Another large effect of joining the Euro that will positively benefit the economy will be the ability for increased foreign direct investment. With the single currency, many firms from other countries within the EU will be able to invest more directly as there will be no need for money exchanges. There will be no exchange rates to worry about which will enable firms to incest the exact amount that they want rather than a lower figure due to the £ being too strong.
There are not only advantages to joining however; there are also many disadvantages to this. Most of the disadvantages are concerned with the identity of Britain. By joining the Euro, Britain will not only lose sovereignty, but with that goes the cultural identity as well as political sovereignty. This could cause citizen unrest as the culture is the public and many people may revolt against the joining of the Euro.
Other drawbacks to joining are more economic, such as the loss of interest rate power. The interest rates for all countries within the Euro will be a general rate set by European Central Bank (ECB), and the UK will lose its independent monetary policy as a result.
Another result will be that the EU will dictate the levels of government spending that can take place. At the moment, the EU has set a rule that no country can run a budget deficit of more than 3% of GDP. This will mean that the government will have to spend money more wisely, but will limit the amount of investment that can take place where a large investment is needed, but only a small amount can be given.
The next argument against joining the Euro is more of a question, where will it end? Once Britain has joined the Euro, will there be a call for a European super state to be formed that will unite all countries in the EU under one government.
Other points that the government will need to take into consideration are, what will happen to all the old notes. Burning them will cost money and it will also take a long time to collect all of the notes. Once we have joined the Euro, it is an irreversible process; therefore if the government decides that we should join, they must be perfectly sure that it is the right thing to do for the country.
In order for us to join, the government has set up 5 economic tests that we have to pass before joining the Euro, these are:
- Is there cyclical convergence between the UK and Euro zone?
- Is the UK economy flexible enough?
- Would joining improve FDI?
- Would joining damage the City?
- Would joining be beneficial to the economy?
As you can see there is no mention of exchange rates in these tests, so how would they know when to join. The government needs to decide the correct exchange rate for Britain to join the Euro, as if it was too low, the public will not be happy as they will want to get as many Euros for their sterling Pounds as possible. But if it was too high, the economy will object.
As you can see there are many factors that the UK government needs to consider before joining the Euro, such as exchange rates and the 5 economic tests. I order to decide what is best for the country and the economy, the government needs to weigh out the advantages against the disadvantages. From the evidence given, I believe the disadvantages outweigh the advantages and so the government should decide not to join the Euro.