Advantages and Diasadvantages of Joining the Euro

The key economic debate that will dominate the political agenda over the next few years will be whether or not the UK adopts the European single currency. This report will look at the list and explanations of the advantages and disadvantages of the UK joining the European single currency; the euro.

The euro is the currency of twelve member states of the European Union. Namely;- Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.

On January 1st 2002, these countries introduced euro notes and coins, which replaced the former national cash forms such as the French franc and the German mark. The euro is now the only legal currency in these countries. There were also 10 new countries joined the EU in 2004, which will be encouraged to adopt the European currency.

The UK government policy is to join the euro if parliament, the government and the people, in referendum, all agreed to the changeover. These plans have been in the making since 1997. The single currency is not principally related to economics, although the economic consequences will be felt by UK businesses whether we are part of it or not.

If the UK were to join the euro, there would be a changeover period. This timetable shows the period as being, in total, approximately 36 months or 3 years. The first step to be taken would be the decision to join. The decision to join would then mean there would be a referendum called. To call this would take around four months. At the referendum, the British people would vote for or against becoming part of the European currency. If the public wanted to follow the decision it would take a minimum of 30 months before E-day. In this two and a half year period the UK exchange rate between pound sterling and the euro would be fixed although few changes would be made to everyday transitions at this stage. Nearing E-day banks would start offering the euro services to customers. Businesses would also start converting to the euro in preparation for the transition.

E-day is the day UK euro notes and coins would be introduced. The euro would officially be legal tender in the United Kingdom. Currencies, sterling and euro would be used for 2 months after this date before the euro is solely used.

After the two months the sterling would become extinct. It would be withdrawn from circulation. And euro would now be the only legal tender.

Disadvantages of the UK joining the single currency

In present times it would seem an unpopular decision. The majority of British people are against Britain joining the euro. This might lead to lack of confidence in the economy. The main worry is over the UK losing control over its own economy and independence. I am going to discuss some major issues which would arise if the UK did join.

Stability and Growth

Joining the euro may restrict the amount of long-term borrowing the UK is able to carry out. Euro zone countries are subject to the stability & growth pact, which means that countries must not spend beyond their means. If the UK wishes to borrow money for long-term investment, this would be against the guidelines.

Loss of control of UK taxation

It is most likely this will not take place immediately but the EMU includes economic as well as monetary union. Eventually the EU will seek to take control of the euro zone taxation policy. This will limit the ability of the UK to respond to its particular economic situation. The EU will eventually impact on both the type and level of taxation. Their tax levels will damage the UK economy through decreasing our competitiveness with their taxes being a sixth higher than those of the UK. To work efficiently the EMU will require an immense central budget over which the ECB controls taxation, spending and interest rates.

One Interest Rate

The UK would not be able to set its own interest rate; instead it would be set by the European Central Bank (ECB) for all euro zone countries. This will reduce the government’s ability to react to unexpected disturbances or shocks (these can affect countries/regions in different ways). Any change in the interest rate will benefit the euro zone countries as a whole, which may mean it benefits some countries more than others. Mortgages in the UK are different to those in the rest of Europe. In the UK there are a high proportion of owner occupiers with a high level of variable rate mortgages. In the rest of Europe however, there is a higher tendency for long-term renting and those that do have mortgages are on long-term fixed rates. Therefore homeowners in the UK are more likely to be affected by interest rate changes than their counterparts in other EU states.

Exchange Rates

Locking with the euro at the right exchange rate is highly important. If we lock at too high a level our exports will be too highly priced and our industry will be at a permanent disadvantage. The pound has fluctuated against other European and international currencies over the years. The pound is stable against the dollar and stronger than the euro. Also in relation to the exchange rate the pound offers great buying power, this means that there are great benefits for the consumer and producer within the UK. This great buying power will be lost so requirements of the ECB can be met if we joined.

A floating exchange rate is an economic safety device and can help protect the economy against economic shocks.

Inward Investment

The UK has been highly successful in attracting foreign investment. This is due to the flexible economic policy, low level of regulation and cheap labour costs. In joining the euro it could discourage investors and cost the country jobs. Investment has actually risen since the establishment of the euro. Most inward investment comes from the US and is high technological industries which are insensitive to exchange rates fluctuations.

Trade

The UK has stronger trade links outside of Europe, especially with the US most of which is in dollars. We are also the biggest European investor in the US and they invest twice as much in the UK as the rest of Europe combined.

We already are in the EU’s single market, which means having the same currency will make little difference. The euro is unstable against the dollar and trade will suffer because of this. Our economy has moved closer to the US than the EU and this ha shown that the pound has remained stable against the dollar.

Employment

The ‘one size fits all’ interest rate of the ECB will most likely damage the economy. There is no job advantage as it is being in the EU and the single Market which is an important factor not being part of the euro zone. The euro was launched in 1999, at this time the UK employment carried on falling and inward investment reached record levels. In the 1990’s the UK created more jobs than the rest of Europe put together and in 2000 unemployment was at 6% compared to an average 10% in the rest of Europe.

The one interest rate is causing problems in Germany where the economy is in a slump and in Spain and Ireland where the economies are over heating and inflation rising. Both situations have an effect on employment, if these countries where outside the euro zone they could adjust their own interest rates and exchange rates to compensate.

Political

The euro can also be seen as a political device not just economic. If the UK joins there will be great pressure for us to participate in more acts of union.

Also on the political side, it has been said that independent central bank is unfair. Governments must be able to control the actions of the central banks because they have been democratically elected by the people, whereas an independent central bank would be controlled by a non elected member. Therefore there would be a considerable loss of sovereignty. Power would be transferred from London to Germany. This would be highly unwanted because national governments would lose the ability to control policy.

Independence

We are the 4th largest economy in the world. Inflation and employment are at their best levels for 40 years. We have achieved long-term stability and joining the euro will only destroy this. By opting out we will have more independence and will be able to follow a more national foreign policy. As a result we will be recognised as a major world player and have more influence abroad separate from that of the EU.