Costs and Benefits of Adopting the Euro

Readers Question: Evaluate the potential cost and benefits to the UK economy of adopting the Euro.” it was a synoptic paper, 2003, and i am rather stumped on how to squeeze 60 marks out of it…any help would be hugely appreciated. Thankyou.

Don’t be put off by the need for 60 marks.

Start off be thinking of 3 good costs and good benefits to the UK economy of adopting the Euro.

Costs of Joining the Euro

Loss of independent monetary policy. interest rates set by ECB, these may be inappropriate for UK economy.

Evaluation: Nature of UK housing market (many have large variable mortgages) means people are sensitive to changes in interest rates. Therefore, in interest rates are too high it could cause a more serious recession

Loss of ability to depreciate currency in recession. Arguably, UK manufacturers are benefiting from depreciating currency in current recession. If we were in Euro we could not depreciate to gain competitiveness

Evaluation: However, depreciating currency could cause loss of confidence in investing in UK. Depreciation causes uncertainty.

Growth and stability pact limits expansionary fiscal policy in Recession. In theory the growth and stability pact limits the amount of government borrowing, therefore making it harder to escape recession.

Evaluation: However, countries tend to ignore growth and stability pact when necessary.

Benefits of Joining Euro

Lower transaction costs for firms and consumers

evaluation – only a small % of firms turnover

Greater certainty for firms investing in capacity to export to Europe. May also encourage inward investment.

evaluation – firms already reduce risk by hedging against exchange rate movements

Greater Price Transparency – easier to check different prices in same currency

Should UK join Euro?

Why UK will never join euro