Discuss the economic advantages and disadvantages to the UK of participation in the European single currency (Euro). Will British businesses be better or worse off if the country decides to participate? Introduction of Euro in the world’s monetary union is a milestone. Eleven countries were going to create EMU at the beginning, now there is a long queue to join in EMU. Most of the EMU members get more advantage then disadvantage to join in Euro. Euro creates a large market in the Eurozone. Three core members of EU (Great Britain, Sweden and Denmark) still not participate in European single currency.
Many European countries are very excited to join in EU, some of them decided to implement European rate mechanism- 2 (ERM-2). If Britain accept euro then the country poses both advantage and disadvantage. Productivity and living standard will increase if Britain joins in Euro. If they will not join, they have chance to fall further behind. European Union European Union is the union of twenty-seven countries. Most of the members of European Union come to join in EU from European Continent. The origin of European Union associated with foundation of European coal and steel community.
Treaties of Rome or Schuman declaration formed European Economic Commission. Both these bodies are essential parts of European Union. Rome treaty signed in 1957 for creating European Economic Community (EEC). Belgium, France, Netherlands, Luxemburg, West Germany and Italy are the core six members of EEC. During that period, West Germany and Netherlands built nexus among them by the help of European Steel and Coal Community. Among the six countries of EEC, they allowed free movement of labour and capital. Free trade also allowed. They abolished internal tariffs among them and set external tariffs.
In enlargement stage, UK, Denmark and Ireland become member of EEC. Greece, Spain and Portugal joined in EEC in 1981 and 1986 respectively. After this enlargement stage, the commission president Jacquas Delors signed single European act. In 1992, the Maastricht treaty signed to establish European Union. According to Sloman and Sutcliffe (2004, p. 563) “May 2004 marks the latest expansion, with 10 new members joining. These are Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Solvakia and Solvenia”. European single currency: Euro is the single currency among the countries that include in European Union.
Other countries also adopt the single currencies. In 1932, the chairman of German Bank Hans F? rstenberg gave the idea about European currency to set up European central bank. The idea came about euro currency among the countries before Second World War. Idea of European integration became stronger after Second World War. Some sequential incidents happen after the war. In 1950, the European Coal and Steel Community (ECSE) established, Rome treaty signed in 1957 and at the same time, European Economic Community formed. Rome treaty and Economic Community both made the path for euro to lunch.
European monetary system established for full monetary support in 1979. According to Solman and Sutcliffe (2004, p. 741) “Details of the path towards EMU were finalised in the Maastricht treaty, which was signed in February 1992. The timetable for EMU involved adaptation of a single currency by 1999 at the latest”. Therefore, Maastricht treaty made the path for euro easier. Before joining the euro currency, each country fulfilled five criteria, which set by the European central Bank. The eleven members of EU out of fifteen could fulfil the criteria and joined in Euro. Sweden and Greece could not fulfil the criteria.
Later 2001, Greece joined in Euro. Euro came in to the market on 1 January of 1999 but the bank note and coin were introduced 2002. National currency of the European countries withdrawn from market due to introduce euro notes and coin. Road to EMU European Monetary Union proposed by Delors committee report. The road to EMU described in three phases. Phase 1: Remove the entire trade barrier in internal market including capital controls among the countries. Enhanced coordination from different countries in the economic and monetary policy. Phase 2: European Monetary Institute (EMI) established.
EMI monitored macroeconomic convergence of members according to Maastricht treaty. In that stage, commission prepared logistic and organisation framework for ECB. Phase 3: In that stage, Union fixed the exchange rate, euro introduced as a single currency. European Monetary Institute replaced by establishment of European Central Bank. Advantage of Single Currency Several advantages deserves, if one country join in to the single currency such as eliminating transaction cost, avoid exchange rate uncertainty, increase transparency of price, increase credibility of monetary union.
All the member of European Union gets equal opportunity and benefits. The countries get benefit in the case of converting currencies. Every European Countries have separate currency. When anyone converting the currency of any European country in to another European country’s currency then the converting cost added each time. If we used single currency, we can easily minimize the converting cost. According to Solman and Sutcliffe (2004, p. 742) “the European commission estimated that the effect was to increase the GDP of the countries concerned by an average of only 0. 4 percent”.
United state of America whose have 51 states with one single currency. They get benefit of single currency in their market. Euro currency gives the chance to European country to make a large single market. Pricing difference increased in market if we cannot use single currency. Pricing depends on rate of currencies. Therefore, we get same product in different price due to different rate of different currencies. Single currency increased the transparency of product price. Invest increased in euro zone because there is one single currency available. According to Solman and Sutcliffe (2004, p. 42) “investment from the rest of the world is attracted to a euro zone of over 300 million inhabitants, where there is no fear of internal currency movements”. Travel becomes easier due to euro. There is no hassle in converting currencies. No time waste during travel due to single currency which used in everywhere in euro zone. According to Solman and Sutcliffe (2004, p. 743) “A single monetary policy convergence in inflation rates. Provided the ECB succeeds in remaining independent from short-term political manipulation, this is likely to result in a lower average inflation rate in the eurozone countries”.
Therefore, the single currency helps lower inflation rate in eurozone. Abolish the market barrier is another advantage in eurozone. Abolishment of trade barrier helps to maximise profit and increase market size. In eurozone, there is no market barrier among the members and they can easily market their product in eurozone. Disadvantage of Single Currency The European Union brings lot of advantage to members. Some are argue that it also brings some disadvantages. When euro introduce, EMU members have to invest huge amount of money to change payroll, pricelist, database, software and so on.
It is an investment cost, which arises due to lunch euro. Previous coins and banks note removed from the market, cost of previous coins and notes also include in investment cost. Some of the countries change their trade patters due to introduce euro. If the country accepted euro as a single currency then the country cannot accept separate national monetary policy. Only European Central Bank can conduct monetary policy in Europe. Most of the people take seriously the issue that we lose our independence in policy making. According to Solman and Sutcliffe (2004, p. 43) “Another problem for members of a single currency occurs in adjusting to a shock when that shock affects members to different degrees. These are known as asymmetric shocks”. In case of asymmetric shocks no European countries have no right to utilize national monetary policy survey, they should try to find out another option for fighting against asymmetric shocks. Single currency also effect in country’s independency. Local government faced problem when they lose the independency. Single currency increased the lost of human capital, because capital moved freely in eurozone.
Skilled worked and specialist will try to look for better jobs and wages in other countries. It means that skilled full worked migrate to east to west to take advantages of higher benefits and wages. Economic advantages for UK to participate in the single currency: It is become a big issue whether Britain join or not join in Euro. Every decision has some advantage and disadvantage. Joining Britain in single currency has some economic advantage and disadvantage. Country’s people and government of Britain are collecting information to make their mind about entry in to the single currency zone.
Increase income & living of Standard: In 1956, France and Germany had overtaken of Britain position in living of standard, because France and Germany decided to join European common market. Then in 1973, Britain joined in ECM and stopped their declining situation. European countries are making a united market by the help of single currency. These single currencies help European countries to increase their income and living of standard. If Britain not joins, they fall behind. Problems in Exchange rate: before lunching euro, Germany faced exchange rate risk if they sold their products in Britain, Italy or any European countries.
After lunching euro, they have no risk because they (European countries) used euro as a single currency but Britain still have the same risk. Eliminating exchange rate fluctuations and increase the price transparency then we can reduce the investment risk- and the total process required a single currency. Therefore, by the help of euro, Britain can easily reduce the investment risk. Large single market: we can easily make a large single market in Europe. This large single market arise more competition and increase trade. All European counties got the benefits of single market so why not Britain?
Britain medium size country, which is dependent on international trade so, separate currency become a disadvantage for Britain even they cannot neglect the exchange rate like as US. In single market, producers are going to reach more customers simultaneously customers can easily get the product from wide range of suppliers. Economic disadvantage of UK participating in the single currency UK still not participates in Euro due to same obstacles. Government of UK takes their time to analyse and understanding their position.
UK takes several problems with great concern. Same interest rate: In the eurozone, every country has some interest rate, which selected by the European central bank. Britain thinks that European central bank set their interest for whole Europe not for Britain. However, Britain thinks that, one interest rate is not suitable for different countries for every times- it means that one size does not fit all. Britain will cut down their interest rate if they faced in negative shock (asymmetric shock). Britain can easily cut down their interest rate because hey still not participate in euro and they have own independent budgetary policy. This budgetary policy can easily used to minimize the shock and stabilize the economy. According to Sloman and Sutcliffe (2004, p. 745) “in the UK, a large proportion of borrowings is at variables interest rates. In Germany, by contrast, much is at fixed rates. Thus if the ECB were to raise interest rates, the deflationary effects would be felt disproportionately in the UK”. So, it is true that, the interest rate which is select for eurozone creates different impacts on each country.
Unemployment rate: different unemployment rate going through among European countries. Over 8% unemployment rate in France, Germany, Italy. Where as Austria, Ireland, Sweden have only 4% unemployment rate but Britain have below 4%. Increasing the unemployment rate in eurozone is not mistake of European Union. This mistake creates by different national policy among different countries. Minimum wage rate is high in UK than any other countries of Eurozone, so skilled full manpower come here to work and UK faces unemployment problems.
Britain think joining euro is like that joins in exchange rate mechanism. They think, ERM was fixed exchange rate system in Europe. This mechanism helps us in exchange our currency not more than that. In case of British Business: The positive effect and negative effect of Euro may be different from country to country. It is very tough for us to identify all of the effect. In the Eurozone, each country has different financial system and euro make some positive and negative effect on their business. In the below, we describe about UK’s business condition if they join in euro.
Positive Side Giant euro firm will create with substantial economic power due to free movements of capital. Many European company is merger recently. British business can easily get benefits to join euro and merge with other company in European continent to maximize profit. If UK joins in Euro, the inward investment will increase. According to Sloman and Sutclifffe (2004, p. 742) “from 1990 to 1999, the UK’s share of inward investment to the EU was nearly 40 percent. From 1999 to 2002, it was 24 percent”. So, inward investment diverted to eurozone from UK.
Britain thinks that if they join in euro, then European Union passed law which affecting Britain. Then, they have no power of influence over European countries. Britain ideas is totally wrong because Britain still not participate in Euro and European Union gives no more emphasize (showed any honour) on Britain. It is better for Britain that joins in euro and influence European Union as well as outside Europe. Britain can easily organise regular meeting among European countries and represent the European central bank. This way, help Britain to influence over European business cycle.
Negative Side Most serious issue is that, the British currency continues to fluctuate against the Euro. It is real disadvantage for business. Suppose a firm produces machine in Britain and sells them in France. Company pay wages in pounds, the goods become expansive to the consumer among eurozone if the pounds become expansive. Therefore, the firm cannot sells as much as they expected, even they accepts a lower profit margin. The firm go to bankrupt situation due to firm’s profit fall. It is a example of business risk. Separate currency increase the business risk for any company.
Most of the company faced this type of business risk because Britain still not participates in single currency. British businesses are going to worse situation due to absence of single currency. London city is the largest financial centre. More people worked in London in financial services than Frankfurt, Europe’s next largest centre. We know that finance is a footloose industry and London is a city of mergers and acquisition, or foreign exchange trading. London city enjoys a success cycle by self-reinforcing. The cycle of the success will be broken due to absence from the Euro.
Conclusion European Union tries to establish a eurozone. Many European countries showed interest to join in EU but we cannot still predict how benefit it for member of EU. Britain still not participate in Eurozone, it is true single currency can boosted the economy but in Britain value of pound still strong against dollar and other currencies of the world. Higher value of pound is an advantage of Britain to attract a lot of foreign investor. Some economist suggested that Britain should join in Euro due to falling rate of pounds but euro cannot make any advantage of UK economy.
Same monetary policy applied in eurozone which create more controversy. It is true that a single monetary policy is inappropriate to deal with asymmetric shocks. To join euro means loss of independency in policy making another way we can say that loss sovereignty of a country. References: Sloman J & Sutcliffe M (2004). Economics for Business, 3rd edn, NJ: Pearson Education McAleese D (1997). Economics for Business, Harlow: Prentice Hall http://en. wikipedia. org/wiki/Euro http://en. wikipedia. org/wiki/European_union http://en. wikipedia. org/wiki/Pounds http://www. google. co. uk/