Currency Union: Should Britain join the Euro

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Currency UnionShould Britain join the Euro?

• Why Britain Should Steer Clear of the Euro
• BusinessWeek (6/2/2003)

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Political Considerations

• If Britain joins the euro zone, the country can
  participate and will likely assume a leadership
  role in a stronger and more unified Europe. If
  not, Britain would remain outside the euro zone
  and risk being marginalized and losing its
  influence over the greater Europe.
• A strong case still needs to be made to the
  British explaining why Britain should give up its
  own currency, a symbol of its national pride and
  sovereignty. Political resistance is expected to
  be strong against joining the currency union.

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Economic Considerations

• Adopting a common currency could lower
  transaction costs and eliminate currency risk for
  British companies to export to, import from, and
  invest in the euro zone. It would also make it
  more attractive for euro zone companies to trade
  with and invest in Britain. If Britain does not
  accept the euro, British companies would not,
  like euro zone companies, be able to enjoy the
  full benefits of the European single market.
  This would affect the long-term competitiveness
  of British companies compared to those euro zone
  companies.
• Since a single currency implies a single interest
  rate, Britain would not have its own monetary
  policy to meet its domestic objectives. For
  example, it would not be able to raise interest
  rates to combat inflation or lower interest rates
  to spur domestic demand. A one-size-fits-all
  monetary policy dictated by the ECB would not
  work in general, because different countries can
  have different economic conditions and different
  domestic objectives. Such ECB policy can be at
  odds with the needs of the British economy.

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Economic Considerations (Continued)

• Joining the currency union would take away
  Britains ability to make exchange rate
  adjustment when needed. Since the advent of the
  euro, the common currency has already appreciated
  substantially. If the currency continued to
  strengthen, it could seriously undermine economic
  growth among euro zone countries. Individual
  member countries have little control over
  exchange rate policy.
• Designed to limit budget imbalance and curb
  inflation, the European Unions Stability and
  Growth Pact requires each member country not to
  exceed a 3 cap on budget deficits as a share of
  GDP. If Britain joins the euro zone, the budget
  cap would constrain Britains ability to conduct
  fiscal policy to stimulate domestic demand when
  needed.