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To What Extent Do You Agree with the View That the Uk Economy Would Benefit If the Euro Were to Be Adopted at Some Point in the Future

In: Business and Management

Submitted By cackermann
Words 796
Pages 4
Back in 1992, the UK Conservative government was forced to withdraw the Pound from the European Exchange Rate Mechanism (ERM) after they were unable to keep it above its agreed lower limit. However now comes the question of whether or not that was the correct reaction to Black Wednesday since 55% of UK’s exports are already going to Eurozone countries, European tourists can bring more spending power into the UK as mentioned in extract D and in a time of recession, strength seems to come in numbers. Hence the UK could benefit from an adoption of the Euro.

The most controversial issue is that the European Central Bank (ECB) will take over monetary policy if the UK were to join the 17-countries strong zone. The problem with this is the ‘one size doesn’t fit all’ dilemma that would make British interest rates the same as the Eurozone, by increasing it to ensure a low inflation rate, which is a priority in the ECB. Arguably, in the UK, this is at the expense of promoting economic growth and spending since the Bank of England tolerates a higher rate of inflation of 2% with a margin of ¬¬+- 1% because their priority is to avoid a double-dip recession. The interest rates in interest would cause a decrease in the marginal propensity to consume as well as increase loan debts, shown in the diagram with an inward shift in AD, as consumption and investment falls. Although there is also a decrease in Imports, it is marginally smaller than consumption (that accounts for 65% of Aggregate Demand). This leads to a fall in Real National Output, which accounts for growth as well as the price level.

On the other hand, the UK could benefit from the European Single Market, since the Treasury’s official assessment of its five economic tests acknowledged that EMU membership for the UK could enhance productivity by increasing trade flows between the UK and other EU nations and boost...

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