The EU has accounted for an increasing proportion of the UK’s trade in goods since the early 1970s. Since 1978, over half the UK’s trade has been with the other 14 members that made up the EU between 1994 and 2004.

Source: ONS

In terms of the current account of the balance of payments as a whole (that is, including services, income from investments and transfer payments) the EU is again the dominant trade partner, contributing two and a half times as much as the United States, the next largest.

Between them, the EU and the US account for two thirds of both sides of the UK’s current account.

Given the significance of the EU as a trading partner, the adoption of the euro would offer the not insignificant benefit of lower transaction costs, since companies involved in cross-border business would not need to incur the expense of converting foreign currency into sterling or vice versa.

Another major benefit would be an end to exchange rate volatility which has made exporting and importing so tricky for British companies.

Membership of the euro would enable British exporters to price their products with far more confidence, which in turn should lead to an increase in foreign sales.

But while exchange rate stability within the eurozone is given, the risk of volatility remains for trade with countries outside the eurozone.

For the UK, with its long-standing trading and investment links with the US, this would be more of an issue than for many eurozone countries.

Real and nominal interest rates in the eurozone have generally been lower than in the UK. In the past, this was largely because of Europe’s better record on inflation.

In more recent years since the Bank of England was put in sole charge of implementing monetary policy, the UK has become a credible low-inflation economy, and the differential in interest rates against the eurozone has had more to do with the latter’s lacklustre economic performance.

Source: Thomson Datastream

For many years, governments of both parties have pointed to Britain’s success in attracting foreign direct investment (FDI). The UK attracts more inward investment than any other country apart from the US, although as most of this represents the acquisition of British businesses by foreign parties, the economic benefit is questionable.

The reasons for the UK’s success in this respect are hard to identify, but the English language and freer and more flexible labour markets are undoubtedly contributory factors.

Access to the EU market is also an important consideration, particularly for companies from Asia and the US which are seeking a European base. Yet Britain’s long-term voluntary exclusion from the euro does not seem to have dented its appeal.

A final point in favour of joining is the political argument that the UK is big enough to influence the shaping of the agenda for the future of Europe. It is argued that although the UK has the same voting rights on EU bodies as the other large economies (Germany, France and Italy) this influence cannot be exercised effectively unless it is a full participant in all the EU’s institutions.

On several occasions in the past, the UK has tried to formalise monetary arrangements with Europe or participated in wider international exchange rate systems.

The experience has rarely been a happy one. The ending of convertibility against gold in 1931, the UK’s brief membership of the European Snake in 1972, and the ERM debacle in 1992, all suggest that if the past is any guide to the future, the UK could have a difficult time as a participant in the euro.

The loss of monetary independence is widely recognised as a disadvantage.

The fact that the UK would have to adapt to an interest rate set by the ECB makes it imperative that sustainable convergence is achieved.

In a number of key respects, the UK is different from much of the eurozone so that the ‘one size fits all’ approach may not be appropriate.

There is a long-standing concern that making the euro work effectively will eventually lead to pressure for greater harmonisation of tax regimes across Europe.

At present, non-wage costs are higher in most European countries than they are in the UK, and this is often cited as a reason for Britain’s more impressive record on job creation, unemployment and attracting inward investment.

But this argument now carries less weight, with the British system of taxation coming to be viewed by many businessmen as unnecessarily complex.

In any case, the need for fiscal discipline into the medium term will inevitably push up the burden of taxes paid by households and businesses in Britain, irrespective of any initiatives from Brussels.

It is foolhardy to assert that it would be impossible for any country to leave the single currency. But it wouldn’t be easy, and there is no guarantee that it would provide any sort of economic panacea.

Any country opting to leave the euro would, first and foremost, have to contend with a huge credibility gap. Government agencies and companies would find it more expensive to tap the capital markets for finance, while a newly-created national currency would most likely be prone to weakness and instability (and therefore even higher interest rates to keep inflation at bay).

Although the creation of a single currency has not delivered an economic shot in the arm to its members, the currency is now well-established and here to stay. It is not beyond the realms of possibility that individual countries could choose to leave, but membership is far more likely to expand than it is to diminish.