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The Euro to join or not to join?

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The Euro to join or not to join? I will examine whether or not Britain should join the Euro. I will examine both the arguments for and against joining and try to draw an overall conclusion. Arguments For the Euro The arguments put forth for membership of the "Euro zone" (countries that have adopted the Euro as their currency) are split into two groups: political and economic. The economic arguments are further sub-divided into three groups: transaction costs, trade competition and investment. Ultimately, abstaining from the Euro means higher costs (as far as transaction costs are concerned) than if we joined. The commissions involved in buying the Euro when trading with European countries will remain and the uncertainty arising from a floating exchange rate will also continue to be apparent. Whilst this is unlikely to make a significant difference for UK businesses buying continental European exports, it could well affect the number of UK exports being purchased by continental European companies. Basically, UK exports will be more expensive to Eurozone countries compared to exports of other Euro zone countries due to the changing cost of buying the pound. The UK's membership in the Euro zone would eliminate these costs. Trade competition refers to the fact that if exports from Euro zone countries are all priced in the same currency then it is easier for companies to see price differences between companies across borders, ultimately increasing competition between companies. ...read more.


Furthermore, adopting the Euro more or less ties Britain into any future plans of a Federal Europe. It would be hard to back out of such plans with so much integration already set in motion. This, of course, would mean the loss of political sovereignty for Britain. It is the economic arguments against the Euro that are the most important and in many ways the most compelling. Economic theory states that the macro objectives for a government are as follows: � Low unemployment � Low inflation � Economic growth � Balance of Pay Equilibrium In order to succeed in these objectives, governments use policies to control various aspects of the economy: � Monetary Policy � Fiscal Policy � Supply-side Policies � Exchange Rate Policies In the analysis that follows, it will be shown that three of these policies would be rendered unusable to control the UK economy: 1. Monetary Policy Monetary policy involves the raising and lowering of the base rate to control aggregate demand. For example, if aggregate demand is rising too quickly and raising prices (demand-pull inflation): In this situation, the government could increase the base rate. This would have the effect of lowering consumer expenditure since there would be a higher incentive to save and a higher cost of borrowing. ...read more.


Particularly, the UK will remain attractive for Far Eastern countries such as Japan and other Asian 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. 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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