Exchange rate is the value of one currency compared to one another. The exchange rate is primarily related to the European Business and trade. As each business trades in return of money. The value of the exchange rate will have an impact on the European business as the rate is not stable and this will lead to an unpredictable business environment. If the environment is unpredictable then you can’t make a budget upfront to see whether the business is making any profit. However the Exchange Rate Mechanism sought to maintain it’s stability between the EU states. The currency becomes valuable when ever demand for it is greater than the supply. This will attract businesses to trade in the countries where the exchange rate is at a fair stability. And it will have an impact on the economy in terms of export and import trading. If the exchange rate fluctuates it causes uncertainty it will affect the economy, which British business are preventing from. The US economy has been slowing down lately and this has been an impact on their imports. However this will be an advantage to buy goods or to go on holiday in US at this moment.
There are advantages and disadvantages for British joining the Euro zone. If Britain join the Euro zone there wouldn’t be an exchange rate cost for the Euro currency, this will attract people in the Euro zone to trade in Britain, and this will encourage competition. Also the foreign investment will be attracted as the Euro currency is the world most used currency and it is stable. The base rate will be kept low compared to the current British base rate. More people will afford to buy afford to buy a property and loan. The disadvantage of adopting the Euro currency is Britain will lose their history and their national identification. The most important issue is that Britain will lose control of monetary policy to the European central bank. And there is a possibility that the fiscal policy will be next. Britain also won’t be able to assist in domestic recession. Britain may also end as 2nd division Europeans, they will be reacting to Euro policy but not having a say in it.
Bretton Woods the founder of International Monetary Fund (IMF) established a system of fixed exchange rates during the conference in 1944. The IMF was in charge of making member of states maintain their respective exchange rates. However, countries with high level of inflation found fixed exchange rate system reflecting to poor export performance. As their exports where relatively expensive on the world market. And those countries with low level of inflation found themselves with regular balance of payments surpluses because of their cheap exports. This how Bretton Woods attempted to link the main currencies, which became unsuccessful in 1972. The exchange rates could rise or fall within the predetermined limits, with USA’s influence that turned the dollar into a ‘snake in tunnel’. Snake in the tunnel was limiting fluctuation between European currencies against the US dollars. However the tunnel collapsed in 1973 when the US dollar floated freely.
Werner was the first politician to propose the introduction of a European Single currency. The Werner Report was proposed in the year 1970’s. This report consist of the progressive union of economic policies. And it established the common monetary and budgetary policies and approval of capital movements. This report also established the tax agreement. These proposals were achieved by the 1980’s with a complete economic and monetary union.
The European Monetary System established the European Monetary Union (EMS) in 1999. EMS made sure that the members of states stimulated to low inflation and growth in trade in result of economic growth. The central part of the EMS is the European currency unit. It’s been argued that single European currency is essential in favour to create the single internal market. While creating a single currency will lead the government to lose sovereignty of their state. The EMS was born with three main components. The ECU is used as an instrument of settlement between monetary authorities, intuitions, firms and individuals.
Delores created a report of proposing three stages that the Economic and monetary union might de achieved. These economic principles was to observe by member of states. These report was published in 1989, member of state had to prove whether achieved stated standards of economic performance. The first stage was approval of working towards the Maastricht Treaty. The member of states are to work closely together in integrating their economy. Stage two follows after endorsing stag 1. The second stage management of policies regarding interest rates and exchange rates and monetary policies in perpetration of the conversion to the final stage. The final stage is where exchange rate was fixed permanently and the establishment of the single European currency and the Common Monetary Policy.
The single European market has allowed economic opportunities to arise. This has make working, studying and living in other European countries very easy. Goods and services can be freely moved between European members of states. Removing the trade barriers is what the European Commission complied to. The has also stabilized certainty for the European businesses.
The black Wednesday happened on 16 September 1992. The government was forced to remove the pound from The ERM, due to pressure from currency speculators. Which made George Soros made 1 billion dollar. And this costs UK 3.4 billon pounds damage.
The adoption of the Euro currency was evitable for the Euro zone as GDP has been growing drastically, compared to the years before the Euro was introduced. It has also been good for the trading, and the Euro currency is at the moment more valuable than the US dollars.
I personally think that Britain should adopt the Euro currency to attract business to trade in Britain, which will be beneficial for the British economy. As the member of the Euro states are growing in the economy and GDP per capita wise. If the Britain joins the Euro zone and inflation arises, the ECB can control it by raising the interest rate on the mortgages to take money out of circulation. Britain is terrified to lose both their monetary and fiscal policy to the European Central Bank, these are what is holding the Britain to join the Euro zone. Which they shouldn’t be worried of as the member of the Euro zone are performing well.
Bibliography:
books:
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Nugent N. and Paterson E. W. 2005. Ever Closer Union. 3rd edition. Lynne Rienner Publishers Inc. UK
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Needman D. and Dransfield R. 1994. European Business Studies. 1st edition. Stanley Thornes Publishers. UK
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accessed on 6 March 2008