U.K. Spared More Pain Than Gain in Avoiding Euro, IMF Study Says

The U.K.’s decision to stay outside the euro area spared the nation three times more pain than the gain it would’ve seen from joining the currency union, according to a study by International Monetary Fund economists.

Under normal times, joining the euro would lower trade costs and help boost a country’s welfare in the long run, according to the report released yesterday in Washington. In a financial crisis that sent interest rates to levels recently seen in the euro region, the effect would be negative, it said.

“The welfare costs from an episode of financial turbulence is more than three times the welfare gains derived from lower trade costs,” Ruy Lama and Pau Rabanal wrote in the study, which focused on the role played by trade and financial links in the decision to join a monetary union. “This stark difference in the results can help to rationalize the decision of the U.K. to postpone the entry to the” monetary union, they wrote.

The U.K. has made it clear it doesn’t plan to adopt the euro in the foreseeable future. More recently, it has stood outside of Europe’s debt turmoil, pressing the countries that use the euro to move toward a fiscal and banking union to save the currency while refusing to take part in bailouts of stricken economies.

“During tranquil times the model indicates substantial benefits from adopting a currency, however under financial turbulence the gains disappear and the appropriate regime is to stay out of the” union, the authors wrote. The result of the study “gives a rationale to emphasize policies of financial stability and fiscal prudence in a monetary union,” they wrote.

To contact the reporter on this story: Sandrine Rastello in Washington at srastello@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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