Advantages and Ddisadvantages of UK Participation in the European Single Currency - Assignment Example

The dream of United Europe is as old as Europe itself and the EU is also an attempt to improve the relations and cooperation between the European countries. The European Union is an association which combines 27 countries of Europe economically and politically. EU came into force on 1st November 1993. The EU headquarter is in Brussels, Belgium. The European Union is an official department where all the countries agree on a single trade policy and it is like an agreement where the trade barriers between the members of the European Union are removed. It eases the mechanism of moving products, services, workforce and capital within the Europe. The basic aim of EU is to encourage and increase economic, social, political, trade, defense and security cooperation between the member countries. The member countries of European Union consists of 27 independent states and these are, Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom. European Union comprises of 18 % of the world’s total trade (Europa 2009). European Single Currency: Euro The first steps towards the EMU were only made in 1992, when the members of the EC met in Maastricht. A timetable for the development of the EMU was created there. In the years after the treaty the preparation began. Euro is an authorized currency of the 16 member countries of European Union. These states called Euro Zone includes, Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. UK refused to join the Exchange Rate mechanism because of the instability of the system. Euro was introduced to the world as a transactional currency of European countries on 1 January 1999 substituting the European Currency Unit (ECU). The currency was circulated all over European Union on 1st January 2002 (Bized 2009). Euro is used by 329 million of Europeans. According to the research conducted by IMF European Union is the second largest economy of the world. Euro is formally organized and managed by European Central Bank and the Central Banks of the EU countries. Euro is today world’s most important currencies after the Dollar. Not all the EU members accepted Euro as a single currency for European Union. One of them is United Kingdom, but 90% of the international trade and transactions in UK takes place through Euro. Pound Sterling is used for local transactional purposes (Hilliard, B. 2008). Economic advantages of European Single Currency Elimination of the transaction Costs A single currency all over the European Union do not require to exchange the money from one currency to another in different regions so the cost of changing money will be eliminated. Elimination of Exchange rate risks A single currency removes the risk of exchange rate. Price Transparency & Equality The law of one price minimizes the differences in price level. The different currencies cause difference in prices in the region due to the rate of the currencies. It causes inflation or may be deflation in the same geographical region. Low level of Inflation The transparency in price will lower the level of inflation as the same currency exchange rate does not require converting the price from one exchange rate to another. Tourism Benefits Tourists can travel all over Europe without any restriction and problem of exchanging money or visa etc. Macroeconomic stability In the European Monetary Union the most important element is the constant growth rate and new jobs. There is balance in the trade among the member countries. It promotes price equality. Facilitates International Trade The Euro makes EU a strong and powerful trade partner. The investors from all over the world can invest in European Union without any restrictions and hurdles. It eases and promotes the trade with countries from other continents. Single Market The Euro makes European Union an attractive region for the investors to invest in; the foreign companies are benefited to do business all over Europe. Euro provides access to a single market for the foreign investors. Protection from External Shocks A single currency protects the economy of the European Union from external economic shocks like the unexpected increase in the oil prices and disturbance in the currency markets. Identity of EU’s citizens The Euro is a single currency of the European Union which gives the citizens of the Europe an identity of their own. They feel proud of their currency and region as the area and the benefits for its member states increases. Self-supporting currency The members of European Monetary Union can survive even without trading with outside world. EU is already so strong that they can survive on its own. New Opportunities in the International Economy A single currency attracts the markets all over the world to invest in the European Union. A third country prefers to invest in the EU due to an advantage of same currency because it makes EU more powerful. (Delnic 2007) Prevent War The member countries of European Union are strongly integrated with each other through trade and a single identity through the similar currency. So it is obvious that these countries cannot wage war on each other as they are bound together for so many positive reasons. Increase Trade It increases trade among the member countries of the European Union due to elimination of the exchange rate fluctuations and increased cooperation. The cost to industry is also reduced due to the reason that the firms don’t need to buy the foreign exchange for transactions within the Europe. The Political benefits There are no boundaries among the member countries of EU so it will promote a stable political environment and the people can be safer travelling in member countries. Travelling becomes easy and do not require any visa etc. a person is protect by EU laws all over Europe (Delgtm 2007). Countries members of European monitory Union (EMU) look at the advantage they have gained from membership POLITICAL BENEITS EMU promotes democracy and a stable political system. It increases the safety of the member countries. No visas required to travel in the countries included in European Union The elimination of the boundaries among the member countries. Easy transfer of people from one country to another. Economical Benefits Exchange of goods become easier The similar law prevails in all over European Union Price Equality among the member countries A single currency is used all over the European Union Competitive prices and markets Stability in the monetary market. Lowers the level of inflation Social Benefits Increased safety and security of the people Job security in the member country It improves the individual standards of living Increased knowledge of the region Improved quality of education Environmental Benefits Improve the environment and surroundings (Europa, 2009) Help in the development of the environment of all the member states and development of the improving the living standards. IRELAND Ireland became a member of EU in 1973. The country was facing the high unemployment, low income rate and increased rate of emigration. The EU benefited Ireland in the following ways: It created1 million new jobs. It provided €58 billion of funds in transfer payments. 960 foreign companies established in Ireland. Huge investments by US organizations in Ireland. (IBEC 2008) Germany Trade in Germany increased by 18% since 1999 after joining EU. Countries members of European monitory Union (EMU) look at the disadvantage they have gained from membership. Loss of monetary sovereignty The member countries feel that they have lost their monetary sovereignty and the policy cannot be used to achieve the objectives of one’s own country. (Ventajas 2008) Fluctuation in the interest rate could not be managed properly by a member country. Cost of Conversion It can reduce growth No control over country’s economic management Gudmundsson, H. (2006) UK economy and particular emphasis on the importance of sterling of the economy UK has the fifth largest economy of the world. It has been predicted that UK is strongest business place than all other EU members. UK is the second largest in receiving the foreign investments. The country is the second largest exporter in the world. It is one of the most important international trading states. London, a city of UK has been rated as the competitive and strongest environment to conduct business in. UK has low unemployment rate. The most important part of UK economy comprises of agriculture. The role of tourism is also of importance in the UK’s economy. It has been estimated that over 24 million tourists visits UK in a year. (GB 2009) The pound sterling is the currency of the UK which is the third largest reserve currency of the world. UK has not adopted the EU currency Euro. Sterling is the fourth most important currency of the world in which transactions are made. The pound sterling plays an important role in the UK economy and considered as an important currency for UK transactions all over the world. The currency plays an important role in the economy of the country. Similarly, UK economy is successful due to its strong currency (Worthington, I & Britton C 2003). Economic advantages of UK participating in the single currency Euro Strengthen the Currency and Economy The European Union has a population of 327 million which is further strengthen by a single currency. Participation of UK in the single currency Euro will make the currency stronger against the Dollar which is the most powerful currency. Elimination of the Currency Exchanging Costs The UK businesses pay £1.5 billion a year to buy and sell foreign currencies for conducting business in European Union. A single currency eliminates the currency exchanging cost Price Transparency The participation of UK in the single currency will decrease the prices in the UK due to the same currency. It promotes the equality in the prices all over the European Union. Investments and Business Success The UK participation in the Euro will improve the business profitability. A single currency will be more effective for the businesses due to the increase in investments from all over the Europe due to same currency. It promotes cross-border trades and investments. Travelling and Tourism benefits The tourism and travelling industry can be benefited as the single currency provides convenience to the travelers to make a journey all over the Europe without changing currency and money. (Lib 2009) Economic disadvantages of UK participating in the single currency Euro The disadvantages of adopting a single currency Euro includes: Destruction of the National Sovereignty UK believe that after joining the EU single currency Euro, they could not be able to set the interest rates according to the economic requirements and it will adversely affect the economic stability. It could result in high unemployment rate and economic instability. Reduced Growth If the UK could not be able to adjust in the Euro, it may experiences low growth rates and higher unemployment rate. The situation can adversely affect the economy of the state. Cost of Conversion Adopting the Euro involves the high conversion cost. It will be difficult for the nations to switch the businesses from pound sterling to the Euro. It can be expensive for the business. It is not possible for the government to overcome the cost of conversion from one currency to another. Impossible to get benefits out of a single monetary policy for all members of EU. It is not necessary that what one country achieves is also achieved by the other country. All the members could not be satisfied by a single monetary policy. Interest rate for each country is different at different times. Single interest rate could not fit in the economy of all the members and benefit them equally. (Palmer, A& Hartely, B 2001) Difference in policies of EU and UK There is a difference in the policies of European Union and United Kingdom. The policies which are implemented in the UK are the one from which UK gets benefit and the EU policies are for the benefit of all the member states, although it could not satisfy all its members’ needs. Risks to Pound Sterling Adopting Euro as a currency may ignore Pound Sterling, it will have adverse affect on the sterling and its benefits to the UK economy. The authorities can try to weaken pound to give boost to Euro, it will create economic instability and the increase in inflation. Transparency in the banking system of UK The UK banking system is more transparent than EU. UK feels more comfortable with the UK monetary system. They feel that switching to Euro will make them accept the inferior monetary system. Graph and value of Sterling against Dollar and Euro Pound Sterling to Euro Exchange Rate April 1999-April 2009 Source: (Index Mundi 2009) Euro to Pound Sterling Exchange Rate April 1999-April 2009 Source: (Index Mundi 2009) Pound Sterling to US $ April 1999-April 2009 Source: (Index Mundi 2009) US $ to Pound Sterling April 1999- April 2009 Source: (Index Mundi 2009) Will the British business be better or worse off if UK join the EU? UK enjoys the title of one of the most favored nation for conducting business. The business environment of UK is considered to be one of the best to do business. The benefits to conduct business in UK include: The exchange rate stability Political stability Stable Economic conditions Willing acceptance of the new products and services Population diversification Cultural mix Investments from all over the world Strong economy There are many other advantages for conducting business in UK and being successful. The British environment is most suitable for carrying out businesses and the investors all over the world prefer UK to conduct business. There is less turmoil and political stability in UK. There are no uncertainties in conducting business in UK.(Sloman J.2004) Every picture has two sides; similarly there are both benefits and drawbacks for UK to participate in Euro single currency. What I have concluded from my studies is that UK businesses would be benefited if the state adopts Euro. UK companies will have an opportunity to explore more markets within Europe. They can expand their businesses in other member states of European Union and the UK citizens can have more and better job opportunities. More opportunities for the EU member states to make investment in UK (Corbett, R 2009). They can achieve economic stability, wealth and success. It is difficult for the European Union members to conduct business in the UK because of the different currency and exchange rate. Other EU members find it perplex to conduct business successfully in UK because of the risk involved due to exchange rate differences and the price inequality. (BBC 2009). Sooner or later UK has to join a single currency Euro because UK is already a part of EU. In the short run UK and the businesses can survive without adopting Euro currency but it cannot help the state in long term because to improve its trade and economic relations with other member states and to be a strong member of European Union, UK must adopt a single currency. UK is deferring the business and economic profits with the delay in the process of transferring to the single currency. UK is losing its negotiating power with the delay in taking a positive decision which is favor of its economic and political condition. Pound sterling has been a strong currency but it has lost its value since 2009 has started. Pound lost its value by 25% against dollar and 20% against Euro. That shows decrease in the value of Pound against the major currencies of the world (Corbett, R 2009). Conclusion Adopting the Euro or not is an important decision to be made by the UK government. It is one of the most crucial economic and political issues in the EU. The idea of adopting the Euro was rejected in a public referendum held by UK government to decide whether or not to join the EU single currency, Euro. The most basic reason is the ups and downs in the house barrier which restrict government not to join the single currency. The reaction of the public and the political parties is both positive and negative over the switch of the currency. Some wants it to happen as soon as possible whereas other does not prefer to adopt Euro as a currency of UK (Bell, M. 2004). The Britishers feel that introduction of Euro will take away their individual identity as a separate nation. There are both benefits and disadvantages of adopting Euro for the UK. Euro increases the growth rate but the same currency can make UK less flexible and not as competitive. It also exerts pressure to increase taxes. The people are of the opinion that UK should not abolish Sterling because UK has its own identity due to its currency. It gives the country a power to control its economic affairs (Guyan, K. 2009). Adopting Euro can reduce the interest rate but the country does not remain with any power to control its interest rate if it does not match with its economic condition. Euro can lower the prices and increases trade with other EU countries due to the same exchange rate, but it comes with more disadvantages as low employment rate and growth in some regions (McDonald F. & Burton F. 2002). The overall world recession also affected the European market. EU needs to restore the confident of the member countries by making the flexible policies and attracting more world markets while retaining the present consumers. (Monti, M. 2009) List of References Palmer, A & Hartely, B (2001) The Business Environment 4th edition, McGraw-Hill Publishing co. Sloman J. (2004) Economics for business, 3rd Edition, prentice hall. Worthington, I. & Britton C. (2003), The Business Environment, 4th edition, Pearson education ltd. Mcdonald F. & Burton F. (2002), International Business, Thompson Business Press. Bell, M. (1994) [online] Available from “The impact the euro will have on business, the investor and the mortgage payer” [accessed 20th April 2009] Hilliard, B. (2008) [online] Available from “Should the UK have joined the Euro?” [accessed 21th April 2009] Gudmundsson, H. (2006) [online] Available from “Iceland Will Not Adopt the Euro” [accessed 21th April 2009] Guyan, K. (2009) [online] Available from “UK must join the Euro” [accessed 18th April 2009] IBEC (2008) [online] Available from [accessed 17th April 2009] Monti, M. (2009) [online] Available from “Financial Times: How to save the market economy in Europe” < http://www.ft.com/cms/s/4e78b1f0-220d-11de-8380-00144feabdc0,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F4e78b1f0-220d-11de-8380-00144feabdc0.html&_i_referer=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Fc40f80a0-2209-11de-8380-00144feabdc0.html> [accessed 17th April 2009] Answer No.2 Part (a) Analysis Analysis is to be clear about the idea or thinking. The doubts should be clear regarding any claim or evaluation. It is examining and evaluating the relevant information to choose the best from different available choices. Analysis is to examine in detail the given options and then choosing the most suitable solution for the problem (Invest 2006). Analysis is the proper study of the process to get the best results. Analysis is the most important step as this forms the basis for the whole implementation process and the success or failure of the project depends upon the effective and efficient analysis. In this assignment it has been analyzed that whether it will benefit the British business or the situation will be worse off if UK adopts a single currency Euro. The analysis is done through studying the advantages and disadvantages of adopting Euro for UK economy and businesses. Evaluation Evaluation is assessing the gathered information to make opinion or estimate about the plan. It involves using the data collected to enhance or improve the system. Evaluation means critically reviewing the performance or the results and comparing them to the standards set. Information must be collected and assessed through a proper system to make evaluation more effective (Lib 2009). Evaluation involves the assessment of the analysis. What will be the cost and expenses of adopting a single currency Euro. What benefits UK will get and what they have to forgo. There is a huge cost involved in switching to the Euro currency. Application Application is the act of applying. It is the use of the data gathered. Employing what has been obtained to get the tangible results and profits out of it. An application is to spread on the relevant things and make use of it. Application is the actual use of the information obtained through the research and analysis. It is finally the implementation of the results obtained through the whole process of analysis and evaluation of the research. Synthesis Synthesis means combining element into a whole process. It is a thought process for finding or creating anything. It is a creative process which involves examining. Synthesis is a sensible thought process bases on theories and reasons, rejecting what is unreasonable or cannot be tested by reason in religion or custom. It is a process endowed with reasons. It includes correctly reasoned relations between actual and what is perceived. In the synthesis, the whole process is combined to get the final desired results (Invest 2006) Advantages and disadvantages to the UK of participation in the European single currency Euro UK is a part of European Union but the country did not join a single currency of EU due to the reason that its currency Pound sterling is one of the most important currencies in the world. There has been great debate on the advantages and disadvantaged to the UK of participating in the single currency, Euro. There are the groups in UK who favors to join a single European Union currency while other rejects the idea of participating in the Euro currency. (Europa 2009) The political groups are also involved in this debate. Some are in favor of the idea while others are completely against the joining in the single currency. Individuals believe that the UK will lose its sovereignty by adopting a single currency. The government will have no control over the economic decisions and not all the decisions by the European Union are in favor of each and every member state. Public opinion in this regard is totally against the joining in the single currency. The major reason that the UK is still not a part of EU is its strong currency and the demand of pound sterling in the world market. UK has maintained its own separate identity through pound sterling. The city of London in UK is one of the most important world business environments. Another major reason behind not joining the Euro is the high cost of switching to the other currency and high budget requirements. UK thinks it will lose its influence over the world and in Europe by adopting the Euro as its currency for transaction. Adopting single currency would make it easier for the UK residents to do business in other regions of Europe or shop there. It also increases the traded among the member countries and UK due to the same exchange rate. UK can get benefits as well as it has some drawbacks to join the single currency Euro. It is yet to be decided that how UK is going to convert the disadvantages into benefits for them. (Ventajas 2008) (b) In this assignment it has been analyzed that whether adopting a single currency would benefit the UK economy or not. The results are that it is advantageous for UK to adopt. A single currency, Euro or it has drawbacks of joining a single currency. Based on the alternatives to the UK, it can choose from the above mentioned two options and the evaluation is done on the basis of the benefits and drawbacks it is going to achieve after the adoption of a single currency Euro. The application of a single currency is a lengthy process which requires time and cost. A huge cost is involved in the implementation of the currency conversion process. UK needs to consider all these points, so this is the reason that UK could not adopt the Euro as currency to be used for its transaction processes and the increased pressure from the political and the individual citizens is another factor which needs to be considered in the application of the currency conversion process. SOURCES: 1. http://news.bbc.co.uk/2/hi/in_depth/uk/2001/uk_and_the_euro/default.stm 2. http://ec.europa.eu/economy_finance/the_euro/the_euro6476_en.htm 3. http://indexmundi.com/xrates/graph.aspx?c1=USD&c2=GBP&days=3650&lastday=20090418 List of References Europa, (2009) [online] Available from [accessed 18th April 2009] Invest (2009) [online] Available from The UK economy at a glance [accessed 17th April 2009] Lib (2009) [online] Available from [accessed 17th April 2009] Invest (2006) [online] Available from [accessed 17th April 2009] Ventajas (2008) [online] Available from Appendix Read More