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The Single Currency - The Euro €
The Single Currency - The Euro €
Before 2002 each country in the EU had
its own currency, for Germany the
Deutschmark, France the Franc, Italy
the Lira and so on. The Single Currency
abolished these (and others), and
replaced them with the Euro €.So if you
have been to a Euro member country
such as France, Spain Italy or Ireland on
holiday in the last few years, you would
have spent Euros (€s) not Francs,
Pesetas or Lira, or Punts.
Not every country in Europe joined the
Euro, so when the Euro started there
were 11 members (see list below).
These countries did not just give up their
own currencies, but also power to set
their own interest rates. So the Irish
government could no more say we will
have an interest rate of 5%, whilst the
Germans set an interest rate of 3%,
instead the new European Central Bank
set an interest rate that was used in all
countries that were members of the
Euro.
The Member Countries of the Euro
Britain could have joined the Euro at the
start, but the UK government decided
The original members of the Euro
against it. The then New Labour
were Belgium,
government
did Germany,
not say noIreland,
forever, but
Spain,
France,
Italy,
Luxembourg,
instead said we would
join ‘whenthe
the
time
Netherlands,
was right’.Austria, Portugal and
Finland
Making the Single Currency Work.
For
the € to that
work,
therelater
has were
to be similar
Countries
joined
economic
performance
from
each and
of the
Greece, Slovenia, Cyprus, Malta
member
Slovakiacountries. This means inflation
and growth needed to be pretty much
the same across all Euro countries, and
governments had to make efforts to try
and achieve his. This matching of
economic performance would reduce
pressures within the Euro system, stop
economic arguments between member
states, and make interest rates as set by
the European Central Bank, relevant to
the economic circumstances present in
of each of the member state's
economies. Unfortunately many of the
member countries of the € have since
broken the rules of membership, with
governments borrowing far more than is
allowed. And interest rate policy has
been good for some members whilst in
others encouraging inflation or causing
problems with too little economic
growth, and again too much borrowing.
How Exchange Rates Work
The £ is a ‘floating currency’, this means
that its value is not fixed, but instead
continually moves up and down on the
foreign exchange markets. The value of
the £ is in the end decided by how
strong the UK economy is compared to
other countries economies, but on a day
to day basis the value of the £ comes
down to things like interest rates,
government borrowing an just how
confident those who deal in currencies
feel about the £.
On one day in February 2011 the £
could have been exchanged for €1.17,
so £100 would buy €117. But back in
October 2009, the exchange rate was
£1 to €1.05, so the same £100 would
only have bought €105. So if you were
going on holiday to France back in
2009, then your £100 spending money
would get you less spending power in
France, than it would now.
For businesses these changes in the
value of the £ also cause problems. If
the £ falls in value then, importing raw
materials and goods from abroad
becomes more expensive. If the £ rises
in value then firms find it harder to find
foreign buyers for their goods, as in the
foreign currency the price of the British
made goods has gone up.
Should we join the Euro?
There are arguments for and against
Britain joining the Euro. These are
shown below. For those of you who read
papers and watch the news, you will
know that many of the countries in the
Euro are in a financial mess at the
moment, so there is no chance of us
joining for the next few years.




Benefits of EMU—being in the single
currency
Those that argue for UK membership of
the €, normally use the following
benefits to state their case.

Removal of Transaction Costs.
That is the costs of changing one
currency into another. We all pay
these costs when we buy currency
to spend on our holidays in
Eurozone countries. So join the
Euro, more money to spend on
holiday.
Clearer Prices. If we were in the
Euro it would be easy to compare
prices across Europe (using the
internet) and then order our goods
from wherever was cheapest.
Removal of Exchange Rate
Volatility. This would end much of
the
uncertainty
in
business
transactions involving exchanging
currency—buying imports and
selling exports, when cost and
sales can depend on the value of
the £. A great deal of profitability
and competitiveness of businesses
and industries can depend on
movements in exchange rates.
Lower Long Term Interest Rates.
The belief has been that British
interest rates will fall to those
levels seen in the strongest
European
countries,
notably
Germany. Typically these have
been around 2% lower than UK
rates (but this was not true from
2009 –2011, when British interest
rates were lower). Any fall in
interest rates should encourage
investment and reduce business
costs,
making
firms
more
profitable.
Maintain London as the main
financial centre of Europe. Other
financial centres such as Frankfurt
are trying to take a large share of
London's business. Outside the
Euro we may find it much harder to
retain this business.
Disadvantages of joining the single
currency.
Those that argue against Membership of
the € use the following arguments

Transitional Costs. These are the
costs
involved
in
changing


accounting and pricing systems
that will have to be paid by UK
businesses. The estimated cost to
UK industry is around £5 billion.
Examples of transitional costs
include
changing
vending
machines for the new currency,
changing cash points, and repricing all goods in the new
currency.
Inflation Potential. The costs of
transition,
passed
onto
the
consumer,
will
cause
an
inflationary blip (temporary jump).
Prices will rise because of these
costs.
Regional
unemployment
will
worsen. Because interest rates will
now be Europe wide, controlled by
the European Central Bank, when
the main industrial and financial
centres are booming little can be
done for regions of countries that
have high unemployment. At the
moment the Bank of England can
alter interest rates to meet the
needs of the UK economy. But the
lack of flexibility that comes with
being part of the € in the setting of
interest rates, means the chances
of regions like Wales and the North
of England suffering can only

increase, making worse the
economic differences between the
richest and poorest areas in
Europe.
Recessions cannot be managed
effectively. A recession occurs
when output of an economy falls.
Because interest rate policy is now
Europe wide, countries that are
entering recessions ahead of
others, will not be able to reduce
interest rates in an attempt to
encourage spending, investment
and growth, and so stop the
increase in unemployment, and
speed recovery from the recession
We see then that there are arguments
for and against British membership ofthe
Euro. It is unlikely that we will join at any
time soon, as even when we had a real
chance of joining around 10 years ago,
the government said no. Many older
people in Britain do not want to give up
the £, they see it losing something very
important and giving more power to
Europe. Perhaps it will be your
generation who will decide to take
Britain in, and we will then say goodbye
to Pounds and Pence and bonjour to
Euros and Eurocents.