Should UK Join The Euro?

There was a time when joining the Euro was a big issue. Recently, it seems to have slipped from the public’s attention, and there seems little enthusiasm for joining. For quite a few years opponents could argue, with good reason that the UK economy was doing very well without being a member. However, since the economic slowdown, I have had a few people asking me whether it is now a good idea for the UK to join.

I would argue that a recession makes it even less desirable for the UK to join.

Firstly, whatever problems the UK has, they are not caused by having its own currency. The Euro economy is also entering a recession.

Secondly, in a recession, it is vitally important the UK is able to have independence over its monetary policy and cut interest rates if necessary.

The major disadvantage of joining the Euro is that the UK is required to have a common monetary policy. In other words UK interest rates will be set by the ECB depending on what the ECB think is good for the whole Eurozone area.

This means that ECB interest rates may be unsuitable for the UK economy. For example, if the Euro economy recovers before the UK economy, interest rates may increase too quickly and harm the UK’s recovery.

The nature of the UK housing market also means that the UK is very sensitive to interest rates. In the UK, many 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.

If interest rates are wrong it can either cause an inflationary boom (or house price  boom) or a deeper recession. These potential negative effects mean that any small advantages of lower transaction costs are easily outweighed.

Essays on the Euro

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