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Should the UK join the Euro? . We will have a vote at the start and the end. Join Abstain Not join. Benefits. The best answers will prioritise the benefits and costs made. They will also go on to offer a counter argument. 1) Less transactional costs.

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should the uk join the euro

Should the UK join the Euro?

We will have a vote at the start and the end

benefits
Benefits
  • The best answers will prioritise the benefits and costs made.
  • They will also go on to offer a counter argument
1 less transactional costs
1) Less transactional costs.

There will be no longer a cost involved in changing currencies; this will benefit tourists and firms who trade within the EURO area. 1% GDP.

2 better for uk producers
2) Better for UK producers
  • Easier to export due to a removal of the last real trade barrier; the exchange rate.
  • If UK goods were priced in euros then European consumers would be likely to buy them. There would be no exchange rate volatility.
  • But any counter arguments?……..
3 fdi
3) FDI
  • FDI money from EU member states accounts for half the total stock of FDI; the report estimates the EU FDI in the UK creates 50-60,000 jobs.
  • Sustainable growth etc…
4 gateway economy
4) Gateway Economy
  • The UK attracts such a high amount of FDI from non-EU countries. International companies choose the UK as the gateway for their European operations. 26% of non-EU companies have their European Headquarters in the UK.
  • I.e. Coca – Cola, CitiGroup Investment Bank
  • Is there a reason Non – EU countries choose UK over their other European partners at the moment?
5 price transparency
5) Price transparency
  • Price transparency will bring prices down for Consumers. UK cars are some of the most expensive in EU. Same currency would expose these differences.
  • Allocative efficiency
6 lower inflation
6)Lower inflation
  • EU is committed to low inflation so this would lower inflation in the UK.
  • Any counter arguments?
1 adjustment costs
1) Adjustment Costs
  • Cost of replacing currency and adjusting machines, however this is a one off cost
2 loss of autonomy over interest rates
2) Loss of autonomy over Interest Rates.
  • With the ECB setting a common interest rate for the whole area, countries have lost an important part of their Monetary policy.
3 loss of autonomy over exchange rates
3) Loss of autonomy over exchange rates
  • The biggest advantage of a floating exchange rate is that it can depreciate. This can then provide a stimulus to the economy.
  • We are finding it easier to trade with Non – EU countries because our exchange rate is lower
  • Any counter arguments?
4 stability and growth pact
4) Stability and Growth Pact
  • Members of the Eurozone are not allowed more than 3% budget deficit nor National Debt over 40% of GDP. ( We set ours at 60%)
  • This further restricts economic policy.
  • Does this apply anymore?
5 macroeconomic convergence
5) Macroeconomic convergence.
  • EU states will react differently to external shocks.
  • Some are oil exporters, some oil importers.
  • In the ‘09 crisis Germany actually had high inflation. They were reluctant to lower Interest rates
latvia joins in 2014
Latvia joins in 2014
  • One of the fastest growing economies in the world.
  • Will be reluctant to adopt such low Interest Rates.
6 policy sensitivity
6) Policy sensitivity
  • Monetary Policy will have different effects in different countries. For example the UK is sensitive to changes in the interest rate because many people have tracker mortgages. Even a small rise would have huge negative effects on UK Consumption.
rank the six costs and six benefits in terms of significance
Rank the six costs and six benefits in terms of significance.
  • 10 is unavoidably, inarguable significance that it is certain to happen
  • 0 is irrelevant
conclusion
Conclusion
  • An Optimal Currency Zone needs to have economies that are experiencing:
  • “Macroeconomic Convergence.”
  • Economies that follow a similar economic cycle and react to external shocks in the same way.
the uk is very different from most eu states
The UK is very different from most EU states
  • Britain has more Non – EU trade ( USA especially)
  • Very Interest Rate Elastic ( high debt and many houses on flexible mortgages)
  • Oil exporter
conclusion1
Conclusion
  • Debate is changing
  • Single market is great, but becoming “Euro” or “out.” Out of the SM could lead to FDI flight.
  • Although Eurozone might revert to the core eight economies, which would be good to be part of.
  • Depends on how sure we are FDI, trade with Non – EU, EU will remain high even if we are out.
slide24

The more converged we are to Europe the more of a reason to join.

  • The recent crisis has showed we are less converged with Europe than other economies.
  • Perhaps there is a competitive advantage from staying out of the Euro
uk s stance on the single currency
Uk’s stance on the Single Currency
  • This topic is very out of date, but the criteria is interesting and it is part of the syllabus.
slide26

Gordon Brown drew up 5 economic tests which the UK must pass for the UK to join. The main principle behind these 5 economic tests was whether the UK would cope with a common monetary policy. It was really asking

  • “Is there Macroeconomic Harminsation”
1 economic harmonisation
1) Economic Harmonisation.
  • The UK economy must be harmonised with the Euro zone. If the UK economy was growing much faster than EU then UK interest rates would need to be higher.
  • There must be a convergence of the economic cycle over a number of quarters.
least converged of all eu members
Least converged of all EU members
  • Britain has more Non – EU trade ( USA especially)
  • Very Interest Rate Elastic ( high debt and many houses on flexible mortgages)
  • Oil exporter