Should UK join euro?

University Degree Business and Administrative studies

ECS1291 Essay 1

Should UK join the Euro?

Should the United Kingdom (UK) adopt the european single currency? This question gained more popularity now, during the global economic downturn, but there is still no definite answer to it. It depends from what perspective you approach it: of a politician or businessman, short-run or long-run oriented person, patriot or globalist; each of the types enumerated has it's own arguments for and against joining the Euro.

Usually the intention behind a monetary policy is a political one, but in order for the final decision to sound more convincing it has to be backed up by economic arguments which are not easy to assess.

First the arguments for joining will be discussed. One of them refers to the fact that in the case of adopting Euro, the UK will benefit from the “law of large numbers”, meaning that a large market is more stable than a small one and that the large market is more resistant to external economic shoks such as rapid changes in the oil prices or volatile currency exchange rates. Another conclusion resulting from this reasoning is referred to as: “the optimal currency area theory”, that suggests that a currency is the more useful the wider its acceptability.

Businesesses will benefit from joining to Euro too; especially those with partners in the Eurozone. A single currency may reduce some costs, because of the elimination of the exchange rate spread. This will allow UK businesess to become more attractive for Eurozone citizens and viceversa. The fluctuations in the exchange rates make the planing process more difficult, because of the lack of knowledge of the exchange rates in the future, some firms suffer additional costs trying to hedge against currency fluctuations. The adoption of Euro will eliminate this problems for some businesses, this will result in better planning and more investment.

The UK products and services will become more attractive for Euro users, because they will not need to overcome the phycological barier of changing their money into another currency, that involves additional costs, additional calculations, this argument is not as significant from the economic point of view, as it is from the phycological one.

Many British households will enjoy the effects of the single european currency in the UK. Retail sterling-euro exchange transactions with a commission as large as 5% will be a thing of the past. Futhermore, the adoption of Euro by the UK will atract foreign businesses into ...

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Some people bear the thought that the prices will go up after joining Euro. In fact, the Eurozone experience shows that the average price level went down after the introduction of the single currency.

On the other hand, there are a lot of reasons why Britain will not want to engage into the Eurozone. British public opinion on the issue of switching to Euro wasn't constant over time. “A recent opinion poll among the British public suggested that 70 percent opposed euro entry. ” (Michael Ross, January 2009). There are some simple explanations for this phenomenon like patriotism and the phycological inertia: people tend to resist change and associate the transition to another currency with a period of uncertainty, going to the bank to change the notes implies leaving the comfort zone for some people. The historical inertia might be a reason too: the UK has a more consistent history than the majority of other european states, that makes Britons more eager to stick to their traditions, being an island state strengthens this mood too.

Politicians tend to carry the most about their reelection. This may be the reason why they adopt the same opinion as the majority of the public does: “Gordon Brown said the government has no plan to adopt the euro or to review its 2003 decision ruling out any attempt to scrap the pound“ (Mark Deen, December 2008). The global reputation of the currency has to be taken into acount too: Pound Sterling is the third largest reserve currency in the world, and it has a long history, this naturally makes it a simbol that Britons can be proud of. Adding to this the fact that the United Kingdom regards having a national currency as crucial to their national identity (Amy Verdun, 2006).

From the economic point of view joining the Eurozone will take a significant part of the control that the Government now has over the economy. The British central bank, The Bank of England, can set the interest rates and influence the money supply. The decisions of the central bank are among the most sensitive actions deployed in a modern economy, influencing growth, living standards, the level of unemployment and the cost of credit and mortgages (M. Baimbridge, 2008). Some of the states which adopted the Euro like Germany and France have significant state pension deficits, after joining “the € club” Britain might have to split this burden with the other states. On the other hand, one Italian expert, Lorenzo Bini Smaghi, argues that Britain's rising public deficit may obstruct the posibility of joining “the € club”.

The decision about adopting the single european currency must be taken in stages. One of them might be the correspondence to a set of economic criteria defined by the British Government called: “ the five economic tests”. The government also promised a referendum so that British people can take the final decision, but the referendum will be held only after all those five tests are passed.(Linda McAvan MEP, 2006)

Should UK join Euro? Decide for yourself. As any question that was discussed to appear on a referendum it has no definite answer, many times the best decision is the fastest one.

Bibliography

Mark Baimbridge, “Britain, the Euro and Beyond”, Ashgate Publishing, 2008, pg.110
Amy Verdun, “Britain and Canada and Their Large Neighboring Monetary Unions ”, Nova Publishers, 2006, pg.17
Linda McAvan MEP, “The Euro: the facts, the UK referendum, the arguments”, 2006

[ http://www.lindamcavanmep.org.uk/special_reports/euro ]