Should the UK join the Euro?

Tomorrow on our 3rd economics lesson me and Dima will be giving a talk on this topic. He will present the reasons for joining, I will be for saving the GBP currency.
So, in order to help myself with the preparations, I'm writing this post.

So, what is euro?
Euro is the currency used in 16 countries from the European Union. On 1st January 2002 is replaced such currencies such as franc (in France) and lira (in Italy). Euro was created to achive economic efficiency, to remove the exchange rate problem which would enable consumption of previously unprofitable because of the tariffs goods and to reduce the difference of prices for the same goods and services in different countries. Not any country, even being a member of EU, can adopt the euro. A country must prove that it is economically strong country, with a stable inflation rate, have suffisient flexiility to deal with problems, the rate of investment must be high and also a country must consuder the effects on trade competitiveness that the change may cause. No doubt that for many countries the adoption of the euro will be a new level of economy and have more advantages than disadvantages.

But is the UK one of those countries? GBP is a very strong currency, it is the fourth-most-traded currency in the foreign exchange market after the US dollar, the euro, and the Japanese yen. <...> Sterling is used as a reserve currency around the world and is presently ranked third in amount held as reserves.
The government of former Prime Minister Tony Blair had pledged to hold a public referendum for deciding membership should "five economic tests" be met to ensure that adoption of the euro would be in the national interest. In addition to this own internal (national) criteria, the UK has to meet the EU's economic convergence criteria (Maastricht criteria), before being allowed to adopt the euro. Currently, the UK's annual government deficit to the GDP is above the defined threshold. In February 2005, 55% of British citizens were against adopting the currency, with 30% in favour. The idea of replacing the pound with the euro has been controversial with the British public because of its identity as a symbol of British sovereignty and because it would, according to critics, lead to suboptimal interest rates, harming the British economy. In December 2008 the results of a BBC poll of 1000 people suggested that 71% would vote "no", 23% would vote "yes" to joining the European single currency, while 6% said they were unsure.

So, despite the euro was created to help and stabiliase, many british are agains adapting this currency.

Will the change to the euro bring more harm than good to the UK? Well, this is a quite difficult question.

Ok, now, why shouldn't the UK join the euro?
Well, there are many reasons:
- the UK government and the Bank of England will partly lose their control over the country's economic situation: the will not be able to set their own interst rates and be dependent on ECB (Eropean Central Bank) decisions on the general price lebel positions. maybe some decisions would be good for the Eurozone but at the same time they might have a negative effect on the UK's economy
- in the Eurozone there is geographical immobilty of labour and also there is insuffisient wage flexibility inside European labour markets. Therefore, the Eurozone doesn't meet the conditions required for an optimal currency area.
- current economic situation is not the best time to adopt the euro. that's obvious: extra costs and possible negative things like price instability, interest rate changes inefficiency and possible collapses of businesses. with current mortgage problems the change to the euro might make the situation even worse.
- fiscal transfers are required to reduce structural economic inequalities. Britian can't afford this at the moment.
- Britian will not be able to attract capital investment inflows from other countries if it doesn't join the euro
- as it was mentioned in the quote above, many british are agains joining the Eurozone, so this might cause the lack of confidence in the UK government among the citizens.

However, there are many positive sides in joining the Eurozone, but, to my opinion, they are not comparable to disadvantages of this truly unpopular decision.


To read:
why the UK doesn't join the euro (2003)

1 comment:

chris sivewright said...