Should the UK join the Euro?

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Should the UK join the Euro?

As with all important large-scale economic decisions there are many advantages and disadvantages to the UK of joining the Euro and therefore the important conclusion to come to is whether the benefits from such a project outweigh the foreseeable risks.

Perhaps the strongest argument for joining the Euro is that a single market requires a single currency if it is to be as advantageous as is possible. A large market such as the European single market benefits a country because producers are able to achieve economies of scale and therefore lower costs whilst consumers are able to choose from a wider range of producers and therefore competition will increase. However there is still much price dispersion in Europe unlike in America and this is perhaps because America has a single currency whilst Europe does not.

The effect on a single market of a single currency can be great. Price transparency is a frequently quoted advantage of the Euro. Economic theory states that competition should increase and that there should be a harmonisation of prices since consumers can see how much similar goods cost in other parts of Europe. As a result prices should tend to those of the most competitive region. With a single currency capital will be able to pursue the investment projects which offer the highest returns so companies carrying out high return projects will be able to raise capital from the whole of Euro-land. A single currency will therefore favour a more efficient allocation of capital. With a single currency European trade has a more stable-looking future because of the absence of disruptive currency fluctuations.

As a result of the UK joining the Euro there would be reduced transaction costs for traders, with savings estimated at around £2 billion annually. These savings come from not having to pay commission or maintain hedge funds to guard against currency instability. At present the British sterling is very strong against other currencies and this greatly effects their imports and exports. Joining the Euro would result in an exchange rate stability for over half of UK trade. This would encourage higher levels of trade, as exporters and importers realised that their profit margin could no longer disappear with an unanticipated exchange rate movement. We must take into consideration that we have a major trade deficit with the EU, and that imports as well as exports will experience this new exchange rate stability. However, despite a lot of our trade being with members of the EU, we must not disregard the other 47% our trade. The Euro itself has been unstable against other currencies. An appreciation of the Euro against the dollar subsequent to our joining would do the UK's important trade with the USA would be at a disadvantage.
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UK firms would probably enjoy reduced borrowing costs, encouraging investment and growth, as British interest rates fall to European levels, and UK home buyers would enjoy cheaper mortgages. It is true that industrial investment in this country has been persistently handicapped by the short term use of interest rates against inflation, but even the present level of interest rates in the UK appears to have set off house price inflation in the south. Firms which currently price discriminate between different European markets would find it difficult to sustain this practice as price transparency increased. Some profits could be ...

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