Should the UK have joined the Euro while in the EU? New evidence using the synthetic control and synthetic difference-in-differences methods

Abstract The question of whether the euro promotes development in adopting countries remains open, with the answer likely varying across cases. Taking the UK as an example, this paper investigates whether the UK would have had a higher per capita GDP had it adopted the European currency in 1999. The study utilizes two conceptual frameworks derived from the literature, which offer potentially opposing predictions regarding the euro’s impact on economic development. To estimate the causal treatment effect of the UK’s policy of not adopting the euro, two contemporary methods for counterfactual analysis are applied: the Synthetic Control and the Synthetic Difference-in-Differences methods. While the results from both methods indicate that the UK would not have benefited from higher per capita income had it joined the euro, neither would it have suffered from a lower per capita income. The findings are cross-validated and demonstrated to be robust to changes in methodology, predictor selection, the donor pool, and the introduction of a placebo treatment year.