1. The UK is the fourth largest economy in the world, with a gross domestic product (GDP) of US$2,133

billion. The UK is forecast to have the strongest business environment of all major European economies for the period from 2005 to 2009 (EIU, 2005). The euro-zone however as of ’05 considered to rank 1st in overall GDP equal to $12.82 trillion (2006,PPP).


From Figure1, we can see that the UK has one of the lowest rates of unemployment within the EU: lower than German, Italy, France and the average of the whole Euro-zone. Poland followed by Slovakia have the highest rates of unemployment in the EU. Surprisingly in fact the UK has a rate of unemployment almost half of the Euro-zones/EU25’s average.

The UK's productivity performance, on a Gross Domestic Product (GDP) per hour worked basis (Fig2), is lower than that of France, while similar to that of Germany and Italy. (Eurostat)

Per capita the UK is GDP performance is leading just behind Ireland and Luxembourg. In terms of actual growth it trails with 1.9% compared to the likes of Ireland again with 5.5% and Latvia with 10% (IMF, 2005). However this doesn’t really indicate performance as both Ireland and Latvia have the adverse effects of inflation. The UK enjoys stable growth from a much greater base.

In 2005, the governments with the highest public deficit figures were those of Hungary (6.1% of GDP - 5.4% in 2004), Portugal (6.0% - 3.2% in 2004), Greece (4.5% - 6.9% in 2004), Italy (4.1% - 3.4% in 2004), Britain (3.6% - 3.3% in 2004), Germany (3.3% - 3.7% in 2004) and Malta (3.3% - 5.1% in 2004). Meanwhile, Belgium, Denmark, Estonia, Finland, Ireland, Latvia, Spain and Sweden registered a government surplus in 2005.

The Stability and Growth Pact limits public deficits to 3% of GDP. Currently 12 EU states face disciplinary action for breaching this limit. The UK’s current deficit is 3.23% of GDP. (EurActiv)

Overall the UK economy compares well to those of the euro-zone countries, it reasonably stable. It obviously isn’t in the same league if you class the EU as a single entity but per capita still holds it’s own.

2. The plan for the euro adopted by Kohl and Mitterrand was political in intent. When economic problems were referred to, these and other protagonist replied that they were secondary and indeed that they would act as a stimulus for further integration ‘to make the euro work’. With that in mind, we must consider the benefits and costs of the UK, being part of the euro-zone.

To join the Eurozone, the subset of EU member states, would be to adopt the euro currency and relinquish responsibility of monetary policy to the European Central Bank.

The main benefit of the UK’s membership to the Eurozone is supposedly economic, political benefits of the actual EU are very hard to define as compared with being outside and politically collaborative. Economically the EU raises many points of question: protective regimes; monetary policy and the euro; pressure to harmonise UK taxation; regulation and social policy; public finance and finally the question of “bail out.”

Joining the eurozone would mean the introduction of the Euro. Since around 20% of UK transactions are already dominated in US dollars, the demise of sterling will not produce totally unfamiliar circumstances. A common currency removes a significant barrier to free competition across national borders. A single currency promotes price-transparency – customers can readily assess the relative prices of similar products from anywhere within the union. Thus competition should increase and price decrease. Joining the euro has now been amply explored, not least by HM Treasury in its voluminous study of the Chancellor’s Five Tests. Elimination of exchange rate risk with the euro-zone- potentially this could reduce firm’s costs as they would no longer have to hedge against the risk.

Join now!

However the debate of the last few years has now clearly revealed how costly it could be to us, in the form of increased economic volatility, ‘boom and bust’ in the Chancellor’s phrase. The recent experiences of Germany and Ireland within the euro-zone have borne witness to the problems the UK would itself experience. As a trading nation with over half our trade (inclusive of services and investment earnings) with the dollar area (Figure 3), we would be particularly destabilised by the fluctuations of the euro against the dollar, over and above our inability to set our own interest rates. Ironically, ...

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