Europe - The euro

Theory 1 - Should the UK join? - arguments for and against a single currency

A significant element of the argument about whether the UK should join the euro is political. However, it is an economic issue as well. There are convincing arguments on both sides, and below are some of them. This is not a complete list, but offers some arguments to help you draw your own conclusions.

For

1. Elimination of the costs of converting currencies - converting between currencies has a cost for individuals and firms. A single currency removes these costs.
2. Increased price transparency - prices in different currencies can be difficult to compare. How often do you travel around with a calculator to check the price of something in another country? If everything is in the same currency, price comparison is straightforward. This may help firms cut costs, as they will be able to find the cheapest product more easily.
3. Increased competition and efficiency - a single currency should encourage greater competition as there is greater transparency in prices. This should help increase efficiency as firms are forced to remain competitive.
4. Increased inward investment - the single market in Europe has in excess of 200 million consumers. The euro is one of the most significant world currencies. Both these things add up to increased inward investment from the rest of the world into Europe now that the single currency has started.
5. Elimination of exchange rate uncertainty - one of the problems with trading with other countries is that you never know which way the exchange rate will move. It may move in your favour, but it could equally move against you and end up costing you a lot more. This sort of uncertainty can hinder trade - particularly for smaller firms. A single currency gets rid of all this uncertainty, and should encourage trade.

Against

1. 'One size fits all policy' - a single currency requires a single monetary policy. This means interest rates set centrally for all euro countries. Say an individual country is suffering a downturn in economic activity, but the rest are booming. The European Central Bank may want to increase interest rates, but that would simply worsen the recession for that country.
2. Differing policy effects - even when countries are closely in line, it may be possible that a single policy will have different effects on different countries. For example, a much larger proportion of people own their own house in the UK than many other European countries. This makes us much more reliant on mortgage lending. A change in interest rates then, may have a different effect on us than other countries.
3. Shocks - this doesn't refer to the shock of having different banknotes, but external economic shocks. An example could be a rapid rise in oil prices (as happened in the 1970s and 80s). This may affect different countries in different ways, depending how reliant they are on oil. The UK produces its own North Sea Oil and so may be affected differently to Luxembourg, which doesn't!
4. Adjustment problems - within a country, resources can move from one area to another to counteract differences between regions. This process (though far from perfect) helps to balance up unemployment rates and GDP levels between regions. It may be more difficult for this process to happen on a Europe-wide level, particularly given language and cultural differences.