“The UK is a member of the European Union but has not adopted the euro as its currency. To what extent do the benefits of membership of a monetary union such as the Eurozone outweigh the costs”? The euro is the official currency of the Eurozone, and is used by the majority of countries within the European Union, including France, Germany and Spain…
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There are a number of reasons to join (or to not join) an international shared currency such as the euro, each of which have more influence depending on the state of the national currency. The purpose of this essay is to evaluate the reasons why the UK has not adopted the euro as its primary currency, and the benefits of joining such a monetary union. The purpose of this is to form an understanding of how a monetary union works and how it can be beneficial or detrimental to partner nations. Perhaps the most commonly cited reason for the UK to join the Euro is so that it can benefit from reduced transaction costs for businesses and consumers (Chapple, 2011). If the UK is part of such a monetary union, there will be no cost for changing currencies before completing a transaction in any country which is part of the Eurozone. Evidently, this will benefit tourists and those travelling to the Eurozone on a regular basis, as exchange rates and commission on currency exchange can be extremely high (Pettinger, 2011). The lack of currency exchange would also benefit a number of companies which trade in the Eurozone or have trade links with other firms which do. The frictional cost involved in currency exchange is high, and exchanging the pound for the euro as daily currency is estimated to save about 1% of GDP (Pettinger, 2011), a staggering amount of money. It would also help the UK to prepare for international trading if the euro gains strength as an international trading currency (Chapple, 2011). Another benefit of the euro is that it would make costs in the Eurozone more transparent. If a tourist goes to the Eurozone and buys souvenirs or other products, accurate costing requires them to translate the euro price into pounds. The benefit for businesses is that the price of a product in the Eurozone would remain fixed (as long as the price itself is fixed). This would mean that there would be no speculative decisions that need to be made about the best time to buy large amounts of product from the Eurozone dependent on current exchange rate (Chapple, 2011). Additionally, companies purchasing large amount of product from the Eurozone could provide more accurate revenue information based upon cost of product without the need to account for these fluctuations in the exchange rate – predictability would be higher. Exchange rate volatility can also mean that exporting products can become unprofitable, which has the potential to have a huge impact on GDP. Adopting the euro could also mean more inward investment for the UK. This would occur as the cost of transactions internal to the Eurozone, as outlined above (Grange, 2002). Inward investment a term used to describe the input of money from outside an economic region into another economic region, and can occur when a company moves part or all of their activity into that region (Grange, 2002). The potential for inward investment is one of the biggest benefits of adopting the euro, particularly in the UK’s current economic climate. Inward investment often leads to the creation of a number of employment opportunities within the economic region (Wikipedia, 2013), which would be hugely beneficial to the UK which is currently struggling with unemployment figures (BBC, 2013). Inward investment is also an attractive way of boosting the economic situation of an area, as it can often be more reliable than investing into small local
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