What are the benefits of joining the single currency?

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What are the benefits of joining the single currency?

‘The European Union has been embarking on a critical phase in its evolution towards greater economic and political integration with the formation of an economic and monetary union (EMU)’

Economists are split on their view on this matter and so are government, so they hold a wait and see policy. In this essay I will critically assess the benefits of joining the Single Currency for the UK.

The single currency is based on the Maastricht treaty; in it suggested that the following conditions would be present within the new system. The inflation rate of a country should be no more than 1.5% higher than the average of the three best performing member countries; the long term nominal interest rates should be no more than 2% higher than the three member countries with the lowest inflation rate; the exchange rate of any member countries should remain within normal fluctuation margins for the last two years before joining the Economic Union and the budget deficit should not be higher than 3% of GDP. And total government debt should not exceed 60% of GDP.

There will be a huge number of benefits from the single currency in this case. Firstly, I will examine the low inflation rates. These low inflation rates means that there will be more price stability in the long run. If there is price stability then this means consumers and investors will be confident and not unsure in their spending. Consumers will not save, because they are confident in the economy, they are aware of current prices and know they will not increase too much, but will stay stable. They are less reluctant to save and more keen to spend. The same thing happens with investors. If investors know that there is price stability they will be more confident to invest because they are not unsure that the inflation rate will be high in long run and so their projects may fail. Knowing there is price stability encourages firms to invest.

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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 ...

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