Should the UK Join the Euro Zone? Evidence from a Synthetic OCA Assessment

Based on optimal currency area theories, this paper applies the empirical methodology of structural VAR to revisit the question of whether UK should join or not the Euro zone. Correlations of effective exchange rates between UK and US on one side and between UK and its major European partners (Germany and France) on the other side are first estimated. Correlations between macro-structural shocks are then estimated and results of both approaches are combined to provide conclusions on the appropriateness of a floating regime of the British Pound or of the integration to the Euro zone. A dynamic analysis shows that UK structural evolution over the period 1970-2008 tends to favor the option of integration to the Euro zone. These results have to be qualified by taking into account the specific position of UK with London as a global financial center and political issues which dominate the debate.