Should Britain Adopt the Euro - Assignment Example

 Should Britain Adopt the Euro? Introduction The majority of Britain’s do not want to abandon the Pound Sterling, a hundreds year-old currency, and adopt the European Monetary Unit (EMU) or Euro as its national currency despite the enormous evidence that supports the benefits this move would provide and rebukes the arguments against its acceptance. On January 1, 2001, 12 of the 15 countries in Europe replaced their currencies with the Euro so as to eradicate trading obstacles between European Union (EU) nations which was intended to increase trade and investment between these countries. This common currency has generated a market wherein people could also more easily move freely around Europe. This transformation has been successful in meeting its goal. Greece has since adopted the Euro while Sweden, Denmark and Britain, the latter of which is not considered a European country, have not. Many legislators and economists have suggested that it is simply a matter of when, not if, the UK will adopt the Euro. This discussion examines the benefits the UK will retain when this eventually happens and answers the legitimate concerns of those opposed to the transformation. Advantages of Adopting the Euro Stronger Currency Certain indisputable results have occurred following the conversion to the Euro. It has eliminated the costs and risks involved when exchanging foreign currency with other counties of the EU and made more transparent the cost of products. By adopting the Euro, Britain would be allowed a place on the European Central Bank (ECB) board thus being able to participate in the economic policy of the EU.  This would enhance the political influence of the UK which in turn would produce beneficial long-term opportunities for its economy. According to many published studies conducted regarding the effect of the Euro, using a common currency has already proven to augment trade and competitiveness within the countries that use it. One study that measured the influence of the Euro on trade discovered “countries that share a common currency trade about three times as much as countries without a common currency” (Micco et al, 2003). A More Competitive Britain It is clear that trade between Britain and EU countries would escalate if the same currency was used. Differences in types of money present barriers to trade because of the cost factors involved in converting it. Large corporations would save significant amounts and open up previously unfeasible opportunities of trade to smaller companies. Reducing the cost of trade will make Britain more competitive as companies will be able to charge less for products yet yield the same profit margin. Not only is the cost of doing business reduced, a common currency allows companies to make more accurate long-range plans. The price of goods and services in a country that has a different currency rises and falls on practically a daily basis as a direct result of fluctuating monetary values. Planning sales and purchases even three or six months in the future is risky and time-consuming because of the information that must be assimilated to make such a prediction. Lending institutions have much more flexibility to fund projects for businesses that have similar currencies. This makes raising funds easier for the businesses and as a result, they are able to expand which employs more people and helps to fuel the economy. Adopting the Euro would give British companies access to a much larger pool of financial institutions thus greater opportunities to grow than they presently have (“The Euro”, 2006). Concerns Loss of Autonomy  The principal concern of those opposed to the conversion to the Euro is that the British government will no longer be able to manage its own financial policies, in particular, setting the interest rate which regulates inflation.  Having autonomy over its own monetary policy is attractive to any country because it can quickly react to various economic situations and protect its own interests. It is a valid concern that the policies designed to fit all countries might not be the right fit for Britain year in and year out (Frankel, 2003).  A recent poll demonstrated the pervasiveness of these concerns. “A BBC poll has found that nearly 71 per cent of people would vote against Britain joining the euro if it were put to a referendum.” (BBC, 2009). However, the potential negative effects that would result from forfeiting monetary policy control if the UK adopted the Euro have been greatly exaggerated. If economies are tied together by the same currency, a unified policy will make corrections that affect fluctuations in monetary values which ultimately are advantageous to all. Instead of being on an island economically as well as geographically, Britain will have a sort of economic safety net because of its affiliation to a larger community of financial partners. The old adage is true, there is safety in numbers. The aspect that is most concerning to those fearful of giving up control of monetary policy is the requirement for EMU member countries to keep its budget deficit to within three percent of its gross domestic product (Munchau, 2004). The most feared component of relinquishing monetary control seems to be more of an asset than a drawback. Keeping the debts of member countries low is an economically stabilizing factor which benefits all member nations. Europe’s Weaker Economy Will Weigh Upon Britain Another compelling argument from those opposed to adopting the Euro is that the comparatively weaker economies of EMU countries will be a drag on the healthy British economy. “Over the last 12 months there has been strong job creation. UK’s GDP has grown 3.7 percent and the productivity growth rate was up 2.5 percent” (Field, 2004). Another good indicator of the UK’s superior economy is that its unemployment figures are much lower than those of EMU countries. It boasts a more progressive economy than in other somewhat equally comparable countries such as Germany and France. Britain is without the pension problems that plague other EMU nations. (Layard et al., 2002. pp. 25-27) In addition, the “UK has a well developed business infrastructure, long tradition as an open trading nation, integrated transport network, a leading telecom industry, and a strong financial sector” (Field, 2004). Moreover, Britain is without the pension problems that plague other EMU nations. In addition, the “UK has a well developed business infrastructure, long tradition as an open trading nation, integrated transport network, a leading telecom industry, and a strong financial sector” (Field, 2004). Because of these facts, Britain will have a powerful voice in the monetary decisions following the adoption of the Euro and will retain a competitive advantage. Even considering the current difference of currency, the financial nucleus of Europe is London which is “far ahead of Frankfurt, primarily because of its modern financial institutions, liberal financial laws, close cultural and economic ties with the U.S., location advantage as a major stepping stone to continental Europe and low tax burden” (Pearlstein, 2004). London’s financial status could only grow following the currency conversion. Conclusion All evidence shows that the UK will maintain its thriving economic growth whether or not it adopts the Euro as its currency but it will be clearly enhanced if and when it does convert. Delaying might prove to be costly. As more nations join, and about a dozen are expected to within the next four years, the need for a major restructuring of the Governing Council of the ECB will be increasingly necessary. It would be in Britain’s best interest to be included when this restructuring occurs. Britain has been waiting for the Euro to prove itself a stable, dependable currency but if it’s going to join anyway, as it will, it should strongly consider joining soon. Britain’s best interests would be served if it did wait for the Euro to be perfected but should be involved from within the monetary system working towards improving it now. Outline: I. Introduction II. Advantages of Adopting the Euro A. Stronger Currency B. A More Competitive Britain III. Concerns A. Loss of Autonomy  B. Europe’s Weaker Economy Will Weigh Upon Britain IV. Conclusion References “The Euro: Our Currency.” (5 May, 2006). European Commission. Directorate General for Economic and Financial Affairs. Retrieved 24 March, 2009 Field, Alan M. (9 August, 2004). “‘Special Relationship’ Continues.” Journal of Commerce. New York, Frankel, Jeffrey. (2003). “The UK Decision re EMU: Implications of Currency Blocs for Trade and Business Cycle Correlations.” Submissions on EMU from Leading Academics. London: HM Treasury; Harvard University. pp. 99-109. Layard, Richard; Buiter, Willem; Huhne, Christopher; Hutton, Will; Kenen, Peter and Turner, Adair. (1 August, 2002). “Why Britain Should Join the Euro” The Centre for Economic Performance Retrieved 24 March, 2009 < http://cep.lse.ac.uk/layard/RL334D.pdf> Micco, Alejandro; Stein, Ernesto & Guillermo, OrdoOez. (October 2003). “The Currency Union Effect on Trade: Early Evidence from EMU.” Economic Policy Journal. Vol. 18, N. 37, pp. 315-356. Munchau, Wolfgang. (13 December, 2004). “A Pact Flawed in Principle and Practice.” Financial Times. Retrieved 24 March, 2009 Pearlstein, Steven. (30 July, 2004) “Refusing to Compete in Frankfurt.” [Final Edition] The Washington Post. Washington DC: p. E.01 “Should Britain Join Euro?” (2 January, 2009) BBC News Retrieved 24 March, 2009 < http://news.bbc.co.uk/2/hi/7809161.stm> Read More