Ease of trade would also increase and price transparency would occur causing prices to fall, at the moment Britain has been dubbed “rip-off Britain” due to its continuous high prices and costs of living. However if prices of necessities like food and clothing would fall people would have more to spend on luxury goods therefore quality of living would increase.
As a result of increased trading unemployment would decrease through the inevitable establishment of Trans National Corporations (TNC’s). The money saved by the government from benefits (less people unemployed means less people claiming benefits) could be re-directed into public spending such as schools or the NHS.
Firms who currently price discriminate between different European markets would find it difficult to sustain this practice due to increased price transparency, this would be a direct consumer benefit.
The Euro zone integrates the national financial markets, leading to higher efficiency in the allocation of capital in Europe. The UK would benefit from an increase in intra-European trade flows and higher capital investment resulting from the development of a single currency. The European Union would also become a more powerful player in the global economy, and the UK would probably benefit from full-scale participation in this.
The above arguments convey a positive and convincing view of the single European currency, however there are many reasons why people believe the UK should not participate in the single currency.
The cost of altering IT systems, coin machines, and staff training for the euro have been estimated at up to £36 billion. In addition to the initial cost of transforming their systems UK firms would be at a competitive disadvantage till they adjust, the rest of the euro-zone has long adapted to the new systems and are operating effectively and efficiently.
Converting to a new currency offers an opportunity for retailers to round up prices and take advantage of the confusion causing a boost to inflation, this was seen during the switch to decimalisation in 1971.The depreciation of the pound required to secure entry at a feasible exchange rate would also cause import price inflation.
Fraud rates could increase as euro notes come in great variety and are not even all on the same paper therefore detecting forgeries could be greatly complicated.
“57.9%” of the United Kingdoms population are opposed to joining the euro. No campaign welcomes decision not to join the euro (2004) [online] available from http://www.no-euro.com [accessed 12th august 2004] This can be justified through the daunting aspects of loosing heritage, independence and freedom but moreover nearly all control of the UK economy. It is accepted that if the UK joins the euro-zone, control of the UK economy will be handed over to officials in Brussels. However most of these reasons are political and moral, it is the economic reasons against joining the euro that are the most stark and compelling.
Economic theory states the macro objectives of the government as:
- Low unemployment
- Low inflation
- Economic growth
- Balance of pay equilibrium
In order to succeed in these objectives, the following policies are crucially adhered to:
- Monetary policy
- Fiscal policy
- Supply-side policy
- Exchange rate policy.
Each of these policies provides balance and control within the UK economy. If the UK joins the euro-zone three out of the above four policies will be rendered unusable which would have detrimental effects on the UK economy.
Monetary policy
Monetary policy involves restricting growth in aggregate demand by the raising and lowering of the base rate. For example, if aggregate demand is rising too quickly and raising prices (demand-pull inflation), the government can increase the base rate. This would reduce demand and have the effect of lowering consumer expenditure since there would be a higher incentive to save and a higher cost of borrowing.
If the UK were to join the euro-zone this policy would be unusable as the European Central Bank (ECB) sets interest rates for every Euro zone member. The ECB is able to operate Monetary Policy over the whole Euro zone however an increase or decrease in aggregate demand might have a positive effect on one economy but a negative one on another. It is highly doubtful that all the economies of the euro-zone are suitably synchronized to allow policies such as this to be used universally.
Fiscal policy
Fiscal policy is closely linked to monetary policy and is also used to control aggregate demand. However, it does so by controlling the amount of government spending and taxation. (Expansionary fiscal policy will involve raising government expenditure and/or taxes, deflationary fiscal policy will involve the opposite) Increasing taxation means that incomes are lowered, which causes consumer expenditure to go down which means aggregate demand decreases.
Fiscal policy becomes more or less useless with the adoption of the Euro, since one of the convergence criteria for joining the Euro zone is a low government debt (no more than 3% of the coutries GDP). This means that the government cannot increase government spending to increase aggregate demand.
In Great Britain the borrowing deficit is 6%, and the reduction of this figure would require public expenditure to be cut by £18 billion (or raise income tax from 9p to 33p per pound and/or VAT from 17.5% to 24.5%). It is estimated that these cuts would raise unemployment by approximately a minimum of 500,000. This would mean more people claming unemployment benefits.
Exchange rate policy
Exchange Rate Policy is the deflation and revaluation of a currency in order to deal with a balance of payments deficit. This becomes irrelevant, as membership of the single currency hands this responsibility from the British government to the ECB
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 only policies Britain would be left with are the supply side policies which aim to increase the production capacity of the economy by; removing regulations or other barriers that may restrict an industry, lowering costs of production for businesses, and increasing labour productivity to increase growth rate (by promoting competition, privatisation, reducing strikes, etc.) However these policies on their own are rather limited in their use and could not possibly sustain the UK economy own their own. The main reason behind setting up the Euro in the first place is to promote economic growth within Euro zone countries, the removal of these policies would defeat this objective.
Having analysed both the pros and cons of membership in the Euro zone, I conclude that at this time it probably is not beneficial to join. I think at present the risks outweigh the advantages. As mentioned before, the UK economy is at its peak and is doing considerably better than other Euro zone members. If the UK joined the Euro it is highly possible that the less fortunate countries could drag the UK down with them, as it were. Furthermore, the ECB will likely have to take relatively drastic action to keep some of the poorer economies in the Euro zone in check. This could have adverse effects on the otherwise sound economy of Britain. The problem is that the economies of the Euro zone are not suitably synchronised to allow economic control to be universal over all of them at the moment one size does not fit all and universal measures are the only option with a single currency. If Britain opts-out for the time being until the single currency has had a chance to both synchronise and improve the economies of the Euro zone, then it might be in a better position to offer advantages that outweigh the risks. On the other hand, if the Euro fails miserably and its economies go into recession, then we will be suitably distant from it to avoid unnecessary damage to our own economy.
Bibliography
Sloman, J. (2003) Essentials of economics, (second edition), Prentice Hall.
Rosewell, B. (2000) The Euro : a loss of faith, London New Europe.
Lecture notes, (2003) semester A, Glasgow Caledonian University.
The association of European operational research societies (2003) the euro [online] available from http://www.euro-online.org [accessed 2nd august 2004].
No campaign welcomes decision not to join the euro (2004) [online] available from http://www.no-euro.com [accessed 12th august 2004]
Yes to Europe to the euro (2003) Killer facts [online] available from http://www.yes-campaign.com/site/home [accessed 5th august 2004]
Transaction costs would still exist, shipping *** etc but costs associated with exchange rates would be eliminated.
the ability for a company to easily compare prices over many companies in many countries
