- If there is no option of devaluation, the government, and firms cannot take the ‘soft option’- there is discipline: just before an election, the government might be tempted to cut taxes or increase spending on hospitals, schools, etc. to please voters, leading to inflation. They will be more likely to do this if they knew that the exchange rate could be allowed to fall. Therefore making our exports cheaper again, and restoring the competitiveness of UK goods. Similarly firms could give into excessive wage claims (also inflation), knowing that any price rises they were forced into because of paying higher wages could be compensated for by exports becoming cheaper following a devaluation.
They fixed exchange rates that will be set to join will prevent firms giving into excessive wage claims and governments spending unwisely, because there cannot be a devaluation to get them ‘off the hook’. The end result is that the discipline imposed in this way will prevent inflation.
It could be argued, however, that Britain cannot afford to lose the ability to devalue our currency as a response to economic shocks. Having said this, if we were part of a single currency, any economic shock that hits us will hit Europe too, and the ECB will take action to help all the EMU states.
- The cost of changing money hits tourists and exporters throughout the single market- amounting to a trade tax of 3 billion a year. Small businesses find that the costs of clearing foreign currency cheques and changing currencies can eat into their profit margins.
We would be putting British businesses at a permanent competitive disadvantage compared with their competitors in France, Germany, etc. because British businesses would have to face transaction costs and the uncertainty of fluctuating exchange rates which their euro zone competitors no longer have to deal with. The competitors no longer have to deal with. The convenience factor is very significant, however it would offset in the short term by costs to businesses of converting to the euro.
- Most of the countries in Europe are currently just coming out of an economic recession; therefore interest rates are low to encourage spending and borrowing. Our interest rates are fairly high at the moment since we are trying to discourage spending and cut down inflation, but also our economy is seen as more of a risk to investors I our currency that will hold its value. So, if we join, there will be less of a need to hold our currency by increasing interest rates, and inward investment should be enhanced.
It could also be said that one of the main reasons for investors from outside the EU to base themselves here in Britain is because we are seen as a gateway to Europe, with about 1 million jobs dependent on overseas investment. More than half this investment comes from the United States- the transatlantic relationship depends on our strong integration with the rest of Europe.
- If we were part of the single currency its effect in terms of interest rates would be felt very greatly. If interest rates are suddenly lowered there would be cheaper finance for industry for industry; more money to invest in new skills and jobs; business competitiveness should improve, and, in this respect, unemployment should fall, and people would have more disposable income. However, in the long-term, the latter may not necessarily be advantageous to Britain (inflation would ensue).
The ECB would control our interest rates if we joined the single currency; it is probable that they would actually be more stable as such than if the Bank of England decided them. In its first 18 months of existence the ECB had changed interest rates interest rates 6 times, in 3 years of independence the Bank of England has done so 15 times. This sort of stability is highly desirable.
- The countries comprising the ‘euro zone’ are converging; as yet they are still divergent, but they are all reaching a similar stage of strong economic recover. Taking the examples of Ireland, France, Germany, it can be said that: Ireland is already in (too) strong a stage of economic recovery, (overheating), France is in recovery but not yet at this stage, and Germany is in its early stages of recovery. Hence the ECB has raised interest rates in anticipation of inflation. This is a stage that Britain is in; our interest rates are high for this reason also. The ECB has just not set interest as high as the Bank of England, yet.
This bodes well for the future should Britain decide to join the single currency. It indicates that Britain is converging with the rest of Euro land, so that policies that are decided will be beneficial to Britain as well as the rest of Europe.
Since we joined the EU in 1973, we have been trading more and more with Europe, and less with the rest of the world. This has resulted in us becoming very closely linked with Europe, and has indeed helped the British economy to be very similar to the majority of those in Euro land, indicating that our convergence with European economies may be one for the long term.
- Joining the Euro will make it so much easier to trade in Europe than it is now. Trade in Europe will be promoted, and producers may well increase their levels of supply, and therefore will need more workers too; unemployment may fall and the standards of living may well improve.
- A single currency may provide an opportunity for Britain to break out of the boom/bust cycle. It is true to say that many of our competitors have enjoyed lower interest rates and lower inflation, and have sustained this performance, but it is virtual that we bear in mind the fact that Britain is NOT in the same economic stage to other countries have reaped will not necessarily apply to us, as our needs are different.
This would mean that business in Britain could invest in the long term without having to worry about wild swings in interest rates (the ECB is likely to alter interest rates as often or as significantly as the Bank of England does since it has many more countries to consider, and needs to act in a way such that most countries will benefit equally).
- The government is the biggest borrower of all; if we joined the single currency claims are that we would save up to 4 billion annually through lower interest rates. This could pay for 25 hospitals, 500 schools or thousands of work training places.
- A single currency will make it easier for consumers to make price comparisons between different goods and services. Retailers will know this and will be forced to reduce their prices in order to complete.
- There is now clearly a trend towards regional trading blocs, such as NAFTA and the EU. A single currency will give European countries far greater economic policy weight against rival trading blocs in America and the pacific.
- Another advantage may be ‘currency stability’. Had Britain joined at the start of 1999 we would have had a 20% fall for the sterling (as part of the Euro) against the dollar. But we would also have had, and this is what industry seems to want, stability with regard to Europe. Euroland accounts for 65% of the weighting in the sterling index. Overall, sterling would be more stable inside the Euro than outside.
- If it does not join, Britain could be discriminated against by the set of ‘insider’ rules decided by the European states that are part of the single currency. They may discriminate thinking that Britain intends to devalue the sterling in order to secure a comparative advantage in the single market. Being on the outside of a single currency would mean that Britain will face most of the disciplines of it, but without being able to enjoy the benefits or influence gained by being inside.
- If Britain joined the single currency, common economic problems which we could not solve alone could be addressed by pooling all the information and resources of the European countries together. For example, the 1930’s depression and the oil price shock was made worse because European countries pursued different policies.
Disadvantages that a Single Currency might have for the UK
- Britain is not in the same economic stage as most of the European countries: whereas they are just coming out of an economic recession, Britain is at the end of a long period of economic recovery. Ireland is at a similar stage to us, and in contrast, it decided to join on 1 January 1999. We can therefore examine their situation as an example of what would have happened to our economy had we joined before now, and hence shows us the problems that joining would, in all probability, have incurred.
That we are not in the same economic stage has vast implications; currently inflation is rising here. There is a danger that our economy is overheating, so our interest rates need to be high to ‘dampen down’ the boom, and discourage spending. However since most of the rest of the countries on Europe are just coming out of recession they need to encourage spending etc. and so need to ensure interest rates are low. All countries in the system must have the same interest rates decided by the ECB; they will oblige the majority- which does not include us. (Nor did it include Ireland, hence their problems).
Not surprisingly, therefore, Irish inflation has increased from 2.1% to 6.2% since January 1999, whereas the UK has not seen this sort of undesirable rise in inflation: UK interest rates have been set to meet the needs of the UK economy, while Irelands have not.
2. As Ireland demonstrates, if we join the single currency we would lose control over monetary policy, and become dependent on others. This is an extremely ‘unhealthy’ position to be in since the ECB, who will have control, have many other countries to consider, not just Britain. We will also be less flexible in adapting to changes.
- If we join we no longer control our interest rates, so the only way we could discourage spending ourselves would be to increase taxes; something that the government is reluctant to do since it has spent the last 20 years promoting and encouraging enterprise culture. This reluctance is because raising taxes gives disincentive to work, and to increase the unemployment sector is extremely undesirable.
- The transactional cost incurred will be great; banks and retailers will have to buy new equipment and re-write some of their computer software.
- It is questionable whether a large monetary union of disparate economies will be able to work to the advantage of its members. Or will exchange rates stability comes at the expense of more general instability? An example is Ireland; the ECB is unable to act directly because the risk of overheating is confined to such minor area of Euro Zone. I.e. it is because the ECB has enforced interest rates that do not suit the Irish economy that is currently overheating: one size does NOT fit all. It is impossible for the ECB to benefit those in the minority because it will be at the expense of the majority.
6. Britain is currently converging with Euro Zone- but now we have the freedom to set out own interest rates and to allow the exchange rate to vary, so this says little, in a way, about whether that convergence would persist in to the Euro.
7. It is also not important to bear in mind the fact that even if we do join the Euro, although we will not have to worry about exchange rates within Europe, there will also be the dollar- Euro, yen- Euro etc., exchange rate to consider which has potential to cause just as many problems that we would hope to prevent by joining the single currency. For example the Euro falling against the dollar, as the sterling would have made imports from the USA very expensive. Although Britain may be slightly more protected if it was a part of the Euro, these exchange rate problems would not be negated.
- The Euro has been quite a weak currency so far because the USA is in a different economic stage to most of Europe. It may therefore be wise for the UK to stay out of it; to be part of a weak currency means imports are expensive means imports are expensive and low earnings from exports. (There is now evidence to suggest that the Euro is rising, however).
Conclusion
The most prevalent argument in favour of the single currency are that trade will be open up, increasing production levels, employment, profits and standard of living. Businesses that is very likely to improve and prosper even more so are those involved in exporting. This would be due to the fixed exchange rate; one currency would not be able to strengthen against another so the problem of imports becoming too expensive would be eliminated, but only to a certain extent: the Euro- dollar exchange rate still has the potential to cause problems since this is not fixed.
Our manufacturing industries would benefit a lot from joining the Euro. It is also important to remember that significant areas of the UK rely on their success; the West Midlands, the North East etc. If these industries are thriving the success of our whole economy is enhanced.
In some ways t could be argued that inward investment will increase as we would present less of a risk, being part of the supposedly more stable Euro. An increase in investment in the UK would indeed be very positive for our economy. However, in reality this is unlikely to be the case since, by joining the Euro we would ‘enjoy’ lower interest rates. Lower interest rates act as a disincentive to speculators and this coupled with soaring inflation that will probably occur with lower interest rates, will no doubt dissuade investors from investing here in the UK. (Inflation will erode the interest on their loan).
On the other hand, the fact that the UK is not in the same economic stage as most of the countries in the Euro Zone has vast implications; our needs are very to the majority of Euroland, and so it is quite inevitable that they will not be met; the ECB is one body deciding policies that everyone must abide by- they have to act in a way that is beneficial and appropriate to the majority. Sadly this does not include us, but even if it did include us now, there is still no chance that we might diverge from the rest of Euroland after we join, which could have devastating consequences too.
The weakness of the Euro has, particularly against the dollar, posed many problems. However since there is now economic recovery in Europe rising interest rates and a rising Euro, Europe and the USA may no longer be in such different stages.
The UK needs high interest rates to try and curb our overheating economy. The ECB has set interest rates in Euroland much lower than the level we need to prevent a boom. This would send inflation in the UK soaring, (if we had joined) and prices being so high demand will fall, as will production, resulting in bankruptcies and unemployment. Needless to say this is a situation we would clearly want to avoid if it is in our power to do so.
The fact that we would lose our independence and our control and will instead is reliant on Europe and the ECB if we became part of the single currency is also of extreme importance. This would undoubtedly have vast consequences, and is an undesirable position to be in for obvious reasons.
On balance, therefore, I would recommend that the UK should not join the system. I feel that we would be taking great risks in doing so, and although there is much to be gained from joining, it is unlikely that the British economy will actually worsen to the same extent as a result of not joining. This is a contrast to the situation described above (boom, inflation, etc.) that could arise, quite feasibly, if we do become part of the system. There is much at stake, and the potential gain is not great enough, in my opinion to justify this risk. (What we stand to gain is less than what we stand to lose).
If the UK became part of the system international trade would be boosted, having a knock on effect on businesses in the UK (enhanced by the fact that we are, in effect an ‘island’ and therefore more reliant on this trade(. But the people to gain the most would be British exporters they would benefit in two ways: trade has opened up for them (the reason given above) but also their export earnings would probably increase because of the fixed exchange rate that would ensure if we joined.
This is a ‘but’ because if we compare the proportion of people in the UK tat stand lose from joining, from those who will directly and almost definitely gain, it is very difficult to justify. Large businesses and exporters are the ones that really need the UK to join the system. Harsh though it may be, we cannot oblige these few, in the minority, at the expense of so large a percentage of the population (and if we do join and experience problems they too will feel them). –just as the ECB cannot oblige us at the expense of the rest of Euro zone (making the fair assumption that our economy will not be perfectly convergent with Euro zone all the time, and that we will be in the minority).
Therefore I think I have proved my hypothesis, Britain should not join the Euro as I don’t think it will benefit the UK’s economy greatly.