United Kingdom and The Euro - Economics

Economics

An assessment of British membership based on five economic tests was published on 9 June 2003 by Gordon Brown, when he was Chancellor of the Exchequer. Though maintaining the government's positive view on the euro, the report opposed membership because four out of the five tests were not passed. However, the 2003 document also noted the considerable progress of the UK towards satisfying the five tests since 1997, and the desirability of making policy decisions to adapt the UK economy to better satisfy the tests in future. It cited considerable long-term benefits to be gained from eventual, prudently-conducted EMU membership.

Some believe that removing the United Kingdom's ability to set its own interest rates would have detrimental effects on its economy. One argument is that currency flexibility is a vital tool and that the sharp devaluation of sterling in 2008 was just what Britain needed to rebalance its economy. Another objection is that many continental European governments have large unfunded pension liabilities. They fear that if Britain adopts the euro, these liabilities could put a debt burden on the British taxpayer, though others have dismissed this argument as spurious.

Some argue that as intra-European exports are 60% of the UK's total exports, a single currency would enhance the Internal Market by reducing the cost of exchanging currency for businesses and travellers, and reducing currency risk. An interesting parallel can be seen in the 19th century discussions concerning the possibility of the UK joining the Latin Monetary Union.

The entry of the UK into the Eurozone would likely have a positive effect on trade with the other members of the Eurozone. It could also have a stabilising effect on the stock market prices in the UK. A simulation of the entry in 1999 found that it would have had an overall positive, though small, effect in the long term on the UK GDP if the entry had been made with the rate of exchange of the pound to the euro at that time. With a lower rate of exchange, the entry would have had more clearly a positive effect on the UK GDP. A 2009 study about the effect of an entry in the coming years found that the effect would likely be positive, improving the stability for the UK economy.

In June 2003, Gordon Brown stated that the best exchange rate for the UK to join the euro would be around 73 pence per euro. (On 26 May 2003 the Euro had reached 72.100, a value not exceeded until 21 December 2007). The euro rose above 80 pence in 2008 and peaked at 97.855p on 29 December 2008. With the impact of the Global financial crisis of 2008 on the British economy: failing banks, plunging UK property values and the pound at 85.98p against the euro on 19 November 2008, some British analysts stated that adopting the euro was far preferable to any other possible solutions for Britain's economic problems. On 29 December 2008, the BBC reported that the euro had reached roughly 97.7p, due to poorer economic forecasts. This report stated that many analysts believed that parity with the euro was only a matter of time.

During 2009, the value of the euro against the pound fluctuated between 96.100p on 2 January and 84.255p on 22 June. In 2010 the value of the euro against the pound fluctuated between 91.140p on 10 March and 81.040p on 29 June. On 31 December 2010 the euro closed at 86.075p. The weakness and the volatility of the pound have raised concerns for the costs it entails for British consumers at home, and Britons living or travelling abroad. On the other hand, a report in Britain's Daily Telegraph has argued that the high euro has caused problems in the eurozone outside Germany. The Liberal Democrats have expressed interest in seeing Britain join the euro in the long term.

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