Should the Uk Join the Euro?

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SHOULD THE UK JOIN THE EURO?

NIKKI ACTON 13JLB

With the change over to the Euro notes and coins now complete across the “Euro-zone”, twelve countries that have adopted the Euro as their currency, the debate over whether to adopt the single currency in Britain continues. There will be those who argue that the introduction of the single currency is merely the next logical step in the development of a truly single market, and that by joining, Britain would gain a voice in what could eventually become the world’s most powerful economic zone. Others believe that a successful common market is not dependant on the adoption of a single currency, which they see as merely another irrevocable step towards the political union of Europe. But the main focus of the debate centres on the parameters of macro economic objectives.

To start, I will discuss the arguments against the UK joining the euro

The UK government has 3 major macro economic objectives and 2 on a slightly smaller scale: i) a high, but stable rate of economic growth within the UK’s potential ii) high, but stable employment iii) low inflation iv) balance of payments equilibrium and v) fair and equal distribution of income.

In order to balance these objectives, governments use policies to control various aspects of the economy, however, in the analysis that follows, it will be shown that the most important of these policies, Monetary policy, would be rendered unusable to control the UK economy should the single currency be adopted and others will be curtailed.

The monetary policy today is used to control inflation, because low and stable inflation is the best background to achieve economic growth in terms of real GDP. Fig 1 shows a shift to the left of the Aggregate Demand (AD) curve caused by a rise in interest rates, this leads to a lower equilibrium price level. Loosening monetary policy by lowering interest rates shifts the AD curve to the right and leads to a higher equilibrium levels of prices (fig1.1). In this situation, this would lower consumer expenditure since there would be a higher incentive to save and more costly to borrow. This is useful because in the future should we find ourselves in the position of deflation the lowering of interest rates would help to rise prices and solve this so that the central symmetrical target of 2.5% +/- 1%.

Insert Anderton graphs PAGE 242

Britain is currently enjoying a period of stable growth of 2.25%, which has been achieved by being able to change its policies appropriate to her circumstances. As with ERM membership in 1990-2, a major concern of some economists is that membership of the euro would deprive the UK of an independent Monetary Policy. The introduction of the Euro could make this policy unstable because interest rates for the Euro-zone members are set by the European Central Bank (ECB) and is the same for all member countries. Of course, the ECB is able to operate monetary policy over the whole Euro-zone, but an increase or decrease in AD might have a positive effect on one economy but a negative one on another. And the requirement of complying with the stability and growth pact will remove their freedom to react to economic circumstances on a national level. Economists argue whether the economies of the Euro-zone are suitably converged to allow policies such as this to be universally used. Besides, the British economy has a higher sensitivity to interest rate changes because of Britain’s higher proportion of mortgage owners, in particular, those with variable rate mortgages. Also, as with decimalisation in 1971, converting to a new currency offers an opportunity to retailers to round up prices and take advantage of the confusion.

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There are inherent differences between the British and Euro-zone economies. Its pattern of external trade links is still different, though progressively assimilating, and the transition mechanism joining the financial system to the real economy is also different. The British economy is invariably out of phase with other European countries, entering recession and recovery at different times to that of most of her EU partners and historically Britain has been more in-line with the US trade cycle.

Business Cycle diagram-lack of convergence page 1 Potts

One important factor to ...

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