Managing the EconomyThe Euro

GCSE Economics (AQA)Unit 12: Investigating Economic Issues

J Wilkins

This lesson:

• All students will identify the key facts about the Euro. (D-G)

• Most students will analyse the arguments for and against the Euro in the UK. (B-C)

• Some students will make judgments about whether the UK should have the Euro. (A/A*)

Key economic terms: Euro

Euro Essentials

• Monetary Union is a deepening of economic integration between participating countries

• A single currency requires a common interest rate for the Euro Zone – i.e. A common monetary policy

• Countries have locked the currencies together forever & adopted 1 currency as a medium of exchange

• Euro as a currency floats against US dollar & sterling• Member nations are also required (in principle) to keep

control of government borrowing i.e. They are not allowed to run large budget deficits >3% of their GDP (in normal times)

Reasons for joining the Euro

1. Removal of transactions costs – people trading within the euro area will not need to exchange currency, which means they do not have to pay commission so trade is cheaper

2. Reduced uncertainty – the removal of exchange rates within the euro area reduces uncertainty caused by changing rates, thereby encouraging trade between euro nations

3. Greater competition and EU trade – prices can be more easily compared between countries in the euro area, encouraging competition, which should bring prices closer and perhaps lower. This should promote higher levels of trade in the euro area.

Reasons for joining the Euro

4. Independent ECB – inflation in the euro area could be lower and more stable, encouraging more investment and faster economic growth.

5. Inward investment – euro area countries could attract more investment from countries outside (eg Japan and USA), creating more employment and growth

• Note: ECB European Central Bank

Reasons against joining the Euro1. Regional imbalances – different countries in the euro area are likely to

develop at different rates, which could mean that their trade cycles get out of step.

2. Some countries could want a low interest rate to ease rising unemployment, while others want a high interest rate because of mounting inflationary pressure. The ECB can only set one interest rate which might not be appropriate for all members.(this occurred during the boom years of 2001 – 2008 when Ireland and Spain grew too rapidly partly because the interest rate was ‘too’ low)

3. Loss of sovereignty – the loss of control over the economy’s interest rate means that the government only really has fiscal policy and supply side policy with which to control its economy to address problems like unemployment and inflation.

Reasons against joining the Euro

4. Loss of devaluation as weapon of economic policy – the country cannot use devaluation to correct a balance of payments current account deficit because there is no exchange rate for its own currency anymore.

5. Changeover costs – adopting the euro means that costs are incurred changing vending machines and other equipment, catalogues, accounting systems, etc. These costs could lead to higher prices for consumers.

Conduct research on the internet

Group 1: The case for entry into the Euro

Group 2: The case for staying out

DEBATE!

Use the

internet and

your notes to

help you

prepare .

You have

10 minutes!

Post it

note debate Today’s

topic:The Euro

• You will given a post it notes each

• You must not hold your post it note at the end of the discussion

• You can give post it notes away by:– Contributing– Giving a post it note away

when you have a valid question about a point that has been raised

Post it

note debate

Activity 1

• British newspaper article – see handout

• Your Question: Do you think that the UK should enter into the Euro? Discuss. 12 marks

• Use your ingredients to create your answer!

• Ingredient pack 1: The Euro is, therefore, because, however, and, furthermore, this means that, overall, depends on

• Ingredient pack 2: The Euro is, therefore, because, however, and, overall

• Ingredient pack 3: The Euro is, therefore, because, and

• Your Question: Do you think that the UK should enter into the Euro? Discuss. 12 marks

Don’t forget: Application!