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The European economic and monetary union which for all official reasons is known as the euro zone or the euro area. It comprises of 16 member states namely Austria, Slovakia, Slovenia, Belgium, Cyprus, Finland, France, Italy, Luxembourg, Malta, Netherlands, Germany, Greece, Ireland, Portugal, and Spain, having adopted the euro as their legal tender. UK has also been offered the option of joining the euro zone and accepting the euro as its currency. The European central bank is responsible for all monetary policies in the euro zone even though they don’t have a common management and representation for the fiscal and political issues. It is apparent that all the member states of the European union including the eight which have been obliged to do so needs be eligible to become a member of the euro zone. Some countries have adopted the euro as their currency by having a agreement with the European union like Vatican City, San Marino and Monaco and they are not officially a part of the euro zone nor are they represented in the European Central Bank.
Whether the UK joins the euro zone or not has its advantages, drawbacks and will affect every field whether politics, business, pricing of commodities etc.
The opportunity cost will be reduced due to the losses in investment and trade in the euro countries, For the first time SMEs will be able to act freely in the market. Such a situation will give impetus to SME sectors leading to their growth and development.
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Increase in Stability would be witnessed due to decrease in vulnerability to short term shocks (such as housing prices and rising interest rates) that will affect the foreign exchange rates, which will in turn affect the level of exports.
UK may find itself getting side tracked in terms of political decisions within the EU, if not a full member in economic terms.
Business costs would be reduced as the effort of converting pounds to Euros’ will be eliminated and associated fluctuations in currency rates that could reduce an unexpected surplus.
UK companies will be able to take long term decisions as the unexpected exchange rate movements will drastically reduce.
As the competition in all local markets increases it also rises the the benefits that consumers enjoy due to varied options and price transparency, which can no longer be hidden with currency rate fluctuations.
Majority of the population in the UK do not support the decision of joining the euro zone which may culminate in no confidence in the economy and many also believe that UK might lose control over its own economy.
The bank rates will be decided by the Central Bank for all euro zone countries and UK would not be able to set its own rates. This will reduces the ability of the government to react to shocks. The fluctuation in interest rates will benefit all the countries of the euro zone , which means that it benefits some countries more than other euro zone countries.
Mortgages in the UK are different from the rest of Europe. In Britain, there is a high proportion of owner-occupiers with variable rate mortgages. In the rest of Europe, however, there is a greater tendency towards long-term lease, and those with long-term mortgages are fixed rates. Therefore, homeowners in the UK are more likely to be affected by changes in interest rates than their counterparts in other EU countries.
The Euro zone member countries are required to follow the guidelines by the Stability and Growth Pact, the member countries should not use credit beyond its income. If Britain wants to borrow money for long-term investments it would be contrary to the guidelines, hence limiting the amount of long term loans that UK can take for growth and development.
Impact of joining the euro zone on the business in UK
Advantages in business planning: – Joining the euro zone would reduce the foreign exchange rate fluctuation which would benefit the companies in their long term investments.
The cost of credit – for quite some time now the rate of interest in Britain is higher than the continental rates of interest. Competitors of the euro zone enjoy benefits of the low prices by availing for loans which helps them improve their technology.
Cross-border transactions: cross border transaction of business, services, and material becomes easier and faster due to the mineralisation of the restriction to business over the borders.
Price transparency: – With the euro, it will be possible to compare prices for identical products or services between the different member countries of the euro zone. This will enable the end user to decide on the product easily as it will give full transparency of price also confirming to better quality due to the open competition , the companies in turn will also have to compete by giving better services to remain in the market thus inducing a continuous process of research and development enabling the consumer to get the best product of latest technology.
Scope of the pan-Euro-sourcing, marketing, labelling and packaging: – By joining the euro zone it makes business easier and much beneficial by opening new option of more suppliers from outside the local market. This opens the possibility of a real business savings. Through the creation of a common unit of account for commercial activities, ensures that businesses are facing a larger, more integrated European market.
Business taxes: – There are chances that joining the euro zone may lead to an increase in corporate taxes in the UK and may also cause job loss and reduced number of orders.
Competitive: -Business which are subject to exchange risks and transaction cost as their major obstacle to cross border trading will get a wider market due to diminishing barriers. Business can be promoted leading to fiercer competition among products and services.
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Impact of joining the euro zone on the people in the UK
Travelling to any member country in the euro zone becomes easier as there is no need of currency exchange. This encourages the effluent consumers to shop and travel abroad
Job Openings :-Job opportunities will be opened up the british economy will be made compatible with te euro countries, there will be more foreign investments leading to industrial growth which will culminate in increase in job opportunities
VAT: – If UK joins the euro, there will be VAT on children clothing and food, the rate of tax will increase considerably.
Effects on the prices of commodities in the UK on joining the euro zone
As discussed earlier if the UK joins the euro zone a price transparency will be witnessed which will make it very difficult for car companies to hold up to their very high prices. With the UK joining the euro zone there can be a considerable increase in energy prices.By joining the euro zone the rate of interests for home loans will get lowered from what it is right now, thus increasing the buying power of the homeowners and getting the real estate market to boom. Due to the transparency of prices, without currency exchange costs and home shopping via the Internet or by mail, consumers can go for the best price in euro zone. But for shopping outside the euro zone, the euro has not proved to be a stable currency to date.
Influence on UK’s Economy on joining the euro zone
In case UK stays out of the euro zone then any appreciation in pound rates will mar the British exports which in turn will dampen the interests of the investors. Whereas any depreciation of pound rates will have an adverse repercussion barring the protection provided by the euro zone.
Maintaining the GBP as the currency of UK enables Great Britain to adopt their own shock absorbing mechanisms. E.g. in case of depression or inflation they can adjust the interest rates to smoothen the prevalent conditions without any outside interference or pressures, where as if they become members of the euro zone they would be guided by the ECB which in turn would set rates for the euro nations. There can be a possibility that these rates may or may not be compatible to the UK economy. Compatibility would be certain but the fear still would lurk on. The e.g. would be the fall in oil prices effected UK the most in comparision to the other member countries of the euro zone
the very idea of location of London as the financial capital of Europe loses some ground in the euro zone. Such situations are highly unacceptable as London is doing extremely well away from the euro zone and has effective euro relations.
In time of economic crisis the proportionate contributions from euro zone nations would affect the UK there will be concerns regarding implications of fiscal federalism and budgetary burden on the UK.
Another aspect of concern is the burden on the UK tax payer to finance the pension payments of the euro zone. Some nations of the euro zone have to make pension payments and these liabilities may also be passed down to the UK. The Maastrict however prevents such situatios from ever arising.
Joining the euro zone will have a very good impact on the exports from UK as the strengthening of pounds which has always had a bad impact on the exports as this can be observed in all previous experiences we have had cases which is evident from Siemens and Gillette. There are similar case studies of leading car manufacturers such as Rovers against BMW. The figures make it evident that the investments have reached a record peak in the fourth year
The problem with the Euro
Since the euro will become the single monetary tender on the UK joining the euro zone with a common rate of interest for all the member states of the euro zone it causes a concern for those member countries which have a faster or a slower growth rate to follow the ECB fro e.g. supposing a member state is in recession it would definitely benefit from the low interest rates thus increasing demand. However the said state cannot later on be flexible on the rates thus ending up on a tight spot
The euro being a universally accepted euro member countries, free movement of labour and capital has its limitations due to the various adaptability of the people within the diverse regions that Europe consists of.
The fiscal policies of the ECB also have their own restrictions since they have a common monetary policy without any similarity in them national debts thus causing hardships in attracting potential buyers. A glaring e.g. of such a problem are the countries of the Mediterranean like ItalY, Greece Spain etc which have accumulated a large national debt, with Italy leading them at a GDP of 100%.
Since all the member states are protected against any currency crises it creates less opportunities and incentive for structural reforms and fiscal responsibilities. Since devaluation of the legal tender is not an option that cannot be explored at all. As devaluation is not possible the growth of the euro states are dependent on the euro rates now that the euro has become alternatively acknowledged like the dollar it has gained the status of a reserve currency whose rates are bound to appreciate further. However sine the euro is stronger than the dollar, the exporter and the other allied businesses like tourism etc now face a problem thus pulling down economic growth prospects in the euro area. Fluctuating euro rates and depreciating flexibility is a problem for countries with large current account deficits, due to the incapability of devaluing the euro which is the only solution to correct the current account deficit as this enables cheaper exports. This opportunity has been lost by the European member countries of the euro zone.
Conclusion (My opinion)
In the recent past membership to the euro zone was a major issue due to lack of enthusiasm and public awareness. In spite of all this the British economy stood out and did well for herself without being a member of the euro zone. In my opinion UK should not become a member of the euro zone as she has to follow the fiscal and monetary policies framed by the ECB, thus restricting a healthy economic growth. Presently the economic slow down in the UK is not because of having her own currency or monetary policies but because of global recession. The recession is in itself a litmus test of why the UK should not become a member of the euro zone.
Infact during such crises where recession takes its toll on a country it is always better to have autonomy over monetary policies and interest rates so as to frame them accordingly for the benefit of ones own economic growth. In case the euro zone they will have to follow the euro zone’s fiscal policies which will be uniform to all the member countries making it difficult to come out of a crises like recession, since the interest rates will be decided by the ECB considering all member countries as one entity, which may or may or benefit the UK economy for e.g. if the euro economy recovers after the UK economy the interest rates will rise slowly making it difficult for UK’s economic recovery one such instance is that of the housing industry in the UK which clearly indicates that UK is very sensitive to fluctuations in the interest rates as mortgage variables is a major issue which means that a fluctuation, that is either a small increase or decrease in the interest rates has a enormous effect on the consumers buying power. Therefore it is very important that monetary, fiscal and the rate of interest is controlled and framed independently along with corresponding policies to suit the UK economy. The benefits and advantages of being a non member of the euro zone are manifold and good for a strong and healthy stable economic growth for the UK.
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