Foreign currency news – Arguments for joining the Euro

December 19th, 2011

There has been much debate about the United Kingdom changing its currency to be part of the Euro foreign currency. This article goes through some of the arguments for the UK adopting the Euro.

Some of the opposition to the UK adopting the Euro is underpinned by claims that the European Monetary Union continues a tradition of overvaluing sterling in fixed money exchange rate regimes. There is no clear cut evidence that periods of floating foreign exchange rates have actually delivered the flexibility that has been theoretically promised.

If Britain joined the Euro, the Bank of England would be replaced by the European Central Bank.  The European Central Bank focuses on economic conditions across the whole community and so will have a less volatile interest rate policy than the Bank of England (or other national central banks). The credibility that attaches to the monetary policy of a Europe-wide central bank helps render the Euro a strong currency and thus permits lower interest rates than at present within the UK – investment and growth are obvious beneficial consequences.

The prospect of sustained low-inflation under the responsibility of an independent European Central Bank would, likely, reduce long-term interest rates and stimulate sustained economic growth and competitiveness. The UK has a successful flexible labour market that would be highly effective inside a single currency arena.

Though the EMU might restrain independent fiscal policy, it will not totally remove the opportunity to act as a sovereign state.

Since around 20% of UK transactions are already made in US dollars, the demise of sterling would not create totally unfamiliar circumstances. A common currency removes a significant barrier to free competition across national borders. A single currency promotes price-transparency – customers can readily assess the relative prices of similar products from anywhere within the union.

The large Euro zone will integrate the national financial markets, leading to greater efficiency in the allocation of capital in Europe. The UK would benefit from an increase in intra-European trade flows and higher capital investment resulting from the development of a single currency. The UK has been a major recipient of direct foreign investment in recent years. Some commentators believe that this would be threatened by non-participation in the currency union.

A single currency will be an important complement to the Single European Market, which would make the European Union a more powerful player in the global economy, and the UK might benefit from full-scale participation in this.

One country can no longer devalue its currency against another member country in a bid to increase the competitiveness of its exporters.

A European currency will strengthen European identity but that does not mean that a Federal Europe is necessarily a consequence of a shared single currency.

The new Euro will be among the strongest currencies in the world, along with the US Dollar and the Japanese Yen. It will soon become the second most important reserve currency after the US Dollar. Britain stands to lose political as well as economic influence in shaping future European economic integration if it remains outside a new system.

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