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
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
- Why UK will never Join Euro
- The Impact of not joining euro
- Costs of Joining Euro
- Gordon Brown’s 5 Economic Tests for joining euro
- The Problem of the Euro
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
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.
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.
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.
“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.