Joining will also encourage trade because it will remove the instability and uncertainty of exchange rate fluctuations. For example, the current exchange rate is £1.4655 = €11 this means that approximately £1.47 = €1, due to the instability of exchange rates, by next month the exchange rate may be £1.00= €1. Due to the change in exchange rates, a French business would have to pay more than they did the previous month to buy the goods from the business in the UK. Due to the instability of the exchange rates, firms are put off from trading and making long term contracts.
Another reason for joining the Euro would be to encourage foreign investment into the UK. An increase in foreign investment is good because it will decrease unemployment as new jobs will be needed this will be good for the economy as the people will have more money so can spend more. It will also increase competition which as I said earlier will increase quality and decrease the price of the goods.
At present, the UK attracts some foreign investment; most from firms that want to sell to the E.U for example Nissan has set up a factory in Sunderland which is now the most efficient in Europe. However, if small foreign firms / new multinational businesses want to sell to the E.U, they would most likely set up their business in a country that is in the euro area because it will be easier to manage as everything is in the same currency and therefore is price transparent.
Disadvantages of joining the Euro
One of the main disadvantages of joining the Euro is that we would have our interest rates set by the European Central Bank. This could have devastating effects on our economy. For example, at present Germany’s economy is in a recession, to get their economy out of recession, it would be wise to lower interest rates so that people wouldn’t want to save money as it is not as worth while, and because the interest rates are low, people would borrow more, and spend that money as it is worth while. But the UK’s economy is in a boom and to stop inflation rising to fast, we would want high interest rates to give people an incentive to save rather than to spend, which would slow down the rate of growth of the economy. Now, because the bank of England would no longer control the interest rates, we can not be sure that the European Central Bank would do what we want them to do; they might decrease interest rates to help get Germany out of recession. Doing so cause the UK’s economy to boom so much that inflation starts to increase at a huge rate, which would not be good.
Some argue that the ‘Transition costs' (The costs to businesses of having to change all prices to Euros) will be significant. This may hit small to medium sized businesses very hard. However this is very short-term and I don't feel it is a significant argument against joining.
There is the problem of what rate to join at. We could join at £1.00 = €1.00 or £2.00= €1.00. According to the current exchange rate - £1.4655 = €1, if we join at £2.00 = €1.00, we would be paying £0.5354 more than we previously were, however, this could result in businesses getting lots of investors from the euro area as one Euro has become worth more pounds so UK goods are cheaper for them. People that do not have businesses would make a loss as their money has become worth less than what it used to be. Also, if we joined at £1.00 = €2.00, peoples money would be worth more. At face value, this would seem to be good but people who are in debt / have mortgages would have a bigger debt.
Two thirds of the UK’s trade is with E.U countries and the other third with the rest of the world. If we join the Euro, companies may find it more profitable to trade with countries in the Euro area instead of the rest of the world, and it seems that we are ignoring the other third and just concentrating on trade with the countries in the E.U when the other parts of the worlds trade is still very important and should not be ignored.
The argument really boils down to whether the countries economy’s that are in the Euro ‘converge’.2 If this occurs, then it would not matter who set the interest rates, because the interest rates would be set to benefit all of the countries as the economies are the same. However, economists are unsure if this is happening and how long it will take for the economies to successfully ‘converge’ but because the UK’s economy is very different from the other E.U countries, it is likely that it will take a long time for us to be ready. When and if the economies converge, that would be the right time to for the UK to join the Euro.
Conclusion
In conclusion, I think that at present the UK should not join the Euro as it is still early days and is still unstable3. The foreign investment and trade that would occur if we did join would be very good for the economy, but at present the economy is already in a boom4 and is still successfully managing to trade with other countries. The main reason why I think that the UK should not join the Euro is due to the fact that the Bank of England will no longer set the interest rates, so they would not always be set to suit the UK’ needs best. I think that eventually, after looking at what happens to other countries and if the economies successfully converge the UK may find it beneficial to join the Euro.
1 - From The Times business section exchange rates. 3/2/04
2 - From the Independent ‘Economists Assess the Euro tests’. 9/5/03
3 - From the Tampa Tribune ‘Surging Euro Prompts Warnings of Instability’ 13/1/04
4 – Online BBC news, (see Bibliography for link)
Bibliography
The times Business section 3/2/04
The Independent ‘Economists assess the Euro tests’ 9/5/03
BBC news - news.bbc.co.uk/1/hi/business/3343337.stm
The Tampa Tribune - 13/1/04