Wanna Argument?
The Euro
The UK works, Europe doesn't?
The level of unemployment depends on a number of factors and the exchange rate is just one of these. The exchange rate we entered the ERM at was generally considered to be quite high and this would have contributed to the UK being less competitive against other European countries causing some unemployment. However, most of the unemployment was caused by the fact that the level of demand in the economy was very low. When aggregate demand in the economy falls the level of equilibrium output will also fall. This is shown in the diagram below:
In 1988-90 the economy was booming (a period often called the "Lawson Boom") and inflation rose. To reduce inflation interest rates had to be raised and this caused a significant reduction in aggregate demand and a recession. This combined with the high value of sterling in the ERM caused much of the unemployment from 1991 onwards.
Unemployment can also be caused by imperfections in the labour market. This type of unemployment is termed disequilibrium unemployment. We can see this in the diagram below:
UK labour markets are generally considered to be more flexible than in many European countries and this should put us in a strong competitive position if we entered the single currency.