Should the UK join the Euro?

We will have a vote at the start and the end

Join Abstain Not join

Benefits

• The best answers will prioritise the benefits and costs made.

• They will also go on to offer a counter argument

1) Less transactional costs.

There will be no longer a cost involved in changing currencies; this will benefit tourists and firms who trade within the EURO area. 1% GDP.

2) Better for UK producers

• Easier to export due to a removal of the last real trade barrier; the exchange rate.

• If UK goods were priced in euros then European consumers would be likely to buy them. There would be no exchange rate volatility.

• But any counter arguments?……..

3) FDI

• FDI money from EU member states accounts for half the total stock of FDI; the report estimates the EU FDI in the UK creates 50-60,000 jobs.

• Sustainable growth etc…

4) Gateway Economy

• The UK attracts such a high amount of FDI from non-EU countries. International companies choose the UK as the gateway for their European operations. 26% of non-EU companies have their European Headquarters in the UK.

• I.e. Coca – Cola, CitiGroup Investment Bank• Is there a reason Non – EU countries choose UK

over their other European partners at the moment?

5) Price transparency

• Price transparency will bring prices down for Consumers. UK cars are some of the most expensive in EU. Same currency would expose these differences.

• Allocative efficiency

6)Lower inflation

• EU is committed to low inflation so this would lower inflation in the UK.

• Any counter arguments?

Costs of joining the EU

1) Adjustment Costs

• Cost of replacing currency and adjusting machines, however this is a one off cost

2) Loss of autonomy over Interest Rates.

• With the ECB setting a common interest rate for the whole area, countries have lost an important part of their Monetary policy.

3) Loss of autonomy over exchange rates

• The biggest advantage of a floating exchange rate is that it can depreciate. This can then provide a stimulus to the economy.

• We are finding it easier to trade with Non – EU countries because our exchange rate is lower

• Any counter arguments?

4) Stability and Growth Pact

• Members of the Eurozone are not allowed more than 3% budget deficit nor National Debt over 40% of GDP. ( We set ours at 60%)

• This further restricts economic policy.

• Does this apply anymore?

5) Macroeconomic convergence.

• EU states will react differently to external shocks.

• Some are oil exporters, some oil importers. • In the ‘09 crisis Germany actually had high

inflation. They were reluctant to lower Interest rates

Latvia joins in 2014

• One of the fastest growing economies in the world.

• Will be reluctant to adopt such low Interest Rates.

6) Policy sensitivity

• Monetary Policy will have different effects in different countries. For example the UK is sensitive to changes in the interest rate because many people have tracker mortgages. Even a small rise would have huge negative effects on UK Consumption.

Rank the six costs and six benefits in terms of significance.

• 10 is unavoidably, inarguable significance that it is certain to happen

• 0 is irrelevant

Conclusion

• An Optimal Currency Zone needs to have economies that are experiencing:

• “Macroeconomic Convergence.” • Economies that follow a similar economic

cycle and react to external shocks in the same way.

The UK is very different from most EU states

• Britain has more Non – EU trade ( USA especially)

• Very Interest Rate Elastic ( high debt and many houses on flexible mortgages)

• Oil exporter

Conclusion

• Debate is changing• Single market is great, but becoming “Euro” or

“out.” Out of the SM could lead to FDI flight. • Although Eurozone might revert to the core eight

economies, which would be good to be part of. • Depends on how sure we are FDI, trade with Non

– EU, EU will remain high even if we are out.

• The more converged we are to Europe the more of a reason to join.

• The recent crisis has showed we are less converged with Europe than other economies.

• Perhaps there is a competitive advantage from staying out of the Euro

Uk’s stance on the Single Currency

• This topic is very out of date, but the criteria is interesting and it is part of the syllabus.

• Gordon Brown drew up 5 economic tests which the UK must pass for the UK to join. The main principle behind these 5 economic tests was whether the UK would cope with a common monetary policy. It was really asking

• “Is there Macroeconomic Harminsation”

1) Economic Harmonisation.

• The UK economy must be harmonised with the Euro zone. If the UK economy was growing much faster than EU then UK interest rates would need to be higher.

• There must be a convergence of the economic cycle over a number of quarters.

Least converged of all EU members

• Britain has more Non – EU trade ( USA especially)

• Very Interest Rate Elastic ( high debt and many houses on flexible mortgages)

• Oil exporter

2) Is there sufficient Flexibility?

3)