Euro you win, Pounds you lose
The organisations mentioned previously are all organisations set up to enable the Euro, not only to exist, but together to create economical prosperity for those that decide to join in the single currency.
For those countries that decide to join, great advantages are to be argued. One of the major consequences would be that through many countries participating in a single currency, it would create a great challenge for the dollar, an increase in investments for the participating countries, efficiency of the economy, no currency exchange charges, and ease of price comparison.
Previously, many companies have held their assets in dollars, which is preferable due to the liquidity of the dollar which means an ease in changing assets to cash, should the need arise. The Euro is said to create this more liquid situation and by holding assets in Euros, companies have an opportunity of reducing the costs of funds.
Increased investment in Europe as a consequence of a single currency would create increased efficiency and decrease the rates for financing companies, which in turn will create a more dynamic market for participants. There is evidence to support this in “Both Sides of the Coin”, where it is stated that in “The commission’s study of the price divergences within member states for standard banking products since the launch of the Euro, figures have increased”. Through efficiency of the economy individuals will also be able to profit as these savings are passed on through banks to companies and finally to the consumer.
It has also been said that Britain is suffering as a result of the exclusion. According to a study by Ernst & Young, euro-zone countries are seen as more popular for internationally mobile inward investment projects. Steven Byers, who is the trade and industry secretary, believes that these results are “the first solid indication that British exclusion from the single currency is having a direct and avoidable, economic impact”, (Financial Times May 30, 2000). However these figures appear to clash with a report by the governments Invest in Britain Bureau, which claim that record investment levels have been achieved.
Through participation in the Euro, commission charges for currency change are also made obsolete. People will be able to take their Euro currency to other countries within the Euro zone and this currency will be accepted. Currency commission will no longer be charged and great savings could be made, which will also be a benefit for companies who no longer have to pay transaction costs.
The single currency will also create ease, in comparing prices and will encourage consumers to review the whole Euro-zone rather than just their country, as the comparisons are not only less complex, but have a reduced risk as the danger of shifts in exchange rates disappears. This will also in turn encourage competitiveness and increase customer choice and therefore create markets with healthy competition, increasing efficiency of companies, which in turn could be passed on to individuals creating a more efficient market for all. However this would be more likely to affect companies selling more expensive items and a prime example of this would be the recent issue, which has arisen regarding the great price differences in cars.
Many pro Euro experts believe that although, through the reality of a single currency, the market is expected to suffer a minor economic low, it is expected that in the long term the economy will prosper so much so, that it will outweigh the negatives. Sir Ken Jackson who is the general secretary of the Amalgamated Engineering and electrical Union stated “more than 3 million jobs depend on being in Europe”. Many also fear that by not being part of the Euro, companies will move towards using participating countries as their head offices and Britain will as a result suffer in terms of unemployment.
Pounds you win, Euro you lose
Although great advantages are argued, disadvantages of joining the single currency can also be seen, which include the difference in economic cycles, tax harmonisation, a possible rise in interest rates, restrictions of the Maastricht treaty, excess debts, unemployment risk and failure of the Euro.
One of the most dominant arguments arising against the UK joining the Euro is that the economic cycle is different in the UK compared to Europe, and could therefore create economic difficulties for the UK, should they join. Comparing the economic cycle of Europe with that of the UK reveals that at present the UK is more open, more liberalised and there is more multi-national trade. Tax harmonisation must also be achieved and although positive steps have been taken in this direction, activists against the Euro feel that by joining before all of these issues have been resolved could cause drastic consequences if the UK joins previous to this by creating what is known as the problem of dsymmetric shocks and introduces an issue of a lack of individuality due to a lack of control.
The differences in economic cycles, gives rise to the issue of interest rates. Upon joining, the UK would loose control of the interest rates and therefore may suffer, should Europe raise or lower them, when although appropriate for some countries, it may be that the opposite is required for the UK. This could result in losing competitiveness and may result in a bust in the economy. By this loss of control, power of UK policy would also be lost and therefore a situation may arise whereas a certain policy that may resolve a specific UK issue, will no longer be feasible, and therefore may also create difficulties in the market.
The Maastricht treaty was signed in 1991 although at that time various different policies were needed for different countries. Twelve countries signed the treaty at this time and the economic situation was a prime example of how important it is to have individual policies, although these situations may have changed today, it is argued that, the UK is at present in need of this individual policy. This treaty not only created a central policy, it also created a central bank, which would take over independent interest rates, it also limits policies which include those of taxation and expenditure. The Maastricht treaty also places restrictions on national fiscal policies.
Another concern is that of debts. Due to participating, there may be an ease of market constraints and healthy economic governments show concern that they may be expected to bail out countries that have borrowed in excess. Alternatively, countries may experience an overall rise in the cost of borrowing, due to borrowing of governments with economic difficulties.
Unemployment is also of concern, as certain jobs are made obsolete through participation, this would include people employed to do such things as currency exchanges and transactions. Also, should the Euro affect the economy in a negative way, concern is shown that due to companies going bust many more could be at risk as investment may be made elsewhere and companies may go bust or merge with other companies so that they may become more efficient.
Should the Euro become an economic disaster in Europe, Britain would also suffer economically which would be mainly visible in our exports, however by not participating it would decrease the amount of suffering for Britain and may increase foreign investment into the UK as it is made to look more attractive in comparison to Europe.
Euro you win or Euro you lose?
One issue that cannot be argued is that there are enormous risks involved and once the UK has joined the single currency there is no return. It is also a political and constitutional decision and although in the long term when the convergence criteria and a competitive exchange rate is achieved the United Kingdom will probably join the Euro.
Due to the magnitude of this decision, it must first be debated whether it is to Britain’s advantage or not. Downing street stated, “Mr. Blair is committed to joining a single currency once economic tests set by Mr. Brown have been met and if voters agree in a referendum” (Metro, June 14, 2000). It is said that five economic conditions should be met, Gordon Brown stated “Plainly Britain can only join the Euro if the economic conditions are right. But we will only be ready for that event if we now resolve in principle that we want to be a member” (Financial Times, June 15 2000).
The debate has shown strains on party policy and has even created conflict. Recently a speech by Robin Cook, was criticised and text praising the Euro was cut at the last minute. The reason for this is unsure, but Gordon Brown is of the opinion that any decision on the Euro must wait until after the general election (Evening Standard, 15 June 2000). Many critics of the government have also accused the government of using delaying tactics, so that the general elections are not affected by any decisions on the Euro.
In the short term, I personally feel that the government will work towards the economic conditions and eventually, once these five economic conditions are met, Britain may in the long term join the rest of Europe in the single currency.
Bibliography
Financial Times May 30, 2000
Financial Times, June 15 2000
Metro, June 14, 2000
Both Sides of the Coin, Christopher Hune & James Forder, Profile Books Limited
Evening Standard, 15 June 2000
