Single Currency Essay

1644 Words4 Pages

INTRODUCTION

This question explores the pros and cons of having a single currency in the UK. Advantages and disadvantages will be illustrated to give a balanced view. Perspectives from individuals, companies and the macro-environment will also be covered to give a holistic argument.

ANALYSIS

Pros
- Stability: Analysts argued that the biggest advantage of joining the Euro is that the UK exchange rate will enjoy greater stability against the other EU members. Over half of UK exports and imports come from trade with the EU. The stability for these exporters will enable them to plan more easily and investment is likely to rise. It will also encourage further trade between these countries, which should lead to further economies of scale.
- Lower …show more content…

For instance, individuals would not pay transaction costs of changing currencies when travelling abroad. The transaction cost advantage for businesses are bigger, as it includes the costs of hedging against huge currency swings. Some economists believe that the UK will attract more foreign direct investment (FDI) if the UK becomes part of the Euro.
- Increased intra-EMU competition: As mentioned in the point previously, intra EMU trade is beneficial for the introduction of single currency. Price transparency due to a single currency will make price comparison across countries easier so consumers can buy in the cheapest markets. It may force higher cost firms to reduce their prices. The success of this is also dependent on action by the EU competition …show more content…

For the UK, this may be due to the structure of the economy e.g. Britain has more non-EU trade, more home loans made at variable interest rates than its partners, and is the only oil exporter. Economic convergence - which is a condition of entry to the EMU - means that all economies would grow and shrink together on the same economic cycle. However, as not all economies are moving in the same direction, this will not be a suitable practice for the UK.
- Loss of power to choose a different short term inflation/unemployment trade off: In the long run there is no trade off between inflation and unemployment. In the short run governments can choose an interest rate which reduces inflation slowly, giving time for the unemployed to find jobs i.e. trading off on the short run. Countries that join the single currency will lose the ability to make different choices between inflation and unemployment in the short

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