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A major issue that the British economy has had to face in the last few years because of the European Monetary Union has been that of the single European currency. The European Union introduced the European Currency Unit (ECU) called Euro, which is a single currency zone where the accepted means of payment consists of a single homogeneous currency, and is trying to transform the European Monetary System into a full European Monetary Union with a single central bank issuing a common currency. In 2002, the euro will be officially put into circulation in some countries, which are members of the European Union. However, the UK is not included in one of these countries due to the fact that the conservative government insisted on an “opt-out” clause, which allows UK to remain outside a future monetary union. This essay examines the main economic issues fuelling the debate over the entry of the UK into a single European currency system, providing the reader a good understanding of the UK’s benefits and handicaps, if the UK were to join the system.
Most European governments and decision makers were welcoming full-hearted British participation in the single currency system. British engagement would have brought genuine practical advantages, while contributing to a better equilibrium on a continent where Germany and Russia naturally tend to be the dominant powers. In spite of this, the UK membership issue, has divided the British political parties, the business community and the population at large.
As far as the businesses in the UK concerns, the ECU offers considerable benefits. The expenditure/revenue of a company that is incurred/received respectively, is in a variety of different currencies. By joining the ECU, the companies in the UK would have simplified their cash management considerably, due to the fact that they would not have needed to change the currency.
Moreover, in intra-Community trade, the exporter and importer agree to invoice in a third currency. Therefore the exchange rate risk for both the exporter and importer are reduced to an important degree by using ECUs. Hence, by using ECUs, the use of several different currencies is avoided with a result of simplifying the administration and reducing the exchange rate risk. Businesses from the UK, that will want to export into the euro zone may face a competitive disadvantage compared to firms throughout the euro zone which share the same currency as the importer. Furthermore, convergence costs in the UK would have been reduced and therefore the UK would have been able to do more trade with other European Union countries. At the moment the exchange rate , causes uncertainty to the entrepreneurs in order to trade and invest. Businessmen, prefer certainty to uncertainty. Therefore, UK entrepreneurs are less enthusiastic where their decision involves the risk of currency fluctuation, hence restricting them from expanding into the multinational sector. Joining the single currency would have removed these uncertainties of exchange rates and interest rates and may have also lead to better business decision making for those companies trading in the euro zone. In addition to that, it could be argued that distribution and purchasing arrangements could have been made simpler and cheaper, since it would no longer be necessary to guard against exchange risk within the Euro zone.
Furthermore, a common currency for Europe would be a substantial informational improvement on the currencies that it will replace. The Europeans, would be informationally speaking, more advanced if all prices in Europe were quoted in ECU. On the other hand, there would not be much benefit for someone from the UK, if he/she knows the supermarket prices, for example, in Madrid, due to the substantial distance between them.
Joining the single European currency would have caused an increase in competition and therefore prices would have been lowered in the UK. This would have been due to the fact that the UK firms, using the same currency with all the other European Union countries, would have had to compete their prices with them. Due to this increased competition, larger opportunities and more jobs would have been created, something which would have reduced unemployment to a certain level.
The single currency is likely to cause