The idea of the single currency evolved as a way of rivalling the dominant dollar and to make for a more balanced global trading environment. The European single currency will redress this balance that is offset by the United States

Authors Avatar

Introduction

The idea of the single currency evolved as a way of rivalling the dominant dollar and to make for a more balanced global trading environment. The European single currency will redress this balance that is offset by the United States- the driving force in the world economy because it has just the one currency, even though the EU is a more important trading group.

The single currency was bought about to promote European interests in the world.

The Euro was introduced on 1 January 1999. By the middle of 2002 it should have replaced most national currencies within the European Union, bringing about full Economic and Monetary Union (EMU). Britain is one of the three countries in the EU that decided not to join on this date.

Whereas before each country decided its own monetary policy, joining the single currency involves handing over this responsibility to the European Central Bank (ECB) in Germany; they decide such things as the rate of interest- now identical for each country committed to the scheme.

In 1998, in preparation for the single currency, exchange rates were fixed, and it was also decided which countries qualified for EMU membership.

Following this, a European system of Central Banks, with the European Central Bank in Frankfurt at its centre, was established. Other countries would then join the EMU as they met the qualifying conditions.

Before any country could join in on 1 January 1999 the following conditions had to be fulfilled: low rates of inflation; low long-term interest rates; a low budget defecit, relatively low levels of public debt; a stable exchange rate; and an independent national Central Bank.

By 2002 it has been decided that Euro notes and coins will come into circulation as legal tender, and national currencies will be withdrawn after six months.

Gordon Brown, the Chancellor of the Exchequer, set five economic tests for Britain in October 1997 to ‘gauge whether Britain is ready to take the plunge’:

  1. Whether the economy can demonstrate sustainable convergence with Euro zone. (So that interests rates, etc., set by the ECB are appropriate to and beneficial for the UK’s economy and particular needs).
  2. The flexibility of the economy, indicating whether or not it will be able to cope with economic shocks once rates are set in Frankfurt.
  3. How investment in Britain will be affected.
  4. How the city will be affected.
  5. How levels of employment will change, if at all, after joining the single currency. There is also to be a referendum before any decision is made. (Currently most people in Britain are against this motion).

Advantages that a Single Currency might have for the UK

  1.    British exporters would be the main beneficiaries of the single currency; the exchange rate would be fixed and in consequence there is no possibility of one country rising against another.

Devaluation of a currency can cause huge problems for the country that relies on others to buy their exports.

   Take the example of how the Euro fell against the sterling early last year resulting in the crisis of The Rover Car Company. The devaluation of the Euro meant that the countries using it now had to give more of them for each pound bought. Therefore, imports from Britain became more expensive, and demand fell.

 Inevitably this would have had a devastating effect on the British exporting industry; demand had fallen, therefore less was being produced and so fewer workers were needed and unemployment rose.

 A single currency would prevent this situation from ever arising because imports could never be more expensive since exchange rates would be fixed and there is no possibility of devaluation.

 The certainty that a fixed exchange rate provides should also boost the confidence of business in importing and exporting and encourage international trade. Since the British economy is particularly reliant on its success in international trade, the benefits would be felt more acutely too. The exchange rate can therefore be seen as a barrier to exchange; a barrier that would be eliminated if we joined the single currency.

 British business would be able to complete on level terms with the rest of Europe- the biggest market for our goods in the world.

 This improvement in export earnings that should follow due to the certainty provided by the fixed exchange rates should also show a budget deficit, and hence national debt should be reduced. National debt would also fall if we joined because the ECB would set lower interest than the level set now.

Join now!

  1.   If there is no option of devaluation, the government, and firms cannot take the ‘soft option’- there is discipline: just before an election, the government might be tempted to cut taxes or increase spending on hospitals, schools, etc. to please voters, leading to inflation. They will be more likely to do this if they knew that the exchange rate could be allowed to fall. Therefore making our exports cheaper again, and restoring the competitiveness of UK goods. Similarly firms could give into excessive wage claims (also inflation), knowing that any price rises they were forced into because ...

This is a preview of the whole essay