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.

Britain could have joined the Euro at the start, but the UK government decided against it. The then New Labour government did not say no forever, but instead said we would join ‘when the time was right’.

Making the Single Currency Work.
For the € to work, there has to be similar economic performance from each of the member countries. 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 performancewould 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 re-pricing 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 offlexibility 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.Becauseinterest 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 arearguments 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.