As any long-serving member of the foreign exchange markets will attest, GBP’s formal relationship with its continental counterparts over the past 20 years or so has been far more a product of political than economic considerations. How else is it possible to explain Chancellor Nigel Lawson’s somewhat curious decision back in 1988 to shadow the DEM at a time when West German interest rates were set at a level that was clearly too low for the needs of the UK economy, leading Edward Heath to call Lawson a “one club golfer”? Equally, it is hard to see the UK’s decision in October 1990 – a month before Margaret Thatcher was forced from office – to join the ERM at what was clearly an inappropriate rate as being driven by anything other than the exigency of politics.
Much the same can be said about GBP’s failure to join EUR over the past 12 years. Certainly, it seems reasonable to believe that the UK’s continued refusal had more to do with Gordon Brown’s cautious approach during his time in office as Chancellor than anything else. However, as with all things in life there is no reason to believe that the political forces that have kept the UK out of the single currency for the past decade will persist.