Should the UK join the Euro?
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Transcript of Should the UK join the Euro?
Benefits
• The best answers will prioritise the benefits and costs made.
• They will also go on to offer a counter argument
1) Less transactional costs.
There will be no longer a cost involved in changing currencies; this will benefit tourists and firms who trade within the EURO area. 1% GDP.
2) Better for UK producers
• Easier to export due to a removal of the last real trade barrier; the exchange rate.
• If UK goods were priced in euros then European consumers would be likely to buy them. There would be no exchange rate volatility.
• But any counter arguments?……..
3) FDI
• FDI money from EU member states accounts for half the total stock of FDI; the report estimates the EU FDI in the UK creates 50-60,000 jobs.
• Sustainable growth etc…
4) Gateway Economy
• The UK attracts such a high amount of FDI from non-EU countries. International companies choose the UK as the gateway for their European operations. 26% of non-EU companies have their European Headquarters in the UK.
• I.e. Coca – Cola, CitiGroup Investment Bank• Is there a reason Non – EU countries choose UK
over their other European partners at the moment?
5) Price transparency
• Price transparency will bring prices down for Consumers. UK cars are some of the most expensive in EU. Same currency would expose these differences.
• Allocative efficiency
6)Lower inflation
• EU is committed to low inflation so this would lower inflation in the UK.
• Any counter arguments?
1) Adjustment Costs
• Cost of replacing currency and adjusting machines, however this is a one off cost
2) Loss of autonomy over Interest Rates.
• With the ECB setting a common interest rate for the whole area, countries have lost an important part of their Monetary policy.
3) Loss of autonomy over exchange rates
• The biggest advantage of a floating exchange rate is that it can depreciate. This can then provide a stimulus to the economy.
• We are finding it easier to trade with Non – EU countries because our exchange rate is lower
• Any counter arguments?
4) Stability and Growth Pact
• Members of the Eurozone are not allowed more than 3% budget deficit nor National Debt over 40% of GDP. ( We set ours at 60%)
• This further restricts economic policy.
• Does this apply anymore?
5) Macroeconomic convergence.
• EU states will react differently to external shocks.
• Some are oil exporters, some oil importers. • In the ‘09 crisis Germany actually had high
inflation. They were reluctant to lower Interest rates
Latvia joins in 2014
• One of the fastest growing economies in the world.
• Will be reluctant to adopt such low Interest Rates.
6) Policy sensitivity
• Monetary Policy will have different effects in different countries. For example the UK is sensitive to changes in the interest rate because many people have tracker mortgages. Even a small rise would have huge negative effects on UK Consumption.
Rank the six costs and six benefits in terms of significance.
• 10 is unavoidably, inarguable significance that it is certain to happen
• 0 is irrelevant
Conclusion
• An Optimal Currency Zone needs to have economies that are experiencing:
• “Macroeconomic Convergence.” • Economies that follow a similar economic
cycle and react to external shocks in the same way.
The UK is very different from most EU states
• Britain has more Non – EU trade ( USA especially)
• Very Interest Rate Elastic ( high debt and many houses on flexible mortgages)
• Oil exporter
Conclusion
• Debate is changing• Single market is great, but becoming “Euro” or
“out.” Out of the SM could lead to FDI flight. • Although Eurozone might revert to the core eight
economies, which would be good to be part of. • Depends on how sure we are FDI, trade with Non
– EU, EU will remain high even if we are out.
• The more converged we are to Europe the more of a reason to join.
• The recent crisis has showed we are less converged with Europe than other economies.
• Perhaps there is a competitive advantage from staying out of the Euro
Uk’s stance on the Single Currency
• This topic is very out of date, but the criteria is interesting and it is part of the syllabus.
• Gordon Brown drew up 5 economic tests which the UK must pass for the UK to join. The main principle behind these 5 economic tests was whether the UK would cope with a common monetary policy. It was really asking
• “Is there Macroeconomic Harminsation”
1) Economic Harmonisation.
• The UK economy must be harmonised with the Euro zone. If the UK economy was growing much faster than EU then UK interest rates would need to be higher.
• There must be a convergence of the economic cycle over a number of quarters.
Least converged of all EU members
• Britain has more Non – EU trade ( USA especially)
• Very Interest Rate Elastic ( high debt and many houses on flexible mortgages)
• Oil exporter