Brexit and the Euro

The year 2019 marked the 20th anniversary of the establishment of the Euro.  It was also the last full year before the UK formally left the European Union. This paper examines the relationship between the UK and the euro area. We look at the economic distance between core and periphery groups of countries which is driven by the level of synchronisation in economic activity. We provide new evidence that since 1990 the UK economy has become significantly more integrated with that of the EMU countries.  The UK has moved from being in the periphery before 1990 to being part of the core over the following 30 years, despite not being part of the EMU.  We also provide evidence that the level of business cycles synchronisation of the UK economy with the EU has had the greatest, among the EU countries, variability over time. We conclude with some policy implications arising from Brexit for the stability of the euro area. Specifically, while synchronisation might have increased the costs of Brexit, the UK exit from the EU represents much less of a threat to the stability of the euro area than the risk of a failure to further European economic integration via fiscal federalism and the banking union.