United Kingdom: EMU opt-out clause

Why has the United Kingdom not adopted the euro? When the Maastricht Treaty was concluded in 1992, the United Kingdom was granted an opt-out clause, meaning that it was not required to participate in the third stage of economic and monetary union (EMU) and consequently introduce the euro. This Protocol specifies the provisions of the opt-out.

ACT

Protocol (No 25) on certain provisions relating to the United Kingdom of Great Britain and Northern Ireland (1992), annexed to the Treaty establishing the European Community.

SUMMARY

This Protocol specifies the provisions of the United Kingdom's opt-out from moving to the third stage of economic and monetary union (EMU), meaning that it has not introduced the euro for the time being. The United Kingdom is still in the second stage of EMU. The opt-out clause was a condition for the United Kingdom to approve the Treaty as a whole.

PROVISIONS OF THE OPT-OUT CLAUSE

The Protocol states that certain articles of the Treaty do not apply to the United Kingdom:

its powers in the field of monetary policy are not affected by the Treaty (the United Kingdom retains its powers in the field of monetary policy under national law);
it is not subject to the provisions of the Treaty relating to excessive deficits;
it is not concerned by the provisions of the Treaty relating to the European System of Central Banks (ESCB), the European Central Bank (ECB) or the regulations and decisions adopted by those institutions.

The United Kingdom's voting rights are suspended for the acts of the Council concerning:

the decision on the irrevocable fixing of the exchange rates between the currencies of the Member States that move to the third stage and adopt the euro;
the appointment of the President, the Vice-President and the other four members of the Executive Board of the ECB.

For this purpose, the weighted votes of the United Kingdom are excluded from any calculation of a qualified majority.

NOTIFICATION OF THE UK GOVERNMENT

On 30 October 1997, the UK Government notified the Council that it was not intending to adopt the single currency on 1 January 1999. The United Kingdom may change its notification at any moment and introduce the single currency provided that it satisfies the following conditions:

the UK Government and Parliament take a decision in this respect (with or without a referendum, depending on national law);
the United Kingdom meets the convergence criteria laid down in the Treaty establishing the European Community.

Acting at the request of the United Kingdom, the Council, after examining a report from the Commission and the ECB, after consulting the European Parliament and after discussion in the Council, meeting in the composition of the Heads of State or Government, will decide whether the conditions are met and will act by qualified majority.

THE FIVE ECONOMIC TESTS

The UK Government has announced that any move to the third stage of EMU will depend on five economic tests being met:

Convergence of business cycles: Business cycles in the euro zone and the United Kingdom must be compatible. The assessment will focus on economic indicators such as inflation, interest rates, the output gap and the real effective exchange rate with a view to long-term convergence.
Flexibility: The UK economy must be flexible enough to ensure that any asymmetrical shocks can be absorbed by, for example, labour-market flexibility and mobility and by fiscal policy.
Investment: UK participation in the single currency must promote investment (foreign or domestic) in the long term.
Financial services: EMU must improve the competitive position of the UK's financial services industry, particularly in London.
Growth, stability and jobs: EMU must have positive effects on employment and growth, measured by the impact on UK foreign trade, price differentials and macroeconomic stability.

According to the UK Government, these tests must be met before the United Kingdom applies to participate in the third stage of EMU. They are in addition to the formal criteria laid down in the Treaty. The assessment of the tests by the UK Treasury carried out in June 2003 (EN) was as follows: since 1997, the United Kingdom has made real progress towards meeting the criteria of the five tests. However, although the possible benefits (increases in investment, financial services, economic growth and job creation) seem clear, the Chancellor of the Exchequer cannot definitively conclude that convergence will be sustainable and that flexibility is sufficient to cope with any difficulties with the euro zone. A decision to adopt the single currency is therefore not currently in the UK national interest, according to reports from the Treasury.

See also