Effects on the national economy of UK entry into monetary union

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European Business

Leaning Outcome 1

Ruonan Huang

                                                     

Effects on the national economy of UK entry into monetary union

Twelve EU countries adopted the Euro as their currency on January 1st 2002. Only three EU countries remain outside: Denmark, Sweden and the UK. Countries joining the EU after 2004 will also adopt the Euro.

The UK government is in favour in principle of joining the Euro, but it has promised a referendum so that British people can take the final decision.

Joining the Euro will affect UK in many ways

  • Inflation

Britain has a low inflation level in recent years. Joining the Euro Britain will be forced to have European interest rates which have been much lower than British ones, which will be leading to a boom on inflation. However, for a long-term point of view, joining the Euro will have effect on prices. Britain has generally higher prices than the rest of Europe, if firms want win the bigger competition; they would have to bring prices down to the lowest level, because it will be easier to directly compare prices without having to convert currencies. British consumers can easily see if they were being charged more, they would be expecting the same prices as Europe. So firms will have to keep prices in check and cut the prices if needed. For example, British car dealers would have to cut their prices because of car prices are much cheaper in Europe.

  • Interest rates

Interest rates are the most important matter for consumers. Joining the euro zone UK short term interest rates would likely be lower on average than they would be if the UK were to stay out of the euro and keep the pound. UK short term interest rates have been higher than German or euro interest rates. UK borrowers would gain and savers would lose as rates fall. Joining the euro would have an impact on eurozone interest rates as well.

  • Trade and investment

Different currencies is a barrier to trade, partly because of the cost and trouble of converting currencies, but also because fluctuate exchange rates can damage profits. Getting rid of foreign exchange costs will boost trade, making it easier for cheaper goods from Europe to higher cost British goods. Britain companies will be joining the largest single market in the world outside the US by joining the euro. It will enable businesses to sell more widely, achieving greater economies of scale. It will also enable families and businesses to buy from a wider and cheaper range of suppliers. Both of these will boost trade and increase the prosperity.

Join now!

Many foreign companies invested in the UK to have access to the EU’s common market. But some foreign manufacturers are switching new investments to other countries. Joining the euro will bring more investment to UK. Reduced borrowing costs would encourage more investment by firms and growth, as British interest rates fell to European levels, and UK home buyers would enjoy cheaper mortgages.

But since Britain has been part of the European single market for a long time, business can already buy from suppliers in different countries, and most of trade barriers has been moved away, having the same currency may ...

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