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 It would be withdrawn from circulation.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.
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.