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The Euro.

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Introduction

Bernice Berschader The Euro (a) With reference to the passage, examine the benefits of a strong pound against the euro to: (i) British consumers As a result of a strong Pound and a weaker Euro British consumers have benefited greatly. Britons travelling to Europe have found their value of money has increased, they have been experiencing 'a formidable spending boost'. This is as a result of the wealth effect, the price of the euro in Sterling is cheap as a result increasing their spending power. Consumer surplus expands as a result and more goods can be bought in the EU for the same amount of Sterling compared to the UK. For example they have been able to buy small 3 to 4 bedroom cottages and a couple of acres of land for �150,000, which they would be unable to purchase at such a price back home. According to the article Britons have been able to save 15% on such purchases. The low interest rates in the EU and the stable European currency has proved to be unfounded. Due to low interest rates, Britons are encouraged to save less, a smaller fraction of each additional pound that they earn. ...read more.

Middle

This will cause the demand for the currency to fall, the exchange rate will as a result depreciate. (c) (i) Why has 'the strength of the pound posed problems for British firms'? The high value of the pound relative to the euro has caused British firms to find exporting their products increasingly more difficult. UK goods have become less competitive abroad due to the international trade effect, the price of UK exports relative to exports from France or Italy for instance has been higher, as a result it has become less competitive and fewer UK goods have been demanded abroad. This has hit certain industries particularly hard, which depends on export a great deal such as limestone industry. However, one has to keep in mind that we assume the goods exported from Britain are elastic, if there were price inelastic a higher price would not affect demand. The high value of the pound has resulted from the supply of the currency exceeding the demand for the currency. To correct this current account deficit in which goods imported into the UK exceed goods exported from the UK an expenditure switch of expenditure reducing policy has to be implemented. ...read more.

Conclusion

The abolition of Sterling is likely to lead to a depreciation making UK goods more competitive on the international market. However, this will hava trade off effect. A depreciation will discourage speculative 'hot money' being invested into the UK economy for they look for the highest rate of interest on savings. If the UK were to join the euro it would share a common interest rates with its fellow EU members who have also adopted the euro, as a result 'hot money' will no longer be attracted. As a result the Bank of England will lose its autonomy over the setting of the interest rates, the European central Bank sets interest rates for all EU countries who have adopted the euro. If the UK were to join the euro it would also be committed to a single fixed exchange rate within the Euro-zone which would make trade easier and less time consuming and no longer prone to price fluctuations, firms would no longer have to sell and buy currencies on the foreign currency market. It is important to take into account however that the Euro can fluctuate with currencies outside this zone such as the US Dollar or the Japanese Yen. ...read more.

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