The diagram shows that an increase in the supply can lead to a depreciation of the exchange rate value. In reverse a decrease in the supply of the exchange rate can lead to appreciation of the exchange rate value.
The other type of floating exchange rate is a Managed Floating exchange rate. This government has a bit of intervention in to the market to influence the value of the exchange rate. The government intervenes and sets up limits to how far the exchange rate can rise and decrease.
A fixed exchange rate is a exchange rate which is fixed by
Government. A example of a fixed exchange rate is the European currency.
The main advantage of the single European currency is the fact that it would cause prices to be greatly reduced. At the moment, Great Britain has been given the label of "Rip-off Britain" due to the frequent extortionate prices which we are charged for goods compared to other countries. The single European currency would allow trading to take place much easier, without the need for exchange rates and currency commission. Easier trading would mean that some countries can specialise in one good or service whilst other countries specialise in others. This would mean that there are more goods available to consumers at a lower price, and lower prices means people have more money to spend on other goods, so there will be a higher standard of living. Also, goods would be able to be transported for free between participating countries. So by joining the European currency, there would be more trade available and therefore a wider choice of goods and services to choose from.
Another main benefit is that a fixed exchange rate would act as an anchor against inflation. Countries such as Italy and the United Kingdom have seen this as an effective way to break inflationary expectations in the labour market, in part by the implied reduction in the discretion of national policymakers. Low-inflation countries such as Germany, however, are concerned about whether the ECB would continue to follow the conservative monetary policies of their national central banks.
The single European currency´s ease of trade would allow the easy establishment of Trans National Corporations (TNC´s), which in turn would create more jobs for more people on a greater geographical scale. This would mean that benefits would be lowered, as not as many people need to claim them. The money saved from benefits would mean that more money is available for public spending, so public services, such as the NHS would be able to offer more quality services.
The above arguments seem to convey a very positive view of the single European currency. But on the other hand, there are many reasons why people believe we should not participate.
Firstly, looking at the moral aspects of the argument, the loss of our own currency would be a loss of our heritage, our independence, and our freedom. Many people do not want to see the face of the Queen banished from the head of our coins to be replaced by something unfamiliar and European. The British nation has a reputation of independence - being our own little island away from mainland Europe. Many people believe the Euro will take that away from us.
Also, many people are sceptical about trusting foreign countries in this matter. We have been deceived before, and it could very well happen again. The recent scandal of BMW selling off Rover, after they promised not to is a classic example. Others include World War One, World War Two and the more recent political scandal involving Helmut Kohl and also the ban on British beef.
Another reason against the single European currency is that we would lose a great deal of democracy. Rather than our government controlling our money, foreigners in Brussels would be, who have not been elected by us and are complete strangers to us.
Each country joining the single European currency must meet the convergence criteria. One part of this convergence criteria is the fact that a joining country´s government borrowing deficit must not be more than 3% of that country´s GDP. But in Great Britain, the borrowing deficit is 6%, and the reduction of this figure would require public expenditure to be cut by an astronomical £18 billion, or an alternative would be to raise income tax 9p to 33p per pound and/or VAT from 17.5% to 24.5%. The public would definitely not appreciate these cuts. It is estimated that these cuts would raise unemployment by approximately a minimum of 500,000. This would mean more people claming unemployment benefits. And who pays for this? We do: the taxpayers.
The question on many people´s minds is why change? We have managed fine up to now, so why bother changing when the pound is strong and the Euro is weak? Also, it is not really a massive loss if by not joining the single European currency we are preventing trade with the rest of Europe. There are alternatives: USA and the commonwealth can provide many more goods and services than Europe.
A single monetary policy cannot deal with the differences, divergences and cyclical variations in the European economies. National currencies provide an adjustment mechanism, and allow governments to use interest rates to respond to events. A single European currency would remove these options. Instead, a single European interest rate, set by the European Central Bank in Frankfurt, would apply indiscriminately to the whole single currency area. This creates the problem of how a participating country could adjust to a shock or economic development specific to that country.
Simply taking a look in the media, it is true to say that the Euro has met its first hurdles. It is failing in many aspects including being very weak against the pound. So would the people of Britain be wise to join a system which is already, within its first year of real operation, facing flaws? I am sure the answer is no.
There is great variation in the economic cycles of the European countries involved in the single currency. The unification of these nations under the banner of a crisp Euro note would be confusing for many countries and it would be a long and arduous process until they were all similar. This process would most probably involve high prices, high taxes and increased unemployment for a great deal of time until these problems are rectified.
