By getting into the European Monetary Union (EMU) early Britain can have greater political and economic influence in the creation and inevitable modification of the Euro zone. This would allow the terms of the EMU system to be made as beneficial to Britain as possible. There is a danger that if Britain is not actively involved and committed at this early stage, other nations will benefit from having created the terms of the union in their favour. This could leave Britain straggling behind if the union is a success, and marginalize Britain’s influence within Europe. Joining later, having sat out until the success of the project could be guaranteed, is a lower risk option, but would undoubtedly bring fewer benefits than the more risky early membership. Although early signs are not extremely good, the Euro has the potential to become a major global currency to rival the US dollar, benefiting those within the Euro area. A resilient, strong currency would benefit all member countries, including Britain.
In joining the EMU, Britain will experience no more transaction costs from exchanging currency from one to another which could reduce international trading costs by up to 1%, since over 60% of UK trade is with countries of the EU this should again reduce costs and prices and stimulate trade with our continental partners. Around 20% of UK transactions are already dominated in US dollars, so the demise of sterling will not produce totally unfamiliar circumstances. A common currency removes a significant barrier to free competition across national borders. A single currency promotes price-transparency – customers can readily assess the relative prices of similar products from anywhere within the EMU. This should lead to increased competition between businesses in general within the EMU, so UK importers should benefit from lower prices, thus reducing their costs.
One of the primary arguments against Britain joining the EMU is that there are severe structural differences between the members' economies. These may well undermine the success of the project, meaning Britain would do well to stay out. In theory, a currency union can offer economic benefits – but only under fortunate circumstances. The lack of exchange rates removes a very effective mechanism for adjusting imbalances between countries that can arise from differential shocks to their economies. History demonstrates that well-chosen devaluations can help an economy out of difficulties – the UK should retain this option.
The problem in Europe is that the UK economy is different in some important ways from the economies of mainland EU, for example, the UK growth/recession cycle’ is often out of phase with the EU cycle. With a UK a non-member, the Central European Bank in Frankfurt is quite correct to keep EU interest rates low as possible, while the Bank of England could need to raise UK interest rates to control inflation. This is a problem because there is no single interest rate which could benefit both the EU and Britain, which may result in recessions and debt for either parties.
In theory, a single currency union can offer economic benefits – but only under fortunate circumstances. The lack of exchange rates removes a very effective mechanism for adjusting imbalances between countries that can arise from differential shocks to their economies. History demonstrates that well-chosen devaluations can help an economy out of difficulties – the UK should retain this option. In a recession, a country can no longer stimulate its economy by devaluing its currency and increasing exports. There are obvious structural differences within the countries of Europe so, even if EMU begins in a state of convergence, economic shocks, such as crisis of supply of primary products, will lead to imbalances and there will be no mechanism to restore the balance.
Another main argument against Britain joining the EMU is that historically currency unions have collapsed in the past. There is no guarantee that EMU will be a success. Indeed the Euro may be a recipe for economic stagnation and higher structural unemployment if the European Central Bank pursues a deflationary monetary policy for Europe in conflict with the needs of the domestic UK economy. It is also quite possible that the monetary union will not be sustainable, countries that discover themselves to be in difficulty may cancel their membership and re-establish an independent currency and an inflationary monetary policy. The example of Ireland’s departure from the sterling currency area suggests that leaving a currency union is beneficial, rather than joining one.
Adjusting to a new European currency will involve substantial costs for businesses and banks. Adjustment to economic divergence by migration of labour or capital will be costly; there is no clear EC commitment to relieving these costs. Furthermore there is a risk of increased monopolisation of European Markets by the big multi-national companies which could use their market power to entrench their own positions in the European Markets. This is a problem as it threatens smaller firms survival and suppresses innovation, thus the hope for increased competition and efficiency could actually end up as the very opposite.
There is also the risk that if Britain join the EMU, Britain would lose its fiscal independence as all decisions would be made by the EU governments with a monetary policy which would threaten UK businesses. With Britain’s move into the EMU, this could accelerate the risk of individual members economic problems becoming a collective ‘European’ problem. This is an important issue because it could mean that taxes on UK business may have to be raised to pay for the recklessness of other governments to make inadequate preparations for future payments.
In Conclusion to this argument whether or not Britain decides to join the single currency will affect the UK market one way or another. The decision is by no means certain however the extend to which it would be beneficial is likely to depend on the following.
It is important to value and treasure our heritage, as that cannot be replaced. However, whether this should stand in the way of such a big issue is doubtful. I believe British culture to be strong enough to retain a real identity without the pound. Britain has many strengths, economically and culturally, that should enable growth to become more prosperous. Nevertheless this would undoubtedly be made easier by membership in a successful Euro zone. However, whether or not this is attainable is really the issue - can the differences between the member's economies be overcome? Is convergence possible? Will the Euro be successful? I would tentatively suggest that the answer to these questions is, in the long term, yes. On this basis I suggest that it is best for Britain to join sooner rather than later. There is a real risk of failure and there will undoubtedly be problems in the short to medium term, but I feel the risk is worth taking.
Britain's current decision not to enter the single currency allows the UK to continue as a self-governing flexible nation enjoying a period of sustained economic growth and stability; favourable to UK businesses, however, in my opinion, Britain's acceptance of the Euro seems inevitable at some point, partly in the interest of the economy and businesses (in order to avoid loss of European trade and competitiveness) - but ultimately driven by the desire for a more distinct European identity and to support political motives.
Conclusively I think in principle Britain should join, but only when appropriate measures have been taken to ensure convergence and economic stability. I think the such as the Chancellor’s ‘5 Tests’ idea before entry is a sensible one, but unfortunately it seems they have been designed for use as a political tool. I can only hope that this decision is focused more on Britain than the Labour party.
