| Product: |
The Euro |
| Date: |
20.07.02 (58 review reads) |
| Rating: |
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Advantages: lol
Disadvantages: lot and lots
As promised by Tony Blair in his election campaign, a referendum on the Euro is to be launched in the coming two years, however most individuals feel relatively uneducated with regards to arguments for and against.
European Monetary Union to many people seems like a very scary word, but simply means every nation part of the Euro will have the same currency. Joining the Euro will have both advantages, and severe implications
No single concept in economics has dominated discussion in Britain than the Euro. Should we stay in? Should we stay out? Is it decided by economic justification? Or does political interest dominate?
I am an economist; hence my opinion is based on the economics of the Euro. Yes the political position is important as ultimately this decides our position on the subject. (Until Blair wants a referendum then we as a nation are, by implication, opposed to the Euro).
The entry into a single currency is an entry into EMU (European Monetary Union). A single currency is only one part of EMU, a common central bank and the complete pooling of reserves are also part of EMU. Many authors have produced estimates of the impact the Euro will have, thus deriving an answer to if Britain should enter the Euro.
These reasons include greater price transparency, the elimination of transaction costs and the Euro to become a strong currency to rival the dollar. Hence while these are well documented (read other ops on this site) the need to re-discuss them, as pure economic situations, is minimal.
To decide if the Euro is beneficial then we need to look deeper. More importantly we need to look at the role of monetary policy (although it is covered I feel that the coverage is lacking). For this it seems is the key to economic macro-management (sorry any Keynesians out there!)
Entry into the Euro means a loss of National monetary policy decision-making. Is this a problem?
It is argued that due to
the differing economic structures within the Euro zone, economic shocks will be asymmetric in their burden, thus different countries will want different interest rate movements.
As Britain has a more interest rate sensitive economy, largely to do with the UK's obsession on house buying and how 'open' its economy is, then interest rate changes especially if they are in the 'wrong' direction will cause even more 'pain' then say a country like Germany.
As interest rates change for the good of the Euro zone as a whole, it could result in Britain having a higher level of volatile economic activity. I.e. one minute being the booming economy of the Euro zone, the next being the black sheep of the family.
Of course this problem is always present within monetary policy. In Britain's case when interest rates change the 'sensitive' North of the country suffers more than the 'South'.
However at National level the decision is made (although not always believed just ask a northerner!) for the good of Britain as a whole. With monetary policy in the hands of a European Central Bank this decision is made for the good of the Euro zone (although many argue that they don't look beyond France and Germany!)
This means that Britain has a one in three chance of achieving the right interest rate 'movement', remember interest rates can go up, down or stay the same. Coupled with the sensitivity of the British economy the cost of losing the 'numbers game' is greater than other countries.
Put simply the 'numbers' game at a Euro level heightens the flaws that monetary policy possesses as an instrument of macro management at a national level.
However these problems could be offset if the European Central Bank (ECB) was more capable at using monetary policy as a macro management tool then Britain's own Monetary Policy Committee (MPC).
If t
he ECB were superior then even by playing the 'numbers' they could create prosperity for all without any losers. Hence the ECB could create good levels of growth for Britain even if the interest rate was not 'ideal' at a national level. (Or even create better growth rates, if Britain's own MPC was inferior and therefore would not be able to achieve better conditions).
Sadly this is not the case. Britain's monetary policy committee is proving to be vastly superior at using monetary policy to control an economy then the ECB.
This seems surprising, much has been written that the more independent a Central Bank the greater they achieve their target of low inflation. (Which seems to be the economic consensus for stable growth). And by many indicators the European Central Bank is the most independent of all Central Banks. So what is the problem?
The reasons why Britain's MPC is better than the ECB is due to accountability and credibility. Put simply the MPC has both, the ECB none.
Both lack democratic accountability, as many of the people involved in both are appointed by the heads of state etc, and not by the people. However the MPC has greater transparency, which leads to a quasi-accountability to the markets and the media.
The minutes of MPC meetings, forecasts, and how people have voted are all placed in the public domain. The ECB has only recently published its forecasts, and does not publish who votes what. There argument being that it prevents nationalistic pressures being placed on members of the ECB who vote.
The greater transparency also means the MPC has greater credibility. People can see how and why the MPC has acted and why. This has led to markets seeing that the MPC is acting credible in the objective of low inflation.
By doing so the MPC has won half the battle, if markets perceive them to be credible and therefore act rational then MPC can use this to g
uide the economic and thus enhance their position even further.
The ECB on the other hand is obsessed with squabbling and proving its independence by doing exactly the opposite to what the media and euro governments want. Markets are nervous of the central bank (a reason that adds to the woes of the euro exchange rate); it seems to be acting irrationally and unprofessionally.
In conclusion this op was not meant to trawl out the pros and cons of joining the Euro in GDP terms, as there is so much conflicting evidence. Instead this op has focused on monetary policy and more importantly how the ECB is simply not equipped to handle monetary policy as affective as the current system in place in Britain.
Until reform is introduced into the ECB then we should not enter the Euro, as losing monetary policy decision-making is bad enough. Placing it in the hands of the ECB is simply careless.
Without trying to sound like an economist, let's explain the advantages.
Firstly, joining the Euro will result in increased international trade between Britain and the rest of Europe, due to the fact that all nations will have the same currency. This would therefore result in increased trade, and as a result, lower unemployment throughout Europe.
International travel will also increase, due to the fact that changing currencies will not be required, so in theory, tourism in both Britain should increase, as will tourism throughout member countries.
Also, price comparisons between countries will become considerably easier, so prices, especially for white goods, will also fall in-line with European prices.
Also, in recent months, many multinational companies such as car manufacturers have made very high profile attacks on the strength of the pound, explaining that if we continue the keep the pound, they will close all production facilities in this country, resulting in further unemployment.
Therefore, joining the
Euro will ensure that a weaker currency will keep many manufacturing industries in this country, resulting in higher unemployment.
However, despite these advantages, there will inevitably be disadvantages from joining the Euro.
Firstly, the costs of converting every British business from the pound sterling to the Euro will be phenomenal, and if chosen over the pound, the Euro will be phased in over time meaning that businesses will have to work in dual currencies, resulting in increasing costs and therefore redundancies.
With more international trade and easier price comparisons, international competition will also occur, forcing businesses to lower their prices to stay competitive. This can only occur through cost cutting measures, again possibly leading to further redundancies.
Joining the Euro would also result in our interest rates, which govern inflation (rises in prices), to be centrally controlled by the European Central Bank (ECB), rather than the Bank of England. Also, as the ECB sets a single interest rate for the entire union, one country could be experiencing a boom, whilst another could be experiencing a recession, therefore one interest rate will not suit every country in the union.
As a result, centrally controlled interest rates could lead to economic instability and as a result, a recession, resulting in further redundancies.
Considering that at the moment, the Pound is very strong when compared with foreign currencies, and is considerably stronger than the Euro, therefore joining the Euro will inevitably result in the devaluation of the pound. Although this would make British businesses more competitive with others in different countries, this would mean that for the British holidaymaker, the costs of going abroad would increase.
Finally, the main reason for many people, wishing not to join the Euro - patriotism. The vast majority of this country would be very unwilling to see t
he pound go forever, and I am sure that this will be the stance Euro-sceptics will follow when campaigning to keep the pound.
However, as seen in the election, and in my opinion, there are many other arguments for and against, and campaigning on just 'keeping the pound' will surely will only win votes from very few people, as demonstrated by the conservatives in the previous election.
This is a very brief overview of the advantages and problems that could occur from joining the Euro, and obviously there are many, many more arguments for and against joining.
Obviously, economics and business is rarely black and white, therefore it will be the government's task to correctly inform the consumer about the possible side effects of joining or not joining the Euro when the referendum is due.
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