There are a lot of differing opinions on this subject. I will try to determine whether it makes political and economical sense for Britain to “join the Euro”. I have researched into the arguments for and against, then I will explain them and make my conclusion after weighing up each of the arguments. I will research using the internet and search engines to find many differing opinions from a variety of sources. I will also visit the websites of Labouri, the Conservativesii, the Lib Demsiii and the UKIPiv to find out about their policies regarding the Euro.
Advantages of joining If Britain were to join the Euro, it would affect many Industries, Businesses and Economies in different ways, whether they are in Britain or not. One example of this is when Businesses’ are heavily affected by transaction costsv – they are involved in lots of exporting and importing. For example take a company, which imports its goods. Before they can import these goods they must first buy them, in this case they buy raw materials from France they must first change their Pounds into Euros.
This involves a transaction cost – the company must pay another company a commission charge as a percentage of the money exchanged. This loses the Business money and can add up, especially when done with large sums of money. Thus if Britain joined the Euro there would be no transaction costs because we would have Euros as our currency and so wouldn’t need to exchange. Unfortunately this would also have a detrimental affect on the exchange industries and banks because many of the exchanges are from Pounds into Euros and back again.
Companies such as Thomas Cook get part of their income from this and would lose out if we were to change to the Euro, though it should be noted here that if we were to join the Euro, these Business’ would lose out on revenue themselves. At the moment there are floating exchange rates between the Pound and the Euro, this makes it hard for a business dealing in imports and exports to make a reliable cash flow forecast or to make decisions as to whether or not start making a new product – it’ll make a profit at today’s exchange rates, but will it in a year when they’ve changed?
It’s impossible to tell. If Britain were to join the Euro then there would be no floating exchange rate between Britain and the Eurozone, thus the same company would be more likely to go ahead with the product because there is a greater “certainty” regarding the price at which the product would be sold because there isn’t a fluctuating exchange rate between the countries. It would therefore improve the economy as more Businesses would be willing to make more products.
If Britain were to join the Euro it would become the target of Foreign Direct Investment (FDI). For example, a Japanese company selling guitars, e. g. Yamaha. If they were selling to a European market they would have to change their revenue from Euros to Yen. To circumnavigate this problem they could set up a factory in Europe, where their expenses and their revenue would be in Euros. Thus they would save themselves the transaction costs they would have otherwise paid in changing their Yen to Euros and vive versa. Disadvantages of joining
Until recently (1997)vi interest rates were set by the government; the government often used their ability to manipulate the interest rates to their political advantage; e. g: in the 1980’s the government lowered interest rates in the run up to the general election, so that more of the voters would be employed and thus more would vote for them. This is no longer the case as Labour handed over the control of inflation to the Bank of England in May 1997. At the moment the Bank of England sets the interest rates so that it will help to curb inflation and help England to have a period of sustainable growth.
It does this by increasing the interest rates if they want to slow growth and inflation, and decreasing interest rates helps to increase growth but may lead to inflation, this is done if the economy is in a a recession. If England were to join the Euro, the control of the currency’s interest rates would go to the ECB in Frankfurt. The ECB would have the best wishes of all the countries in the Euro in mind. Thus Britain’s economic needs would only have a small impact on the setting of interest rates. This could have a detrimental effect on Britain’s economy; E. : The German, Spanish and Greek economies are all booming, but the British economy is having a recession.
The ECB would want to increase interest rates to curb their inflation, but this would result in the British economy being forced further into it’s slump. If we still had the pound we could decrease interest rates and help inflation. At the moment Britain can manipulate the exchange rate between the Pound and the Euro. This is done to our economies advantage, if there is no exchange rate seperating us, we lose our ability to manipulate it.
It can be done to make the import and export industries suffer or gain depending on whether the exchange rate is increased or decreased. Again, if we join the Euro this will mask our Company’s international competitiveness, but this in turn would force them to become more efficient themselves, which is good for the British customers. The estimated costs of changing our country’s pound to the Euro is many times larger than the costs saved by businesses on transaction costs, though in the very long term it would make up for this. Conclusion
In conclusion the arguments for joining the Euro are largely Economic, and the arguments for staying out are largely Political, like the country wanting to keep it’s sovereignty. There are also questions of timing – what exchange rate do we join at? Perhaps the British economy has already got many of the benefits of the Euro even though they haven’t joined. Also there is the issue of the inevitable collapse – will Britain be able to pull out if they want to. It would also seem that in the global situation there needs to be a counterbalancing force to the US and it’s dollar. This could well be the Euro.