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Evaluate the Case for the Uk Joining the Euro

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Evaluate the case for the UK joining the Euro

There has been much dispute over whether the Euro has been a success and as to whether Britain should drop the pound and become the latest country to join the Euro. There are many advantages for and against the case for the UK joining the Euro which this essay will evaluate.

One of the key advantages that adopting the Euro would bring to the UK is the lower costs of exchange associated with a single currency. When Britain trades with Europe they must pay the exporter in Euro’s and to obtain the currency they must pay a charge to banks. This is a significant cost which is usually passed on to consumers through higher prices. This is a very significant benefit considering for the EU as a whole the transaction costs involved with trading between each other are estimated at 0.4% of EU GDP. Associated with this is also price transparency; using a single currency makes it much easier for consumers and business to compare relative prices between prices. This also leads to improvements in allocative efficiency which in turn increases consumer welfare, however, when compared to other factors this gives relatively small financial gains for Britain.

Joining the Euro would also increase Foreign Direct Investment. Many argue that the high amount of FDI that Britain currently receives could be at threat in the long-term if the UK doesn’t adopt the Euro. By removing a currency, which is a barrier to trade, membership of the Euro could also facilitate the development of UK-owned multinational enterprises.

Retaining a fixed exchange rate increases the risk of speculative attacks on the currency as they are said to have a one-way bet. If the currency they have bet against is not devalued, all they have lost is their transactions cost on the deal, whereas betting correctly can result in substantial gains. The only way in which...

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