Difference between Euros and British Pounds (Euro vs GBP)

The Euro is the official currency of the Eurozone, which includes 19 of the 27 member states of the European Union, while the British Pound, also known as the Pound Sterling, is the official currency of the United Kingdom.

This article analyses the difference between Euros and British Pounds, their functionalities and their role in social and economic development in their respective regions.

Introduction: Euros and British Pounds

The Euro and British Pound are among the strongest and most widely traded currencies in the world. The Euro, the official currency of the Eurozone, and the British Pound, used by the United Kingdom, have a profound impact on the global economy and exchange markets.

Historical Context: Euro vs GBP

The British Pound (GBP), also known as Pound Sterling, is the oldest currency still used today, dating back to Anglo-Saxon times around 775 AD. Over the centuries, the British Pound has been a symbol of economic stability and strength.

It was the de facto global currency for several centuries before being surpassed by the U.S. Dollar in the mid-20th century. Today, it remains one of the world’s top reserve currencies.

The Euro (EUR), on the other hand, is relatively younger. It was launched on January 1, 1999, by the European Union (EU) as an electronic currency for banking and financial transactions, with Euro banknotes and coins entering circulation in 2002.

19 of the 27 EU member states have adopted the Euro as their primary currency, forming the Eurozone.

Understanding the Euro

The Euro is managed by the European Central Bank (ECB) and the Eurosystem, comprising the Eurozone countries’ central banks. The Euro was introduced to harmonize and integrate the economies of the EU member states, facilitate free trade, and prevent competitive devaluations.

As of September 2021, the Euro was the second most traded currency in the world, trailing only the U.S. Dollar. Its value is influenced by factors such as the Eurozone’s economic health, political stability, inflation, and the ECB’s monetary policy.

Understanding the British Pound Sterling

The British Pound, managed by the Bank of England, represents the United Kingdom’s currency economy.

It was once tied to the gold standard, which ensured stability, but it has been a free-floating currency since 1971. This means its value is determined by supply and demand dynamics in the foreign exchange market.

The Pound’s value is influenced by the UK’s economic health, political stability, inflation, and the Bank of England’s monetary policy. Its strength has also been traditionally associated with the UK’s political stability and robust legal system, which attracts international investment.

Key Difference Between Euros and British Pounds

• Management and Control: The ECB, representing multiple nations, manages the Euro, while the Bank of England manages the Pound. The multinational management of the Euro often leads to complex decision-making processes.

• Economic Representation: The Euro represents the collective economies of the Eurozone, while the Pound reflects the UK’s economy. This means that the Euro’s value can be affected by a single country’s economic situation within the Eurozone.

• Use: As of 2021, the Euro is used by 19 EU member states, while the Pound is used mainly in the UK and its dependencies.

• Stability and Strength: The Pound is renowned for stability and strength due to the UK’s historical economic resilience. However, the Euro has seen periods of instability, partly due to the varying economic health of the Eurozone member countries.

Also, four microstates (Andorra, Monaco, San Marino, and Vatican City) have formal agreements with the EU to use the Euro as their official currency. Kosovo and Montenegro also use the Euro but without a formal agreement.

Outside of Europe, several overseas territories and regions use the Euro. These include the Azores, Canary Islands, French Guiana, Guadeloupe, Madeira, Martinique, Mayotte, Réunion, Saint Barthélemy, and Saint Pierre and Miquelon.

However, it is important to note that not all EU members adopted the Euro, most notably the UK, which retained the British Pound Sterling, and others such as Sweden, Poland, and Hungary.

The Forex Market: Euro and British Pound

The foreign exchange (Forex) market, where currencies are traded, is a significant indicator of a currency’s strength and global standing. The most common currency pair involving these two currencies is the EUR/GBP.

The value of EUR/GBP represents how many Pounds (the quote currency) are needed to purchase one Euro (the base currency).

Euro vs GBP: What’s the Difference?

How is the value of the Euros and British Pounds determined?

The value of both the Euro and British Pound is determined by the foreign exchange market (Forex), a decentralized global market where currencies are traded.

Several factors influence currency values in this market:

• Economic Indicators: These include the overall health of an economy, inflation rates, interest rates, and the balance of trade (the difference between a country’s exports and imports). A strong, growing economy with low inflation and high-interest rates often has a stronger currency as it attracts foreign investors seeking better investment returns.

• Market Speculation: Forex traders speculate on future changes in currency values based on economic indicators and geopolitical events, buying currencies they think will increase in value and selling those they think will decrease.

• Political Stability: A country’s political environment can influence its currency value. A stable political environment attracts foreign investors, increasing demand for that country’s currency and, thus, its value.

The European Central Bank and the Bank of England also play a role in influencing the value of the Euro and British Pound, respectively, through their monetary policies, including setting interest rates and controlling the money supply. Traders closely watch their decisions which can lead to changes between Euros and British Pounds.

How does inflation affect the Euro and British Pound?

At moderate levels, inflation is often seen as a sign of a healthy economy, implying that consumer demand is strong. This can attract investment, leading to an increase in the value of a currency.

However, high inflation can lead to economic instability, devaluing a currency and eroding purchasing power, as each currency unit buys fewer goods and services.

Central banks, like the European Central Bank (ECB) for the Euro and the Bank of England (BoE) for the British Pound, use inflation targets to guide their monetary policy. They adjust interest rates to keep inflation within a target range, typically around 2%.

When inflation is above the target, they might raise interest rates, making borrowing more expensive, slowing spending, and cooling the economy. They might lower interest rates to stimulate spending when inflation is below the target.

Changes in interest rates can have significant effects on currency value. Higher interest rates often lead to currency appreciation as they attract foreign investors seeking higher returns, increasing demand for the currency.

Conversely, lower interest rates can lead to currency depreciation as they may cause investors to seek higher returns elsewhere.

Why did the UK decide not to adopt the Euro currency?

The decision by the UK not to adopt the Euro as its currency resulted from various economic, political, and nationalistic considerations. Economically, the UK has historically had different economic cycles and interest rates than many of the Eurozone countries.

Adopting the Euro would mean giving up control over its monetary policy, including setting interest rates and the ability to devalue currency if needed, to the European Central Bank. This could pose risks if the UK’s economic cycle were not synchronized with the rest of the Eurozone.

Politically, there were concerns about losing national sovereignty. The Pound Sterling has been a symbol of national identity and independence, and many felt that adopting the Euro would entail ceding too much control to Brussels, which some UK citizens were uncomfortable with.

Regarding pragmatism, the UK also negotiated an ‘opt-out’ clause from the Euro when the Maastricht Treaty was signed in 1992. This allowed it to decide whether to adopt the Euro or not.

There was also scepticism about the Euro project, the one-size-fits-all monetary policy, and its implications for financial stability. The subsequent Eurozone crisis somewhat validated these concerns.

Despite these factors, the UK maintained a close relationship with the Eurozone, with London being a significant hub for Euro-denominated transactions.

How does the political stability in the UK and the Eurozone influence the Euro and British Pound, respectively?

Political stability is a crucial factor that can significantly influence a country’s or a region’s currency. It impacts the Euro and British Pound in various ways.

Investors prefer political stability as it provides predictability. It enables them to make long-term plans and decreases the risks associated with their investments.

When the UK or the Eurozone countries exhibit political stability, it can bolster investor confidence, potentially attracting foreign investment. This increased demand for a currency can strengthen its value.

Conversely, political instability or uncertainty can have a negative impact. For instance, the Brexit referendum 2016, where the UK voted to leave the European Union, caused significant uncertainty about the future of the UK’s relationship with Europe.

This uncertainty contributed to a decrease in the value of the British Pound in the period that followed the referendum.

Similarly, political instability in Eurozone countries can affect the Euro. The Greek debt crisis is a prime example where political and economic instability in Greece negatively affected the Euro’s value.

It’s also worth noting that the Euro and British Pound don’t operate in isolation. Political events in the UK can influence the Euro and vice versa, given the global economy’s significant economic ties and interconnected nature.

Over time, the name “pound sterling” became synonymous with British currency, symbolising its robustness, stability, and international standing. The term “sterling” underscores the historically high purity of British currency, with the pound originally signifying a pound of sterling silver.

Today, while you often see the currency referred to as the “British pound”, the formal term remains “Pound Sterling”, and it is denoted by the currency code GBP (Great British Pound). The symbol for the pound is £, derived from the Latin word “libra”, which refers to a unit of weight similar to a pound.

In Summary: Euros vs GBP

The Euro and British Pound are powerful currencies with a significant influence on the global stage. Despite their differences in historical context, management, representation, and stability, both play an integral role in the world economy and foreign exchange markets.

Understanding the difference between Euros and British Pounds provides a unique lens through which to comprehend the dynamics of international finance and trade.

References

• Arthur Korus and Kaan Celebi, Universitätsbibliothek Wuppertal, “The impact of Brexit on the British pound/euro exchange rate.“
• Gill Seyfang, New Political Economy, “The euro, the pound and the shell in our pockets: rationales for complementary currencies in a global economy.”
• Minford, Patrick, IEA Occasional Paper, “Should Britain Join the Euro?“

Read more articles