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As Europe says 'hello' to the euro, is the UK sound as a pound?
What are the dangers of having a single currency?
'One-Size Fits All' monetary policy
A single currency for 12 out of the 15 European Union member states necessitates a single interest rate, set by the European Central Bank. This runs the risk of monetary policy not being sufficiently flexible when dealing with the different economic conditions in the various eurozone states.
This means that eurozone governments are unable to change their interest rate in order to allow for these economic differences. Also, as there is only one currency, foreign exchange markets cannot compensate for the differences in eurozone economies.
External shocks, such as a September 11th event or a massive oil price rise, would impact on different eurozone members in different ways. The ECB would still set a single interest rate and this would not change.
Non-Convergence of eurozone trade cycles
EU countries wanting to adopt the euro faced a set of targets that they had to reach in order to be considered. These 'convergence criteria' aimed to avoid imbalances between the various eurozone countries affecting the stability of the single currency. They focused on inflation, interest rates, budget deficits, national debt and exchange rates (see the Virtual Economy for more on the Maastricht convergence criteria).
The eurozone is a 'patchwork quilt' of different economies. It is perhaps only when economic conditions are tough that these differences really become clear. Despite rumours of the imminent recovery in America, there appears to be at present the first economic downturn to affect the world's three largest economies (the USA, Japan and Europe) since the 1970s.
And yet in the EU these conditions are being felt differently according to your business location.
For instance, there is evidence that the world downturn is hitting Germany particularly hard, (look at their unemployment rate for evidence). German exports rely heavily on capital goods (items that are used in the production of other goods), so a collapse in global business investment affects German firms more than others in the EU.
Spain is likely to be disproportionately affected by the economic problems in Argentina, because its banks are deeply involved with the Argentinian system.
France, whilst being as export-dependent as Germany, is less reliant on trade in capital goods, so may be able to avoid recession through strong consumer spending.
Britain, on the other hand appears set to resist economic recession altogether. As such, the UK economy seems to be out of step with the general EU trading cycle. You should refer to the following diagram and identify the position of the UK economy in relation to other EU economies.
