As with all important large-scale economic decisions there are many advantages and disadvantages to the UK of joining the Euro, therefore it is important to assess whether the benefits of such a project outweigh the foreseeable risks.
The argument for a single currency
“The single currency is merely the next logical step in the development of a truly single market which will lead to greater economic prosperity, stability and security for Europe's inhabitants, and that by joining Britain would gain a voice in what could eventually become the world's most powerful economic zone”
(http://www.theeurodebate.co.uk/)
Perhaps the strongest argument for joining the Euro is that in order to gain the maximum possible benefits from a single currency is required. A large single market such as the European market benefits a country because producers are able to achieve economies of scale and therefore lower costs. Furthermore consumers are able to choose from a wider range of producers and gain all the other benefits of increased competition. However there is still much price dispersion in Europe unlike in America and this is perhaps because America has a single currency whilst Europe does not.
The effect of a single currency on a single market can be great. Price transparency is a frequently quoted advantage of the Euro. Economic theory states that competition should increase and that there should be a harmonisation of prices since consumers can see how much similar goods cost in other parts of Europe. As a result prices should tend towards those of the most competitive region. With a single currency capital will be available to pursue the investment projects which offer the highest returns so companies carrying out high return projects will be able to raise capital from the whole of Euro-land. A single currency will therefore favour a more efficient allocation of capital. With a single currency European trade has a more stable-looking future because of the absence of disruptive currency fluctuations.
With the British help the European economy will succeed and grow faster and obviously this will make the trade links stronger. This will bring the Euro to more real rivalry with US dollar, which in the nearest future could replace the role of the US dollar.
The main argument for membership the benefits that removing the exchange rate uncertainty will bring. If there was a common currency within Europe, businesses could be more confident about investment, as they would not need to worry about what effects fluctuating exchange rates would have on them. This should lead to greater investment in the Euro zone and flourishing intra-European trade. A single currency also allows easier movement of labour between member states. This, again, should lead to greater investment and trade in the Euro region and greater overall European prosperity.
The Euro will expand tourism in the UK, which will bring more money to the country. This is because more Europeans will consider visiting a country where they do not have to pay high rates of interest when changing their notes. Tourism brings much capital into the UK and governments are always keen to expand any programme that will encourage tourism.
As a result of the UK joining the Euro there would be a vastly reduced transaction cost for traders, with savings estimated at around £2 billion annually. These savings come from not having to pay commission or maintain hedge funds to guard against currency instability. At present the British sterling is very strong against other currencies and this greatly affects their imports and exports. Joining the Euro would result in exchange rate stability for over half of UK trade. This would encourage higher levels of trade, as exporters and importers realised that their profit margin could no longer disappear with an unanticipated exchange rate movement. We must take into consideration that we have a major trade deficit with the EU, and that imports as well as exports will experience this new exchange rate stability. However, despite a lot of our trade being with members of the EU, we must not disregard the other 47% our trade. The Euro itself has been unstable against other currencies. An appreciation of the Euro against the dollar subsequent to our joining would mean that the UK's important trade with the USA would be at a disadvantage.
UK firms would probably enjoy reduced borrowing costs, encouraging investment and growth, as British interest rates fall to European levels, and UK home buyers would enjoy cheaper mortgages. It is true that industrial investment in this country has been persistently handicapped by the short term use of interest rates against inflation, but even the present level of interest rates in the UK appears to have set off house price inflation in the south. Firms which currently price discriminate between different European markets would find it difficult to sustain this practice as price transparency increased. Some profits could be lost by UK firms, but consumers would benefit.
The argument against a single currency
“This, [a single European currency] they say, will lead to a loss of national sovereignty, diluting the voice of the British electorate whilst handing too much power to unelected officials based in Brussels and Frankfurt.”
(http://www.theeurodebate.co.uk/)
One of the primary arguments against joining is that there are severe structural differences between the members' economies. These may well undermine the success of the project, meaning Britain would do well to stay out. There is no guarantee that the Euro will be successful, and this is a key issue to consider when assessing whether or not Britain should join at this stage. Britain has already had her fingers burnt by the disastrous entry into the doomed European Exchange Rate Mechanism, the previous attempt to fix European currencies against each other which collapsed, plunging Britain into recession.
Another key argument against entry is the loss of economic independence that would be seen from Euro membership. If Britain were to join the Euro, our interest rates would be set by the European Central Bank (ECB). Since the Bank of England has been given independence it has been successful in controlling inflation through interest rates. Problems could well arise if Britain loses control of interest rates as a tool for its own economic objectives. The past few decades have shown we need all the measures we can to keep control of the economy.
To illustrate this problem, let us suppose that there are inflationary fears in Germany and France, two influential member countries, but not in Britain. In response the ECB is likely to set high interest rates to dampen economic activity and curb inflation. However, in Britain this dampening of activity is not needed as there is little inflationary pressure. The high interest rates set by the ECB merely serve to slow down the British economy. This problem may be aggravated by the fact that Britain is very sensitive to interest rate changes. This is due to a large percentage of variable-rate mortgages, and companies being heavily reliant on debt finance for investment.
Fiscal policy would also be lost, to a certain extent. Fiscal policy is designed to manage the level of aggregate demand in the economy by changing government spending or taxation. Fiscal is used as a tool for economic management, and this resource would be lost due to the fiscal stability pact which limits national budget deficits to 3%. So the government cannot spend its way out of trouble.
Some argue that the 'menu costs', i.e. the costs to businesses of having to change all prices to Euros, will be significant. This may hit small to medium sized businesses very hard. However this is very short-term and I don't feel it is a significant argument against joining.
A major set back is the one-off cost of converting IT systems and coin machines, and training staff, which have been estimated at up to £36 billion. These costs would be encountered by UK firms after their competitors in the existing Euro-zone had settled in the new systems, and therefore UK firms would be at a competitive disadvantage for a couple of years after joining in addition to paying the capital cost. The result of a boost in inflation also deters the UK from joining the Euro, converting to a new currency offers an opportunity to retailers to round up prices and take advantage of the confusion. The depreciation of the pound required to secure entry at a viable exchange rate would also cause import price inflation.
There is also a large risk that there will be an increase in fraud and crime as the Euro will be new to British citizens when they are first released. This means that it will be much easier to get away with forgery, mainly because the Euro notes come in great variety and are not even all on the same paper. Detecting forgeries could be greatly complicated. At 500 Euros the largest note there is a high chance that criminals see this as a particularly attractive opportunity.
Conclusions
It is important to value and treasure our heritage, as that cannot be replaced. However, whether this should stand in the way of such a big issue I really doubt. I believe our culture to be strong enough to retain a real identity without the pound. Britain has much strength, economically and culturally, that should enable her to grow and become more prosperous. But this would undoubtedly be made easier by membership in a successful Euro zone. However, whether or not this is attainable is really the issue - can the differences between the members’ economies be overcome? Is convergence possible? Will the Euro be successful? I would tentatively suggest that the answer to these questions is, in the long term, yes. On this basis I suggest that it is best for Britain to join soon. There is a real risk of failure and there will undoubtedly be problems in the short to medium term, but I feel it is worth the risk.
http://www.theeurodebate.co.uk/
http://www.motorola.com/content/0,,335-648,00.html
