Disadvantages and Advantages of a Single Currency Essay

Discuss the arguments for and against the UK joining the European single currency. The European single currency is a common legal tender currently used by 17 of the 27 member states of the Euro zone. This single currency is known as the Euro which was first introduced as an electronic currency on 1st January 1999, where it could only be used for cashless payments. Then later on in 2002, the euro became a physical state, notes and coins. The intention of creating a single European currency was in order to make it easier to trade across the EU, excluding the problems of exchange rates.

However, there are two of the original member states that still to this day do not use the Euro; Denmark and the United Kingdom. They both agreed an ‘opt-out’ in the treaty which then excluded them from participation in the third stage of the European Monetary Union. (EMU) For the remainder of the member countries that currently do not use the single currency, they will need to meet certain conditions before changing their current money into Euros. These certain conditions would be known as the convergence criteria, which is a mixture of economic requirements that EU members must meet before entering the third stage of the EMU.

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Over many years there have been several debates as to whether or not the UK should enter the European single currency. With regards to this debate there are many advantages for the UK to join the single currency that we should take into account. For example, if the UK was to enter this scheme then one advantage would be that the single currency should put an end to the days of currency instability in Europe by fixing exchange rates. This action would create reduced exchange rates for UK business as well as tourists.

By reducing the exchange rates, ‘it will cause the elimination of the risks of unforeseen exchange rate revaluations or devaluation, but also it means that no one country can devalue its currency against another member country to increase their competitiveness of its exporters. ’ (The European Union) According to advocates “The euro zone will be a zone of economic stability. ” (European business) Furthermore, if the UK was to stay outside of the Euro zone and keep relying on its over-valued currency, then the UK’s export performance would most probably suffer.

For example, a number of multi-national companies have pulled out of the North East region including big names such as; ‘Siemens’ and ‘Gillette. ’ Taking into consideration the UK, Toyota has threatened to pull out of the UK if it doesn’t adopt the single currency. (Floyd 1999) This is understandable because if Toyota are able to make a profit and succeed with other member countries in the European Union that all use the single currency then why would they bother with the UK if it is more time consuming and more difficult because of the exchange rates.

One further benefit for the UK to adopt the European single currency would be the fact that there would be no transaction costs. For example, if we have a shared currency with the other member states of the Euro zone then we would no longer need to pay the transaction costs of changing currency. According to some statistics (Anon, n. d) currently, ‘UK firms are spending approximately ? 1. 5 billion per year on buying and selling foreign currencies in order to carry out business. ’ If you think how much money the country would save if only it joined the single currency it would be a huge amount.

One last point would be that if the UK was to stay outside of this single currency then sooner or later it will loose political and economic influence on shaping European integration. This would be because the new Euro is going to be one of the strongest currencies in the world along with the dollar and the Japanese yen. It will soon become the second most important currency in the world after the US dollar. On the other hand, you should also take into account the arguments against this choice. The UK joining the European single currency could be an unpopular decision amongst the population.

The majority of the British population are not in favour of joining the single currency due to their lack of confidence within the economy. But also at the time of this choice, the British economy was doing well and outperforming the other euro zone states such as Germany who was having problems. Therefore if the UK did go ahead with the decision of joining then they would no longer be out-performing these countries because all the currencies would be the same, ‘euro. ’ In addition, for the UK there would be a loss of independent monetary policy.

What I mean by this is that the UK would not be able to set its own interest rates and therefore would not have the ability to react to shocks within the British market. Once the UK is indulged into the single European currency this would mean that anything to do with the monetary policy is set by the European central bank (ECB). This would be a bad thing because according to (European commission, 2011) the ECB looks at what is best for the whole Euro economy and not what is just best for the UK. For example, if the UK was to join in 2007, then interest rate would fall from 5. 5% to the ECB rate of 2. 25% which could have then lead to future inflationary pressures within the UK. However, you should also take into thought that if the UK does adopt this new single currency then there would be a painful loss of sovereignty over interest rates. When this decision first came into acknowledgement, the treasury had outlined five economic tests in the year of 1997. These tests were, cyclical convergence, flexibility, investment, financial services and employment and growth. All of these five tests were needed to be met before the UK could join the Euro.

In June 2003, the British government assessed whether or not these specific tests had been met. The result was that only three of them had been met which were the investment, financial services and growth, stability and employment. Therefore, they decided that joining the single currency was not in the nation’s interest. One last draw back of the UK adopting the single currency would be that it could create some economic shocks and create a possible increase in un-employment. What I mean by this is due to none of the many countries included within the Euro zone speaking the same language, this creates communication barriers.

Therefore there would be many areas where there will be depressed workers who in no way can communicate with other people using different language. However this would only happen in labour mobility. But, if there is no labour mobility then there aren’t enough jobs in one country for all the population therefore this would cause a huge amount of un-employed people. Overall, as you can see there are many arguments for and against whether the UK should adopt the European single currency. However, in my opinion I believe that it is a weighty argument on both sides.

For example, my reasons as to why I wouldn’t advise joining, is purely because I believe that some of the arguments against are far much stronger than those for. For instance, with regards to unemployment, looking at the way in which the UK and the rest of the world are at the moment with the problem of unemployment, it would be stupid to adopt the single currency and as a price of it have more and more unemployed people who need help from the government. But then on the other hand, I also believe that some of the arguments for joining the new scheme were more powerful than some of the arguments against.

For example, one of the most important arguments to join the single currency was in fact the idea that there would be no transaction costs and no exchange rates. This would be very beneficial seeming as though some statistics say that some UK firms are approximately spending ? 15 billion on foreign currencies. If we became a single currency with the rest of Europe then firms would no longer need to spend a silly amount of money on the exchange of currencies. Therefore the country as a whole would be saving more money. However,in conclusion I believe that the UK should not adopt this single currency especially now after all of the problems that it has currently been facing with all of the bail-out packages.

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