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Investigate if the UK would benefit by adopting the single currency, and if so how would the UK benefit

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Report on the UK adopting the single currency Name: Jaymit Patel Date: 02/07/04 To: Alf Filer From: Jaymit Patel Terms of reference To investigate if the UK would benefit by adopting the single currency, and if so how would the UK benefit Also to investigate the advantages and disadvantages for the UK on adopting the single currency. History of the Euro The European Union has been embarking on a critical phase in its evolution towards greater economic and political integration with the formation of an economic and monetary union (EMU). Great confusion exits in Britain when considering this issue. The British Government holds a wait and sees policy, whilst the citizens remain uncertain with no definite leads from either of the main parties. With regards to Britain's past involvement in European Integration, it is continuing to show reluctance by remaining two steps behind everyone else. Consequently in this report I will critically assess the economic issues raised by the Single Currency for both the EU as a whole and the UK, in doing so it is important to The concept of greater economic co-operation began to take shape when the European Economic Community (EEC) was created in 1957 from the Treaty of Rome. However, it was not until 1970, when the Werner report was published, that the process of introducing several stages for an EMU was developed. The Werner report set out three stages, but the process did not take off, due to the lack of convergence in the economies of the member states. The Delores Committee report of 1989 was thought by many, to have taken the EMU to the forefront of the European debate. The report defined the EMU, as a once and for all locking of exchange rates, leading to the adoption of single currency, in three key stages. � Stage 1. The aim was to remove the restrictions of all capital movements between member states, the strengthening of competition policy, accelerating the single market program, increasing regional funds, and improving economic and monetary co-ordination within the framework of the EMS. ...read more.


unsuitable for the UK's economy, and it would possibly destabilize the economic conditions Those who oppose the EMU, argue that it will threaten our sovereignty, impede growth and employment, reduce our purchasing power, and dangerously split the EU into two tiers, and eventually collapse leaving an economic mess. With regards to the question of sovereignty, "Where a parliament is sovereign it has an unlimited authority, recognized by the courts, to make any law or to amend any law made. " In Europe, abandoning the national currency in favor of the proposed Euro appears to many, to signify a loss of nationhood. By joining an EMU a nation will hand over its monetary policy to the ECB, and consequently loss its control over national money. There will also be change over costs, including the process to change from national currencies to one single currency which will effect both business and trade, these are essentially short term costs, but are of some significance. The main cost associated with the EMU is the loss of monetary independence, and adopting to a, "one fits all" approach. Accepting a single currency requires giving up the use of the nominal exchange rates as a tool for macroeconomic adjustment and as a means of gaining competitiveness. Exchange rate adjustments can help to stabilize economies through the booms and slumps of an economic cycle, or unusual shocks, but once a, "one fits all," policy is implemented this will not be possible. Asymmetric shocks could lead to deep regional recessions and increasing unemployment, creating social burdens that is politically unacceptable to many governments. Consequently alternative mechanisms in adjusting to asymmetric shocks in EMU will need to be found. In the case of asymmetric shocks where there is a shift in demand from country A to country B, then an aggregate demand would go up in country B and down in country A. If there is a shift in relative demand across countries, and real exchange rate does not adjust, there will be unemployment in the country where demand has been reduced unless there is migration towards the country where demand has increased. ...read more.


There seems to be uncertainty as to which is greater, but it should be noted that the cost/benefit ratio is not likely to be equally favorable in all the EC countries, since there are important structural economic differences among them. 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. This is for two main reasons. Firstly, the UK economy is at its strongest at the moment and has still has prospects despite opting-out of the Euro for the moment. Capital inflow is likely to continue even if we stay out of the single currency and the UK still has attractive supply-side factors in both product and labour markets for foreign investors. Particularly, the UK will remain attractive for Far Eastern countries such as Japan and the so-called tiger economies. Secondly, I think that currently the risks outweigh the advantages that would be gained. 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 then it is highly possible that the less fortunate countries will 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. 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. ...read more.

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