Britain - In Our Out

¶ … Britain - in our out for the Euro

Discuss the pros and cons for Britain of joining EMU.

Proponents of Britain joining the EMU claim that entry would stimulate foreign investment and trade with other EMU countries by eliminating exchange rate uncertainty and reducing transaction costs. They also argue that limits on deficits and set ranges for inflation and interest rates would promote greater stability and shared growth and greater economic efficiency. Economic justification rather than short-term political goals would drive economic policy.

And, Britain joining the EMU would stimulate competition by making it easier to compare prices and wages across countries.

On the negative side, critics charge that Britain would lose control over its own interest rates and monetary policy and expose Britain to EU regulations if it joined the EMU. This is particularly problematic since the British economy is not in synch with other European countries as evidenced by its lower unemployment, lower inflation and higher growth rates than Euroland. This suggests that Britain has specific needs for economic policies to benefit its own circumstances. A one-size fits all rate made be difficult to achieve, particularly when there are economic shocks that impact countries disproportionately. Further, limitations on deficits could lead to higher taxes and/or reductions in public spending.

Commentators pointed to the fact that many people in Britain have variable-rate mortgages as opposed to the fixed-rate mortgages more common in Europe. Britain also has the most flexible labor markets in Europe. How would these factors likely affect Britain's economic costs and benefits of joining the euro?

Euro entry by Britain could prove to be very destabilizing because of the large sensitivity to interest rate changes that might lead to instability in the housing market, consumer spending and the flexible labor market that helps keep unemployment low. Consider the following scenario. The most likely outcome of Britain's entry into the EMU would be that interest rates would drop to a lower level determined by the ECB. The UK will be very sensitive to these rate decreases because of the large number of variable-rate mortgages. Thus, there would, at least initially, be a housing boom as consumers are enticed to invest in housing by the lower interest rates

But, as interest rates eventually rise over time, the housing market corrects and higher mortgages lead to lower disposable income because it takes more and more money to service the mortgage debt. This, in turn would have a negative effect on the labor market, resulting in a sharp increase in unemployment.

While part of the goal of the EMU is for market convergence that will country-specific implications of EMU economic policies, there is no evidence that this will be true of the mortgage markets where people physically live, so Britain would be left with economic instability.

What type of British companies would most likely benefit from joining EMU?

Any company that exports to another Euroland country will no longer have the cost of converting one national currency to another. Multinationals also save money if all their subsidiaries trade in the same currency. Further, companies won't have to worry about exchange rate fluctuations and all will have access to a larger, more transparent market that will bring down prices and make firms better able to compete internationally.

Some believe that joining the EMU would help small -- and medium-sized enterprises and the tourist industry the most. Unlike larger companies, many have not had access to customers in Euroland or access to the Euro investor market. So, for the first time, small-and-medium sized companies will have access to Euroland markets and financial resources. The tourist industry should be boosted by the elimination of currency transaction costs between participating countries.

Some large multinational warned that they only chose to invest in Britain on the assumption it would ultimately adopt the euro. Why would multinationals be interested in Britain joining the Euro?