Joining the Euro: Is it a Good Idea?
Introduction
The first stages of European Monetary Union (EMU), or the adoption of the single European currency, the Euro, took place in 1999. For the first two years of its life, however, the Euro was solely an electronic banking currency, and the first notes and coins were not issued until 2002, when the Euro became legal tender in the 11 founder member countries of the European Union, plus Greece.
Today, over 300 million people, in the "Eurozone" – as the European Union countries which have adopted the single currency have become known – use the Euro as their currency, making it similar in geographic and economic terms to the United States. The difference between the Eurozone and the United States, of course, is the diversity of European countries, such that what may be beneficial, economically, for some may not be beneficial for all. The British currency, Pounds Sterling, is no longer one European currency amongst many – as it was prior to 1999 – but a small currency dominated, in terms of import prices and competition, by a much larger one.
The debate over whether joining the Euro is a good idea, or not, for Britain continues. Joining the Euro: The Case For The adoption of the single European currency is a major move, and a bold one at that, but those in favour of joining the Euro argue that the impact is lessened, considerably, if you consider the effects of speculation in foreign exchange markets. The Euro and, of course, the U.S. Dollar are components of continent-wide economies, such that the relationship, and any volatility in exchange rates, between them, is less important than the potential for volatility in Sterling. Foreign exchange speculation can lead to fluctuations of anything up to 10% in a single trading session, and wreak havoc in the British export market.
Proponents of Keynesian economics view speculation as a form of gambling, which should not be allowed to undermine the efforts of commerce and industry, and this is one of the main arguments for joining the Euro. Exchange rate risk, and the need for currency "hedging", would be abolished, overnight, if Britain joined the Euro – poignant in light of the fact that Sterling had plunged 20%, or more, against major currencies in the past 12 months – not to mention the likelihood of inward investment, increased cross-border competition and reduced transaction costs. Joining the Euro: The Case Against The case against joining the Euro is, if anything, more persuasive, not least because Britain has had its own currency for 900 years – much longer than many other European countries – and is resistant to losing its autonomy in terms of fiscal and monetary policy.
Interest rates would no longer be determined by the Monetary Policy Committee (MPC) of the Bank of England, but by the European Central Bank, whose emphasis is on the Eurozone as a whole, rather than on Britain alone. This would mean that in times of recession – as currently – interest rate cuts would not be possible; this actually occurred, to some degree, in the early Nineties, where interest rates of 15% were sustained to maintain the value of Sterling in the Exchange Rate Mechanism (ERM), but also deepened, and prolonged, the recession at that time. Furthermore, conditions for joining the Euro include a limit on Government borrowing, to 3% of GDP ("Gross Domestic Product"); this would, at present, prevent Britain joining the Euro even if it wanted to, but if it had joined prior to the recession, it would not have been able to increase Government borrowing above this level.
Even a cursory analysis of the Eurozone reveals that some countries – Greece, Ireland, Italy and Spain, for example – are in dire straits, economically, regardless of their membership of the single European currency. Spain, in particular, has suffered from lower interest rates as its housing "bubble" inflated, and vice versa, and now faces its deepest recession for 50 years and 16% unemployment. Britain, too, has suffered its own boom and bust cycle in its housing market, but the cycle would have been that much more pronounced had it already been in the Eurozone. One notable characteristic of the Eurozone is that is has tended to polarise the activity of member countries around the sectors where they have an advantage. Britain holds an advantage in the financial services sector and, if that advantage were to increase on joining the Euro, as is likely, the outcome would be an economy biased towards an increasingly powerful City of London, and consumption rather than production.