Should the UK join the euro?

Would it be a good thing to join the euro? There are certainly two schools of thought on whether to join the euro. These are called the positive externalities some of which are reduced transaction costs, exchange rate stability, reduced borrowing costs, offsetting the theory called ‘rip off Britain.’

There are also a lot of strong arguments against the UK joining the euro these are called the negative externalities, some of theses are such: one off conversion costs, stock market decline, fraud and crime and monetary policy, loss of sovereignty.

If the UK were to join the European union then a benefit would be the reduced transaction costs this would save traders with savings an average of 1 billion pounds (see in my appendix) a year. These savings would come from not having to pay commission or maintain hedge funds to guard against currency instability.

There would also be exchange rate stability for over half of the UK’s trade. This would then in encourage a lot ore trade, as exporters and importers would realise that there profit margin could no longer disappear with an unexpected exchange rate movement. But remember that 59% of the UK’s trade is not with the countries in the EU (see in my appendix) and that the euro itself has been unstable compared to other currencies. An appreciation of the Euro against the dollar consequently to our joining would do the UK's important trade with the USA no favours and therefore could prevent further trade in the future.

The UK would experience reduced borrowing costs if we were to join the euro, as British interest rates fell to European levels, this would encourage investment, spending and therefore growth. UK homebuyers would experience low mortgage rates. This is particularly important, as the house price inflation has gone up over recent times (see in my appendix).

The UK would experience a theory that is called ‘rip off Britain’ this would be when the currency is changed over the companies would raise their prices to take advantage of people getting used to the value of the new currency, this would be bad for the customer but shop owners will earn more money and therefore the government will gain more off taxes and have a boost in the first few months of the money that they gain. A student by R. Kitzoleri Greek ministry of Tourism told us that this happened in Greece and had a negative effect ...

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If the UK were to join the single currency then I feel that there would be a lot more chance of both imports and exports taking place between us and other European countries I feel this because there would then be no need for an exchange in currency and this would then stop the smaller business getting frightened by the exchange rates, companies would therefore completely trust that the amount of money they are getting for there goods is what they think they are getting and would therefore be more encouraged to take there services to our neighbouring European countries.

If the UK were not to join the euro then they could save a lot of money on the conversion rates, these rates on converting all the IT systems, coin machines, training staff and the actual making of the money itself has all been estimated at a huge £36 billion (see in my appendix). These costs would be encountered by UK firms after their competitors in the existing Euro-zone had bedded in the new systems, and then the UK firms would be at a competitive disadvantage for a couple of years after joining in addition to paying the capital cost.

The theory ‘rip off Britain’ would be a big disadvantage to the customers and if it comes to a national vote then this could be a huge concern that may sway the British into voting against the new currency, all the people who were around in 1971 when decimalisation took place will have remembered what happened to them when the currency changed and will probably not want it to happen again.

An economist lecturing in Edinburgh University quotes this:

‘The UK would experience a stock market decline. It has been estimated that £300 billion could be moved from UK stocks into European stocks as a result of portfolio adjustments, which will be required as a result of entry, by market tracking funds. Such a decline would put upward pressure on interest rates and make it more difficult for UK firms to borrow in order to invest. UK fund managers will also have to follow the precedent of European fund managers who used to speculate in European currencies, before the creation of the Euro put a stop to that (except with regard to sterling) and forced them to conduct their arbitrage in other markets, therefore involving the movement of funds out of the Euro zone. More funds would therefore flow out of the Euro zone and into the American dollar and the Yen, putting more downward pressure on the Euro.’ .

If we were to join the euro the UK could expect the numbers of people committing fraud and crime could rocket as the euro notes come in a great variety and not even all on the same type of paper. This would therefore make it easier for imitations of the notes and with people new to the notes they will therefore be less used to them and not notice the fakes as easily. The highest note is a 500-euro note, which could be extremely attractive to the forgers.

Another theory suggests that Britain’s main trade Power is invisible; banking, insurance electronic trade would therefore make trading with nations like the USA easy, the argument for European proximity would not be a problem.

If the UK were to join the euro then we would lose our own currency the pound and would therefore lose the identity we have, a lot of people feel that joining the euro is just the next step to becoming a single country that would be united, they feel that Britain are strong enough to be a stand alone country without the help of the EU.

Before there is any thoughts of changing the currency over to the euro the Chancellor of the Exchequer Gordon Brown has said that the government have to be satisfied that all of theses five conditions are true before the exchange to the euro:

1.Convergence of business cycles, enabling the UK to be comfortable with Euro interest rates

2.Enough flexibility in the Euro system to deal with problems

3.The impact on firms choosing to invest in the UK

4.The impact on the competitive position of the UK financial industry

5.The impact on growth, stability and jobs

If all of theses tests are passed then the British government will then consider joining the European union.

A major economic pattern would be a loss of monetary control. The bank of England could no longer use interest rates to ‘heat or cool’ the economy or counteract inflation. The one size fits all solution may not be appropriate for 25 diverse states.

The world is split up into trading blocks, there are groups of countries that join together and trade with each other with lower taxes that benefit each other. These are such groups as the NAFTA (North American free trade Association) there are others in different parts of the world, if the UK do not join in one of these trading blocks (the EU) then they will eventually have nobody to trade with and will lose out.

There is also the theory that there is power in numbers and that if the UK were to join the euro currency then they would gain economies of scale as the power of the countries together would make it cheaper for the EU as a whole to trade with other nations (outside the EU) as they would have more power and influence on the worlds economy.

In my appendix you will see that there is a questionnaire and some graphs to show what the people I asked thought. It shows that 57% of the people want to join the single currency and leaves 43% not wanting to join, it also shows a high percentage of people are worried about the loss of sovereignty. There is also a high percentage of people that feel the EU will exclude them from their trading if they were not to join there single currency. My primary research on the whole suggests that the public do want to join the euro although there are a lot plus sides to keeping the pound sterling.

I personally feel that it is not a matter of if we do join the single European currency but when we join the currency, I feel this because if we do not join the currency I am afraid that Europe may freeze us out of all trade and transactions that take place in Europe this will then put a huge amount of stress on the other imports on which we rely on such as the USA or Japanese companies. I feel that there are too many good factors and easy trade that will come out of joining the single currency and that the way forward is to trade more with our European neighbours.

I am of the opinion that the positive externalities outweigh the negative ones as a whole and that the longer we hold out before we take on the euro the more it is going to cost us and the slower it will take to settle our economy in the UK.

I also feel from my primary research that it is in the public interest to join the European currency and we should therefore do so.