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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. 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?

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  1. Should the UK join the Euro? We will have a vote at the start and the end

  2. Join AbstainNot join

  3. Benefits • The best answers will prioritise the benefits and costs made. • They will also go on to offer a counter argument

  4. 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.

  5. 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?……..

  6. 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…

  7. 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?

  8. 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

  9. 6)Lower inflation • EU is committed to low inflation so this would lower inflation in the UK. • Any counter arguments?

  10. Costs of joining the EU

  11. 1) Adjustment Costs • Cost of replacing currency and adjusting machines, however this is a one off cost

  12. 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.

  13. 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?

  14. 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?

  15. 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

  16. Latvia joins in 2014 • One of the fastest growing economies in the world. • Will be reluctant to adopt such low Interest Rates.

  17. 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.

  18. 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

  19. 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.

  20. 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

  21. 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.

  22. 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

  23. 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.

  24. 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”

  25. 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.

  26. 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

  27. 2) Is there sufficient Flexibility?

  28. 3)

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