When the euro was introduced in January 1999, the United Kingdom was conspicuously absent from the list of European countries adopting the common currency. Although the previous Labor government led by Prime Minister Tony Blair appeared to be receptive to the idea joining the euro club, the current Tory government is clearly not in favor of adopting the euro and thus giving up monetary sovereignty of the country. The public opinion is also divided on the issue.
Whether the United Kingdom will eventually join the euro club is a matter of considerable importance for the future of European Union as well as that of the United Kingdom. The joining of the United Kingdom with its sophisticated finance industry will most certainly help propel the euro into a global currency status rivaling the U.S. dollar. The United Kingdom on its part will firmly join the process of economic and political unionization of Europe, abandoning its traditional balancing role.
Investigate the political, economic and historical situations surrounding the British participation in the European economic and monetary integration and write your own assessment of the prospect of British joining the euro club. In doing so, assess from the British perspective, among other things, (1) potential benefits and costs of adopting the euro, (2) economic and political constraints facing the country, and (3) the potential impact of British adoption of the euro on the international financial system, including the role of the U.S. dollar 1. Potential benefits and costs of adopting the euro
As far as we concerned, if British adopts the euro, it has to face to 2 aspects. They are potential benefits and costs.
According to Potential benefits, the most necessary advantage is no transaction costs. It’s really easier for people in exchanging currency without transaction costs. For businesses, they don’t need to pay so much transaction costs include the costs of hedging against huge currency swings. Moreover, it’s eliminating exchange rate volatility. The UK manufacturers will expand investments such as importing capital goods from other European countries. Besides, UK can attract many investor s from others because it has a plenty of advantages such as abundant productive workforce, independence of the monetary and flexibility in labor market. Price transparency is also a potential benefits for UK. There is a severe competition between local firms about their price of goods.
And it’s absolutely a positive advantage for costumers in choosing goods with a reasonable price. Some companies can minimize their production costs with a cheaper price of their materials. Furthermore, UK can improve the inflation performance. In UK, CPI is allowed to increase up to 3% but in Euro, its targeted inflation is close, but not more than 2%. The last but not least, it is rising importance of Euro. Nowadays, Euro currency plays an important role in international trade. And it can be able to replace dollar one day in period of globalization. Because there are more and more other potential members participate in Euro club. Thus, this ensures that the Euro’s economy is much larger than US one. The instability of dollar and rising national debt in US also affect to dollar currency.
About costs of adopting euro, initially UK has to face to the sensitivity of changes in interest rates. Because house ownership in UK is the highest in Euro club, any changes in interest rates can rapidly impact their economy. Secondly, adopting euro is constraint the government spending. In reality, Stability pact signed by member countries which states that members’ annual budget deficit cannot exceed 3% of GDP. If there is an economic recession, it easily exceeds this number. Thirdly, UK has to give up monetary decisions to European Central Bank. Since gaining independence from Labor government in May 1997, UK’s Monetary Policy Committee has gained credibility and international recognition. Also the council members in ECB are representative from different countries with varied vested interests.
Consequently, Consensus and interest rate decisions will be less frequent than MPC who will only consider what is best for UK. In addition, UK seems to be Inflexibility in labor market. UK has finally reaped all the benefits under the reforms during the era of Margaret Thatcher (1979-1990) after some effect lags. Trade union has been under control thus wage-push inflation is of limited influence while some companies in UK are given more autonomy when it comes to employment. Thereby, more part time works have been created. It helps reduce unemployment. By joining Euro, UK will have to strictly adhere to many new labor rules, many which are created with employees in mind. Finally, it is costs of adjusting currency. Most of machines and other tools will have to be adjusted. However it just incurs this cost one time.