Despite the United Kingdom never having adopted the euro, the upcoming Brexit will have consequences for EU monetary integration.
The UK’s withdrawal from the EU will heighten fears of marginalisation among the ‘euro-outs’, that is, the eight member states that have not adopted the euro.
Britain’s departure from the EU could compel non-euro EU countries to reconsider their ties with the euro area.
The eight euro-outs (Bulgaria, Denmark, Croatia, Poland, Romania, Sweden, the Czech Republic and Hungary) are a heterogeneous group of countries, with different EU priorities and different relationships to the euro and the eurozone.
This makes it difficult for the group to cooperate politically with one another within the EU.
The UK’s withdrawal represents a political power shift within the EU, as a major non-euro state will leave European decision-making processes, increasing the voting power of the EU-19.
The impact of the superior weight of euro area countries on voting procedures in the council will be limited, if the body maintains its tendency to take decisions by consensus or in areas, where unanimity is required (eg EU multi-annual fiinancial framework, MFF, or social issues).
The UK’s strength in the EU has, however, not only been formally reflected through its weight and population in legislative processes, but has also made itself felt at an informal level.
London has strongly supported the deepening of the single market in services, digitalisation and energy, an attitude that was in line with that of all EU members outside the euro, in particular the central and eastern European countries.
EU-19 vs EU-8?
Although there is currently little potential for conflicts of interest between the EU-19 and the EU-8, further integration, particularly in the field of financial markets, may lead to increasing dissent.
Conflicts between the euro-ins and the euro-outs do occur, as demonstrated during the discussions on the banking union in 2012.
In this conflict the UK feared that the interests of the euro area would prevail at the European Banking Authority (EBA), which is responsible for setting common supervisory standards in the banking sector of the single market.
Under pressure from London, a special voting system was agreed for the EBA: a double simple majority of EU states inside and outside the euro area.
Fearing marginalisation in the post-Brexit EU, some countries recently met in a new format.
The New Hanseatic League, initially included the euro states Estonia, Finland, Ireland, Latvia, Lithuania, the Netherlands and the two euro-outs Denmark and Sweden.
The group stands for rules compliance, economic self-responsibility and inclusiveness of the EMU reforms to the euro-outs.
In June 2018, the Netherlands, an informal spokesperson for the group, protested against the Franco-German proposal to set up a separate Eurozone budget.
The group now comprises ten countries following the accession of the Czech Republic and Slovakia and it is an example of how successful joint representation of euro-ins and euro-outs can be on the issue of Eurozone reforms.
Although all EU countries, except Denmark and the UK, have a legal obligation to participate in the monetary union, this obligation is not linked to any timetable.
The most likely candidates to introduce the euro are the EU’s three poorest countries: Bulgaria, Romania, and Croatia.
However, their structural problems, institutional weakness and economic conditions need to be significantly improved before Eurozone accession.
Another important aspect for adopting the euro is public support for the single currency.
According to Eurobarometer surveys from May 2018, it seems that only Romania, Hungary and Bulgaria seem supportive to the euro.
The new realities in the EU after Brexit are likely to persuade the euro-outs to revise their links with the euro area.
The first test of the political weight of the euro-outs will be the distribution of key EU positions after the European parliamentary elections in May 2019.
The appointment of some candidates from eurozone countries such as Slovakia, Slovenia or the Baltic States to key EU positions could convey the message that the political and financial risk of joining the euro is one worth taking.
Besides, the euro-outs should be encouraged to strengthen their links with the euro area by participating in the single supervisory mechanism (SS).
The recent case of massive money-laundering at Danske Bank shows that banking supervision needs to be strengthened, not only in the euro area but throughout the single market as a whole.
This could intensify pressure on Copenhagen to join the SSM. Sweden, whose banking sector is dominant in the Baltic states, should also be encouraged to join the SSM for the same reasons.
More generous financial support for those countries about to adopt the euro in order to strengthen institutional convergence in the MFF for 2021-2027 should be advanced.
This facility must be substantial enough to tackle huge structural challenges in the most likely euro candidate countries (Bulgaria, Romania, Croatia).
Further eurozone enlargement is in the interest of the EU.
This could reduce both the problems associated with the dual nature of economic governance in the EU and the risk of fragmentation of the internal market. However, the most important condition for further accessions to the euro is the lasting stabilisation of the euro area itself.