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.

· Stage 2. Emphasis was placed upon closer economic policy co-ordination. The European Monetary Institute was created which had two main two main tasks:

. To strengthen co-ordination and monetary policies between EU central banks, with the objective of ensuring price stability.

ii. To prepare for stage three, including the establishment of the European System of Central Bank (ESCB), which is the institutional structure required by the Maastricht Treaty for conducting the common monetary policy for all the Euro member states.

· Stage 3. Would commence with the move to irrevocably locked exchange rates and the introduction of a single currency to replace national currencies. The ESCB would be responsible for the implementation of monetary policy, and exchange rate.

The Maastricht treaty, which was established in 1991, adopts the, Reports Proposal for a single European currency, and European Central Bank. It also defines a timetable for the establishment of a Monetary Union and most importantly provides convergence criteria for the member states, which must be achieved before the last stage of the monetary union can be entered.

EMU has become a dominant issue in British politics. The UK's past political leaders have had difficulties dealing with EMU. The issue has contributed to the downfall of the three most senior and influential figures in British politics in the 1980's, Margaret Thatcher, Nigel Lawson, and Sir Geoffrey Howe

There has been great uncertainty as to the intentions of Britain. The EMU has provoked a, "sitting on the fence," reaction. The chancellor made the decision to opt-out of the start of stage three on the basis of five economic tests, which UK economy had to meet before entry would be considered

Advantages for UK adopting the Euro

An initial benefit is that transaction costs would be substantially reduced. As a single currency would be circulating in the community having replaced the various national currencies, companies and individuals would no longer have to transfer between currencies as they make purchases or invest in countries around the EU.

Interest rates could be lower. The stabilization of exchange rates would reduce the risks to investors. This will then enable governments to decrease the risk premium they are required to pay on government securities. Intensified price stability in some of the member state countries, along with an improved EU average inflation performance would also encourage lower interest rates. The European Commission has estimated that such reduced borrowing costs, resulting from EMU, could increase the overall output of the EU by 2%.

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Internal EU exchange rate stability would be achieved once and for all. With advantages for investment, and improvements in the productive capacity for European industry.

The introduction of a single currency would eliminate certain speculation against individual European Currencies. An example of this is when the currency crisis threw the Pound out of the EMR, causing a cost of billions in lost foreign exchange reserves. This type of risk would completely disappear.

The single currency of Europe, the Euro, would become a leading world currency, alongside the dollar or yen. This would lead to increased interest world- wide. ...

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