Should the UK Join The Euro?

There was a time when joining the Euro was a big issue, frequently debated in the UK. Recently, it has slipped from the public’s attention and, apart from dire hard Euro-enthusiasts (such as Michael Heseltine), there is very little enthusiasm for joining.

Reasons Not to Join The Euro

1. No Devaluation. In the Euro, you can’t devalue if your currency becomes uncompetitive. This has been a significant problem for Euro countries like Spain, Italy and Greece. Compared to Germany, these countries have seen higher wage growth, higher inflation and lower productivity growth. This means their exports become uncompetitive leading to lower demand and lower growth.

  • This is reflected in large current account deficits in these southern EU economies.
  • By contrast, the UK has been able to devalue, restoring our competitiveness and giving our economy more flexibility.

2. No Independent Monetary Policy. In the Euro, interest rates are set by the ECB for the whole Eurozone area. However, this monetary policy may not be good for the UK economy. In 2008, the UK was very hard hit by the financial crisis. In response, the UK could cut interest rates very quickly. Also the Bank of England were able to pursue quantitative easing to try and stimulate economic activity. If the UK were in the Euro, it would not be able to do this. Therefore, I believe the UK recession of 2008-11 would have been even deeper, if we didn’t have an independent monetary policy.

In an economic cycle, if the Euro economy recovers before the UK economy, ECB interest rates may increase too quickly and harm the UK’s recovery. For example, in 2011, the ECB raised interest rates because of fears over inflation. Yet, in 2011, the UK economy was slipping back into recession. An increase in interest rates would have been very damaging for the EU economy

3. UK Housing Market. The nature of the UK housing market means that the UK is very sensitive to interest rates. In the UK, many home-owners have high variable mortgages. This means a small increase in interest rates has a big effect on consumer spending. Therefore, it is even more important that interest rates are not unsuitable for the UK economy.

4. No Lender of Last Resort. The Current Euro debt crisis shows that countries in the Euro are more susceptible to rising bond yields. Countries in the Euro have no central bank to act as a lender of last resort. This means, if government is struggling to sell sufficient bonds in a particular month, investors will panic and sell bonds. In the UK, the Bank of England would step in and buy sufficient bonds to avoid a liquidity crisis. Therefore, countries in the Euro are facing much higher interest rates to reflect the nervousness of investors about liquidity fears. (see: lender of last resort)

5. ECB overly concerned with inflation. The ECB have an over-riding objective of low inflation. Arguably this is at the expense of promoting economic growth and inflation. In response to a small degree of cost push inflation, the ECB raised interest rates, showing to markets they were willing to risk core-inflation falling below target, despite low growth or recession in parts of the Eurozone. The Bank of England by contrast, tolerated a higher rate of inflation because they felt more important to avoid a double-dip recession.

6. Irreversible Decision. Once in the Euro, it is very hard and very costly to reverse the decision. See: difficulties in leaving the Euro

See more problems of the Euro

Reasons to Join the Euro

  • Lower transaction costs for tourists and firms. However, relatively small % of business costs
  • Insulation against exchange rate fluctuations. Helps exporters to know future costs and incomes.
  • Helps UK to be at the heart of the Eurozone and have greater influence over policy making.
  • See: Benefits of Joining Euro

Conclusion

Membership of the Euro has potentially very serious consequences, and significantly increases the risk of deflation, recession and a debt crisis. These potential problems far outweigh the small benefits of joining.

Essays on the Euro

19 Responses to Should the UK Join The Euro?

  1. glenn January 17, 2010 at 12:14 pm #

    “For example, if the Euro economy recovers before the UK economy, interest rates may increase too quickly and harm the UK’s recovery.”

    But the Uk would be in the Euro economy so the argument is silly.

  2. Nas February 10, 2010 at 10:46 pm #

    quoting glenn

    If the eurozone recovered earlier than the UK. The ECB could decide to increase interest rates too early for the UK to be ready. However this policy would be undertaken because it would be in the general interest of the eurozone.

    If the UK joined the Euro it doesn’t mean it would come out of the recession at the same time as every other country in Europe, every country is different.

    So if the UK was still in recession it cause such problems as discussed above

    Look at Greece and similar countries to see examples that a currency like the Euro is susceptible to.

  3. michael March 3, 2010 at 12:44 pm #

    quoting Nas

    Looking at Greece I see that the UK is doing even worse. Therefore I have no reason to believe that keeping pound helps a lot to the British economy. In fact I am tempted to think taht the reverse is true.

  4. Just a Prestonian March 13, 2010 at 1:35 pm #

    quoting everyone

    I think Michael is correct.
    Greece is just a minor setback, Germany, France, Portugal & Italy haven’t been as affected as Greece at all.
    And what about countries which have benefited greatly? Slovakia and Slovenia have, and would be in a worse position now if it wasn’t for the Euro.

    We are already part of the EU, most people don’t want to leave. So what reason do people have for not joining the Euro? The benefits are much greater than the bad points.

    The polls are also incorrect, they’ve changed. At first, it was 40% pro-Euro, 50% anti Euro and 10% unsure. That was how simple the polls were.

    In the recent 2009 polls, the 3 categories were different, 1) we should join euro 30%
    2) NO CURRENCY CHANGE 55%
    3) unsure 15%

    The fact is, most people in category 2 are unsure. When you aren’t sure about something, people think it’s better to stay the same until you know properly.

    But why are people unsure then?

    Most people are stuck between pro-€ (to be with the rest of Europe) and pro-£ (to be with British tradition).

    See that, it’s tradition that’s holding us back.

    People should just make up their mind, I don’t know about them, but I believe we should join the Euro.

  5. mike November 22, 2010 at 11:20 am #

    I think joining the euro would be great for britain!

    I know for a fact my business would be a lot easier, we would incur a lot less costs and I would definitely be able to sell more products in Europe.

    I think there are a lot of businesses in the same position, I really think this should be a priority in the Uk to align ourselves with europe and the euro

    • Joe and Peter July 6, 2012 at 11:06 am #

      Dear Mike,

      I’m afraid I am going to have to disagree. On a micro scale, it may well work. However, on a macro scale; being part of the EMU would signifanctly decrease our flexability in terms of monetary policy!

      Also u is gay m8!

  6. Jo December 18, 2012 at 11:16 am #

    I think joining the Euro would be epic, hope it happens asap would really help me export tractors to europe.

    • Mrs Tang February 6, 2013 at 11:22 am #

      I love tractorsssssss

  7. joe royce December 18, 2012 at 11:23 am #

    I think joining the eurozone would benefit us massively, as a rural scottish farmer I often buy a tractor or two and so easy importation of tractors using a single currency would be fantastic. Also as a keen warhammer player I need to import a host of goods from Europe and so this would help me a lot. I support Ipwich football club which is a long way away as you can see and so money spent on football would be a lot easier using the euro

  8. Josh Smith December 18, 2012 at 11:26 am #

    Needs to happen soon,

  9. jess February 3, 2013 at 4:02 pm #

    For the long term, Britain should join. It’s unrealistic to think you can stand alone in the long term.

    • Niall February 23, 2013 at 11:53 am #

      So now it is 2013. Britain has spent a number of years with it’s interest rate set at just about zero, has entered a triple recession, has lost it’s AAA credit rating and Sterling is only worth €1.15 a drop of over 30% against the Euro.

      So for those who still cannot see the wood for the trees and still believe the “anti-euro” propaganda wake up and smell the coffee.

      I will put it this way, despite the turmoil the Eurozone has been suffering for the last 5 years, despite it’s inability to drop interest rates to zero to make itself more competitive, despite it’s differing ecomomies and demographics it has risen in value against the UK as a Nation but over 30%.

      Can you smell the coffee yet?

  10. Greg February 10, 2013 at 4:52 pm #

    Joining the euro is not a good idea, staying in the euro zone is. Not being in control of your monetary policy would leave the uk in a similar position to the other economies who are trapped in Germany’s control of the ECB. Currently we can devalue our currency to make our exports competitive and hold the interest rate at the all time low to stimulate spending and get us out of recession.
    We need to stay in the eurozone as ultimately this is a trading zone with barriers lifted for free trade to members. However I think that the current French style bureaucracy that has become insipid within the halls of Brussels needs to be renegotiated from within. Regulatory practise has its place, but as we have seen from the US example it is a lead weight to swimming through the shark infested waters of capitalism and global competitiveness.

  11. Chris April 14, 2013 at 1:27 pm #

    Why should we ever leave the Sterling Pound? What a shame it is to lose a currency as all other Eurozone countries have. The fact is the Sterling is stable and we shouldn’t play with what we don’t know. Maybe, the Euro makes certain things more convenient, but could you imagine how catastrophically the UK could be hit? Take Spain for example, they never had n economic crisis and now after joining the Eurozone, this happens to them. The fact and matter is that Germany seems to have full control over the ECB and does incline to be flexible enough for other Eurozone countries. Ok maybe they don’t have full control over the ECB, but things always end up helping them more than countries in need. Just look at Cyprus, maybe they got into this mess by themselves, but a) they aren’t getting the “back-up help” they were promised if they would join and b) the Euro isn’t flexible enough leaving Cyprus devastated until at least 2016.
    The Sterling is stable and even powerful, there aren’t any real advantages to joining the Eurozone, which is collapsing over its own weight. Personally I think the reason why the EU itself isn’t working out is because it’s not a country within itself, although it is trying to act like it. We simply don’t have the same interests and needs and until we do, we shouldn’t consider even being in the EU itself.

  12. Liam May 8, 2013 at 8:52 am #

    I read a lot of people are against joining the Euro. It is fascinating how Britain wants the cake but does not want to help bake it. One foot in and one foot out never proved to be an efficient way of dealing with issues

  13. shaneyney May 31, 2013 at 4:14 pm #

    we should not join the euro there in too much trouble

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