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Effects on the national economy of UK entry into monetary union

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Introduction

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. ...read more.

Middle

It could also help to promote supply side reforms in the EU and encourage specialisation and further exploitation of UK's comparative advantage in several sectors of the economy in the longer term. The main danger of the euro is the same interest rate because the British economy is so different with those of mainland Europe. For example, Ireland overheated and ended up with rising inflation because it had to cut interest rates to German levels in the middle of its economic boom. Joining the euro may mean greater stability for the currency, but it will replace an unstable exchange rate with unstable interest rates. Britain is doing well outside the euro with a low tax, flexible economy and long term economic stability, but the single currency euro is developing, joining the euro would benefit both businesses and consumers and make businesses more competitive. Although there are economic advantages to joining the euro, the government has to be careful about the potential costs. The costs for UK businesses of adopting the euro would be massive - notes and coins would need to be replaced, along with cash registers, cash dispensing machines, accounting systems etc. The retail sector would have to undergo a complete renovation of cash systems. The costs of this changeover would affect all businesses in the UK, whether or not they trade with Europe and whether or not they will benefit. ...read more.

Conclusion

The Bank of England does not actively intervene in the currency markets to achieve a desired exchange rate level. In contrast, the twelve members of the Single Currency agreed to fully fix their currencies against each other in January 1999. In January 2002, twelve exchange rates become one when the Euro enters common circulation throughout the Euro Zone. The interest rates decisions 2004 January The Bank of England's Monetary Policy Committee voted to maintain the Bank's repo rate at 3.75%. February The Bank of England's Monetary Policy Committee voted to raise the Bank's repo rate by 0.25 percentage points. The world economic recovery has become more broadly based. Although sterling has appreciated, continued growth above trend means that inflationary pressures are likely to pick up gradually over the next couple of years. Against that background, and despite CPI inflation currently below the 2% target, the Committee judged that an increase of 0.25 percentage points in the repo rate to 4.0% was necessary to keep CPI inflation on track to meet the new target in the medium term. March The Bank of England's Monetary Policy Committee voted to maintain the Bank's repo rate at 4.0%. April The Bank of England's Monetary Policy Committee today voted to maintain the Bank's repo rate at 4.0%. (http://www.bankofengland.co.uk/Links/setframe.html) Reference List www.bankofengland.co.uk The single currency, Power point briefings 2004, http://www.tutor2u.net/economics/flashdecks/europe/single_currency/euro_debate.swf www.ft.com www.guardian.co.uk Stephen Romer, Understanding the European Union, 2nd Edition, Anforme ?? ?? ?? ?? 2 ...read more.

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