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Disadvantages for the UK if they join the single currency

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Introduction

Disadvantages for the UK if they join the single currency After Black Wednesday when the UK was forced to leave the exchange rate mechanism system, the pound started to appreciate in the long run around 1996. It appreciated 23% against what is now the euro. This happened due to the UK outperforming countries of the ERM and becoming substantially more competitive. Additionally, inters rates were high in the UK and a lot of 'hot money' flowed into the UK economy. UK manufactures learnt to deal with the strong pound and the volumes of exports were increasing once again, improving the current account deficit. The government were able to use certain polices to get into this possible economic situation and the Bank of England was able to adjust interest rates in order to control inflation. However once the UK join the Euro both exchange rate policy and many other policies and interest rates will be in control of the European Central Bank. ...read more.

Middle

If interest rates are raised then consumption decreases and so does investment, leading to more unemployment. So in theory the Euro seems beneficial for the members of it, however when looking into it we see that the Euro has many underlying difficulties like creating a policies that fit all the member economies; it will not happen. Critics of EMU say that the creation of a single currency will abolish the policy option to set interest rates separately at the level appropriate for each country. This exchange of power from our central government to the European Central Government projects another disadvantage to joining the Euro. Euro sceptics believe that joining the Euro will take away our national sovereignty. Having foreign central government deciding on the polices of our economy diminishes our identity, we are not able to decide our own future of our economy, it is in the hands of central European bank. Keeping the British pound is a national sign of our 'Britishness' and it is important to keep it in order to maintain this identity. ...read more.

Conclusion

Lastly there are high transition costs of joining the Euro, it is estimated that it will cost British retailers between �1.7 and �3.5. Such changes include educating customers, changing labels, training staff, changing computer software and adjusting tills. These costs may cause a temporary blip in inflation. The economy may experience cost-push inflation where the transition costs are put onto the customer. At the moment the UK is two-steps behind those in the members of the EMU. This is advisable because they are able to see if the euro succeeds or fails and this will not be shown until a few years yet. Therefore if it succeeds they can become members, however if it fails they have not lost anything, whereas the countries of the EMU will have experienced two sets of transition costs. The UK economy is in a good situation at the moment and so there is no need to join the single currency just yet, however if it proves successful then the UK can take action. ...read more.

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