining a member of the EU meant 'talking from a position of strength'.”
Britain’s allies say that opting out of the euro would be foolish and would remove London from any voice in the euro’s global influence. Opponents of the EU are certain the Britain would thrive on its own outside the euro and point to the five-year Eurozone debt and Greece’s near bankruptcy as proof of a faulty monetary merger that is destined to die unless it is incorporated more widely within Europe and beyond, a situation that would remove Britain from its top position and place it outside any direct financial impact.
When Tony Blair won the election in 1997, his then finance minister, Gordon Brown conducted a comprehensive study on whether or not Britain should join the euro. He set out five economic criteria for joining and his conclusion at the end of the study was: not yet. These five tests have never been met to date and London remains as the single Eurozone member outside the currency.
Brits Favor Sterling
Should a referendum be put to the people today, most Brits would vote to hold onto their precious sterling. Prime Minister Cameron has promised that he will bar no efforts to keep his country out of the euro forever, a move that would keep his country separate from the 19-nation Eurozone, the main governing center of the broader 28-member EU.
George Osborne, Cameron’s heir apparent as Prime Minister, told a group of London financiers last month, “We, almost alone among the non-euro members, have no commitment to join the single currency and no realistic prospect of wanting to do so.”
Still, fears do exist that by remaining out of the euro, Britain would eventually be the only EU member outside the euro and would be outvoted by the Eurozone on all regulatory issues if the 19 members voted as a block.
A final decision won’t be reached until after the Cameron referendum at the end of 2017. But global events occur in a New York minute and Britain’s balancing act may need to be revisited sooner than expected.