More investment and consumption leads to many things. With these two variables increasing together it will start of a large multiplier. Money from investment will go to workers and for the actual project and money from the workers in injected back into the economy through consumption. There is a continuous cycle of money flowing through consumers and investors and in turn, national GDP increases. As a result of this large multiplier, people’s confidence increases, many jobs are made, which will decrease unemployment and they have a better standard of living. The graph below shows clearly the effect of a price stabilisation.
Secondly, there are low interest rates in the countries, which use the single currency. The benefits for the UK will be that mortgage repayments decrease greatly, and seeing as though there is a crisis in the UK about property prices increasing this will benefit house owners and buyers immensely. This is also a great confidence booster for UK firms to invest. If they know that the cost of borrowing money for new projects is cheaper and will stay cheaper and stable for the long run too they will invest. (As shown by the diagram above, this will increase GDP, while maintaining price stabilisation. However, this is not good news for those interests in ‘hot money’ within Europe and for those with savings accounts and bonds. This low interests rate will mean they get a low return on their money invested in foreign banks and their domestic bank.
If the countries that use the Euro adhere to the Maastricht treaty then this will eliminate the argument that the ‘one fits all’ approach is useless. Hopefully if all economies are quite similar in the ways mentioned in the treaty then certain economic policies would affect them all in the same way. This opposes the argument that policies implemented to save one economy could destroy another. . This however does not take into account natural differences in economies yet is still a valid point.
Foreign investors who are interested in trading in countries who use the Euro will be apprehensive about investing in the UK economy. There are two reasons for this, if they wish to export from the UK to countries using the euro, they will incur transition costs they could avoid if investing in a country using the euro. Secondly, they may sustain higher costs that they could alternatively get, due to the UK missing out on the price stabilisation. Therefore, if the UK where to become part of the Euro they will have an increase in foreign investment within the economy. This will bring about two changes in the economy, there will be a multiplier effect and jobs will be created and secondly there will be increased competition within our economy.
Increased completion is good in three ways, prices can decrease, quality may increase and production in the economy becomes more efficient. If there is a lot of competition then consumers have a lot of choice and tend to choose firms who have the highest quality good or service and are the cheapest. Therefore, firms need to become more efficient to compete with each other. They will try to produce at the lowest point of the long run average cost curve or just lower than that of their competitors; in doing this their profits will be higher or they can lower the price to increase market share, while taking in the same profits. This will benefit consumers because they will have a much wider field of choice of products and have cheaper prices to choose from. However, quality of the product is important. This will give firms the incentive to innovate and invest to improve the quality of their good to compete with foreign firms.
This will also with other countries within the EU who use the Euro on a larger scale, because they will have more to compete with. Another benefit to joining the single currency is price transparency. Because everyone has the same currency is easy to compare prices between countries, this means the cheapest firm can be found easily. It Is also very difficult to price discriminate between countries, price transparency allows a consumer to see if they are being discriminated against and choose the best price. What’s more it will raise competition further because price is now knows on a wider scale and the consumer may not just search domestically but will now search on a more of a international scale.
Lastly, the most obvious benefit is that exchange rate costs will be eliminated. For example there are no exchange rate costs for Italy to export to Germany because they have the same currency, however for the UK to export to Germany they must pay exchange rate costs, which is costs they could otherwise avoid if the UK joined the Euro.
In conclusion In conclusion it can be seen that Single currency does have many benefits for the UK and the European Union as a whole, if the project is successful. Employment, investment and growth could rise as a result. Not to mention the possibility of cheaper prices and higher quality goods.