UK Join the European Monetary Essay

  • Length: 9 pages
  • Sources: 8
  • Subject: Economics
  • Type: Essay
  • Paper: #27654606

Excerpt from Essay :

(Minford; Walters, 2004, p. 306)

(xii) Competition to the U.S. dollar: In the likelihood of UK joining the EMU and adopting the single currency, the threat posed by the only international competitor to the U.S. dollar, the euro, would become real. Therefore, the U.S., at least would not encourage such a move and witness a downturn to its currency, the only true international currency. (Minford; Walters, 2004, p. 306) However, not all economic issues go against UK's joining the currency union. There are several factors which may benefit the UK if it joins the EMU.

Arguments in favor of joining the EMU

Some of the factors which support UK's joining the EMU are:

(i) A unified Europe where trade barriers are abolished and specialization and economic transactions occur as per the "Law of Comparative Advantage" will result in enhanced production and increase in the level of living standards. Increase in specialization will help in creating economies of scale along with decrease in production costs. (European Monetary Union: Should Britain join the single European currency?); (Should the U. K join the European Monetary Union?)

(ii) Lowered inflation and price transparency: Joining the EMU will provide the benefit of lowering inflation, a perpetual problem in UK, and expanding trade. It will also result in increased competition and higher price transparency. Consumers also stand to gain from this since they can now compare product prices and are less subjected to price discrimination. Business firms can also purchase and sell from a cheaper and larger choice of suppliers. Such benefits have the potential of enhancing integration and trade between member nations and offer lower inflation and better economies of scale. In addition, the traded goods market can get free access to markets that were previously protected by quotas and tariffs. This can lead to improved trade and more prosperity for the member nations. (European Monetary Union: Should Britain join the single European currency?); (Should the U. K join the European Monetary Union?)

(iii) Monetary Union helps in market integration: According to a study conducted by Andrew Rose of Berkeley, monetary union has a notable influence on trade. This may be because monetary unions eliminates the uncertainty associated with trading and makes trading and long-term decision making much easier. This also assists in enhancing economic performance. (Minford; Walters, 2004, p. 308)

(iv) Growth in inward investment: Having a stable currency as compared to UK's key business partners will enhance inward investment by foreign companies who want to set up base in the EU. A Euro land having exchange rate stability will encourage more investment which in turn can generate new jobs and increase physical capital. This will have the potential to act as a major catalyst to usher in change and foster economic growth. (European Monetary Union: Should Britain join the single European currency?); (Should the U. K join the European Monetary Union?)

(v) UK and the European market: In case UK joins the EMU, it will come closer to the European market which will help firms when they have to develop and market new and innovative products. Refusing to join the EMU can have an adverse impact on businesses since thousands of local jobs can be lost if foreign investors decide to set up their factories in Euro zone just like Toyota Motors which threatened to move out of UK. In such a situation British businesses may become somewhat uncompetitive as compared to their Euro land rivals. (European Monetary Union: Should Britain join the single European currency?); (Should the U. K join the European Monetary Union?)

(vi) Benefit for local firms: Local firms in UK will benefit tremendously if UK joins the EMU since they will have the opportunity to diversify across Europe which would be next to impossible if UK decides to remain isolated. (European Monetary Union: Should Britain join the single European currency?); (Should the U. K join the European Monetary Union?)

(vii) Status of London: One of the main concerns facing UK in joining the EMU is the loss of political sovereignty that may occur consequently. However, an equally disturbing probability exists in case UK does not join the EMU and that is the loss of London's status of being Europe's financial hub. This status might get transferred to Frankfurt since most of the financial transactions in Europe are likely to take place in Euro zone instead of in London. (European Monetary Union: Should Britain join the single European currency?); (Should the U. K join the European Monetary Union?) Joining the EMU can not only consolidate London's position as Europe's financial hub but even have the potential to enhance its status. (De Grauwe, 2007, p. 105)

(viii) Reduction in transaction costs: Joining the EMU would result in having a common currency throughout various economies which would lead to a reduction in costs of transactions conducted internationally. These savings would become proportionately higher with the growth in the volume of trade conducted with other member states. UK's economy is a very open one and around 30% of its GDP comes from imports and exports from and to other countries, out of which approximately 50% is conducted with European nations. Therefore, savings arising from being a part of the currency union would be substantial and immediate as well. (Mankiw; Taylor, 2006, p. 807)

(ix) Price stability: UK has been plagued by high rates of inflation. Joining the EMU will mean that the common currency, euro, will be handled by the ECB or European Central Bank which will fix interest rates at a level that will keep inflation low. The ECB, situated in Frankfurt, is based on the German Bundesbank which has proved to be successful in checking inflation levels in a turbulent Germany after the Second World War. Any attempts of individual administrations to borrow or upset the inflation targets will be restrained by the "Growth and Stability Pact." (European Monetary Union: Should Britain join the single European currency?)

Other Issues

It has been seen that social, cultural and political reasons have played a more important role than economic reasons in UK's decisions about joining the EMU. According to some experts, there are fears in Britain that losing control of its own economy might force the country to bow to external pressures for accepting other types of political integration as well. Others have pointed out that the durability of the monetary union is dependent on political union and might result in the formation of a single political entity and that UK would lose its political identity in the future. (Should the U. K join the European Monetary Union?)


A transition period is always accompanied by hiccups and limiting one's vision only to the losses experienced during this transition period would be myopic. The present administration in UK must be far-sighted enough to look beyond this transition period and see the benefits provided by joining the currency union in the long-term. The EU and the EMU are still in their developing phases and will need some time to evolve into a more mature union. The problems that plague the EMU and the issue of UK joining the union like a common interest rate, intra-European fiscal transfers, susceptibility of UK lapsing into frequent bouts of inflation, etc. can all be worked around and have to be given sufficient time to improve.

The idea that the nation might lose its political identity sounds too far-fetched in this modern world. It is true that there may be short-term costs associated with joining the currency union but the long-term benefits may far outstrip them. However, it would not be wise to rush into the monetary union just now when the world is facing one of its worst economic crises and UK must wait for the appropriate moment when joining the European Monetary Union would best serve the economic, political as well as social interests of the country.


De Grauwe, Paul. 2007. Economics of Monetary Union. Oxford University Press.

El-Agraa, A.M. 2007. The European Union. Cambridge University Press.

Harris, Neil. 2001. Business economics. Butterworth-Heinemann.

Mankiw, N. Gregory; Taylor, Mark P. 2006. Economics. Cengage Learning EMEA.

Minford, Patrick; Walters, Alan Arthur. 2004. Money Matters. Edward Elgar Publishing.

N.A. n. d. European Monetary Union: Should Britain join the single European currency?

A2 Module 6: Program of study 4: European Monetary Union. [Online]. Available at: [accessed 25 April 2008]

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N.A. 2009. What are the arguments for and against joining the Euro. [Online]. Available at: [accessed 25 April…

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