IS THE BRITISH ECONOMY IN THE PRESENT CRISIS BETTER OFF WITH ITS POUND OR WOULD BE BETTER OF WITH THE EURO

Executive Summary
The European Monetary Union is constantly expanding since it was launched, with the main objective of using a single monetary policy and currency within its member states. The adoption of the euro by Britain in this present economic crisis is both an opportunity and a threat towards the country’s economy. The objective of this paper was to determine whether the British economy will be better with the pound or better off with the Euro. This was achieved by reviewing the arguments that are core regarding Britain’s membership of the European Monetary Union. The research then focused on the impacts of the credit crunch and the recent global recession regarding the prospects of UK joining the Euro Zone. It was found that adopting the euro implies joining the euro zone, meaning that Britain will be a full affiliate of the larger single market and can benefit from the economies of scale and competitive excellence that is likely to be imposed by a monetary union and a single currency. Therefore, the British economy will be better off with the euro compared to the pound in the present global financial crisis.
Introduction
The adoption of a single currency implies that there are no cases of independent national monetary policies, a responsibility that is undertake by the European Central Bank, which undertakes the wide monetary policy in Europe (Levitt & Lord 2000). As a result, joining the Euro implies losing the monetary policy and associated interest and exchange rates. The present financial crisis has exposed the susceptibility of Britain regarding having world-scale banks yet operating on a medium-sized currency. At least ten years have passed since the establishment of a monetary policy union under the Euro (Marsh 2009). The European Central Bank is charged with the responsibility of formulating the interest rates and issuing the bank notes and coins of the Euro currency for the sixteen member countries of the European Union. The UK is the largest member country in the EU that is yet to adopt the Euro; it opted to retain its national currency unit as the sterling pound with the Bank of England being charged with the responsibility of supplying and establishing the sterling interest rates (Norris 2011). There have been opposing viewpoints regarding the British membership of the European Monetary Union irrespective the strong economic and financial ties that exist between the United Kingdom and the larger Europe. In order to determine whether British economy will be better off with in the present crisis with the Euro or its Pound is integral to conduct a critical analysis of the opposing viewpoints in order to determine the answer the question (Blanchard 2000). This research paper reviews the opposing viewpoints concerning British membership of the European Monetary Union in order to determine the performance of the British Economy in the current financial crisis.
Problem Definition
This research aims at determining whether the British economy is better off with its pound or would be better off with the Euro. This will be achieved by reviewing the arguments that are core regarding Britain’s membership of the European Monetary Union. The research then focuses on the impacts of the credit crunch and the recent global recession on this subject.
Methodology
The research mainly relies on analysis of secondary sources of data that are the potential for obtaining the opposing viewpoints regarding the British adoption of the Euro. This research will begin by a review of the economics of monetary union, after which it will review the proposed arguments for and against Britain’s membership of the Euro Area. This will be achieved by reviewing the arguments that are core regarding Britain’s membership of the European Monetary Union. The research then focuses on the impacts of the credit crunch and the recent global recession on this subject. The deductive approach will be used because the research will begin by a theoretical framework, hypothesis formulation and arriving at the conclusion in accordance to the findings of the study (Baumol & Alan 2006).
Main Body
Economics of the European Monetary Union
The most defining characteristic of a monetary union is the implementation of a single currency, which in the case of the European monetary union is the Euro (Baumol & Alan 2006). In such a scenario, there are two significant implications, which involve the elimination of the fluctuation of exchange rates in the member countries and that the monetary union implies the same interest rates in all the countries (Blanchard 2000). The European Central Bank is charged with the responsibility of setting a single interest rate that is applicable in the Euro area. Recent research studies by the European Central Bank reports that using a single interest rate is related with the aspect of convergence of long-term interest rates that are payable using government bonds, this is turn plays an important role in setting the cost of borrowing for a majority of the homeowners and business proprietors (O’Sullivan 2003). The integration of a fixed exchange rate among the member states and using universal interest rates are responsible for the loss of national monetary autonomy when countries join a monetary union that is based on a single currency area.
The arguments that are for a monetary union are arguably evident. Trade economists assert that a single currency area helps in the savings that are incurred during the transactions between countries (Baumol & Alan 2006). For instance, losses associated with different foreign exchange rates are eliminated by using a single currency across the various member countries. Economists also consent that the growth in trade between European countries can be significantly attributed to the reduced costs of conducting cross-border business. The outcome is that it there is access to larger markets that makes it possible for businesses to make effective use of economics of scale, which in turn plays a significant role in lowering the unit cost of production and cultivating competitiveness in such a manner that helps in boosting the long-term growth potentials and resulting to delivery of better value for money for the end users of the products in such a market (Blanchard 2000).
An analysis at the macroeconomic level reveals that a monetary union presents an opportunity for an improved policy. For instance, during the time whereby there were 16 different national currencies in Europe, there was a potent of currency attacks, whereby investors could sell a given currency uncompromisingly basing on a perception that it was over-valued, this compelled authorities to invest in huge amounts of foreign currencies that would serve to support their currency in event of a currency attack. The monetary union eliminates this aspect by minimizing the foreign currency holdings, thereby reducing the instances of a potential currency attack by a single currency (Baumol & Alan 2006). The new monetary framework also means that there will be reduced instances of policy errors that were a common instance during the 80s and 90s.
The significant disadvantage of a adopting a monetary union is that the member countries lack the ability to make use of the tools of monetary policy to address macroeconomic goals such as addressing high inflation and employment. Despite the fact that many national interests have been subject to collapsing in the euro zone, the same does not apply for the case of the rates of inflation and unemployment. This in turn results to inefficient macroeconomic results for the countries under the monetary union.
The primary issue of concern that arises from the economics of monetary union is whether the potential benefits are more than the costs in order to determine whether British economy will be better with its pound or will be better off using the Euro. This is mostly determined by the inefficiencies that are imposed by the adoption of a single currency and monetary policy. According to Nobel Laureate Robert Mundell, labor mobility can serves as a substitute for monetary policy in terms of an adjustment mechanism in accordance with the asymmetric demand shocks (Marsh 2009). For instance, if Ireland faced a significant macroeconomic downturn compared to Netherlands, then under a common monetary policy, unemployed Irish could move to Netherlands in order to facilitate the realization of full employment in the countries that are under a monetary union. This implies that Ireland and Netherlands would make up an Optimal Currency Area (Baumol & Alan 2006). The significant limitation associated with this approach is that countries that are in the euro zone and the United Kingdom do not have the required international labor mobility to qualify as an Optimal Currency Area in accordance with the criterion established by Mundell. Using the same example of Irish and Netherlands, the inflation in Ireland could fall to a rate that the exports of the country are competitive imposing an increase in demand for Irish products that will also aid in the restoration of full employment in the country. In addition, the national fiscal policies could be effectively deployed to bridge the gap imposed by a monetary union (Blanchard 2000). The following section discusses the reasons for Britain membership to the European Monetary Union.
The Reasons for adopting the Euro
The main objectives for Britain adopting the euro are similar to the joining of a larger unified market. This will facilitate businesses within Britain to expand owing to the fact that they will sell widely and benefit from the economies of scale. In addition, the differences in national currencies are a major barrier to international trade (Baumol & Alan 2006). In order to have a single market in Europe that is effective, it is important to operate on a single currency, as in the case of the United States (Blanchard 2000). Currently, British firms that are embarking on exporting their products to the continent are uncertain of how the pound will perform in foreign financial markets. This implies that businesses in Britain cannot precisely determine their future profits that may be due to expansion in the larger Europe. This poses an exchange rate risk, which is a significant trade barrier for Europe. In addition, Britain is currently facing an economic downturn compared to the situation before 1999 (Baumol & Alan 2006). This is because continental investment has been increasing in the euro zone due to elimination of the exchange rate risk by use of a single currency. In addition, trade activities in the euro zone has increased by approximately 20 percent compared to the Gross Domestic product, while the trade between Britain and the larger continent has been stagnant, which can be significantly attributed to a different currency. There is also a possibility that the fluctuations in the exchange rates may increase (Baumol & Alan 2006). This is due to the fact that transfer of capital will be facilitated by the adoption of the euro. Britain has been subjected to this effect regarding the strength of the pound during 1998-2002, which imposed devastating effects on majority of export and import- competing businesses in the country. The basic implication is that a different currency stands as an impediment for a country that is medium sized (Baumol & Alan 2006). The economy of Britain largely relies on international trade for it to be able to neglect the exchange rate of its country. The pound is positioned between two large currency blocs, implying that it is only probable that the pound will be affected significantly by the damaging fluctuations regarding the interest rates (Levitt & Lord 2000). Another potential advantage associated with adopting the euro is that Britain will have a significant influence in the continental business cycle. An inference that can be made from the above is that joining the euro zone is both a potential opportunity and threat for Britain (Baumol & Alan 2006). The following section highlights the arguments why Britain should not consider adopting the Euro.
Reasons for not adopting the Euro
The core reason why Britain should not consider joining the euro zone is due to the fact it will need to deploy its own interest rates in order to meet its macroeconomic goals and policies. This is not provided for in the European Monetary Union since all the interest rates will be determined by the European Central Bank (Blanchard 2000). For instance, if Britain faces a negative shock that only affects the it in the larger Europe, then it important that the country establishes its own interest rate that are is tailored to meet the negative shock. Despite the fact that an independent national currency that is fluctuating is a potential cause of shocks, there are shocks that are more specific to British economy because of the domestic policies. In addition, most of the currency unions in the past have failed, and it is not guaranteed that the European Monetary Union will be successful. In fact, the Euro is likely to foster an economic stagnation and increase structural unemployment if the ECB deploys a deflationary policy for its member countries that are not in line with the domestic policy requirements of Britain (Blanchard 2000).
There is also a possibility that the monetary policy will not be sustainable, this is because countries that have found it difficult to operate under a single currency have embarked on cancelling their membership and reestablishing an independent national currency and a monetary policy that is not deflationary. An example of such as case is Ireland (Baumol & Alan 2006).
Theoretically, monetary unions can impose significant benefits, although under fortunate scenarios. For instance, not having exchange rates eliminates a potential mechanism that can be deployed to adjust the imbalances that exist between countries as a result of different economic shocks (Baumol & Alan 2006).
The effects of the global financial crisis on the prospects of Britain adopting the euro
The global economy is facing one of the most significant challenges in history with the onset of the credit crunch during 2007, which resulted to the need to implement radical adjustments in the global financial infrastructure (Blanchard 2000). The global recession is a significant bottleneck for the implementation of macroeconomic policies that were effective for creating economic stability during the 1990s. The following are some of the impacts of the global financial crisis and how they are likely to affect Britain’s adoption of the euro.
The global financial crisis is a probable source of asymmetric shocks in the economy of the euro area and the British economy (Levitt & Lord 2000). The causes of the global financial crisis can be traced back to the United States Sub-prime mortgage market. The losses had a significant impact on the viability of banking institutions across the globe, as a result, the lending to prime and subprime borrowers was frozen, resulting to a global credit crunch. As a result, households and business firms reduced their budget significantly that imposed a reduction in demand leading to the global recession (Levitt & Lord 2000). The effect of this crisis was more immediate and profound on the British economy compared to other countries in Europe. This is mainly because the British Mortgage market’s structure was similar the liberal model deployed in the US. In addition, there were strong financial and economic ties between the UK and the US and that the banking institutions in Britain depended on global capital markets to fund loans to businesses and households. This implies that Britain requires a significant reduction of its interest rates reduction compared to other countries in the euro area (Blanchard 2000).
The second observation regarding the recent financial crisis is that the UK has deployed its monetary autonomy in order to respond to the crisis. This is evident in various ways. The first approach was the reduction of the interest rate by the 4.5 percentage in a period of five months in order to address the global financial crisis. On the other hand, the ECB reduces its interest rates by 3.25 percentage points in a period of seven months to address the financial crisis. This implies that addressing the financial crisis required a monetary autonomy for Britain owing to the differences in monetary policies between the Bank of England and the ECB (Blanchard 2000).
Results and Conclusion
The paper has attempted to evaluate all the sides with respect to whether the British economy will be better with the pound or better off with the euro in the present global financial crisis (Blanchard 2000). Adopting the euro implies joining the euro zone, meaning that Britain will be a full affiliate of the larger single market and can benefit from the economies of scale and competitive excellence that is likely to be imposed by a monetary union and a single currency. The mechanism bases on the argument that a separate currency is vulnerable to exchange rate fluctuations, which is a significant trade barrier and negatively affects the levels of production. Therefore, adopting the euro serves to eliminate the exchange risk. This is backed by the fact that trade among the countries in the euro zone has increased by approximately 20 percent relative to the Gross Domestic product (Baumol & Alan 2006). On the other hand, trade between the Britain and other countries in the continent has reduced since the introduction of the Euro, and can be attributed to the aspect of foreign exchange risk. In fact, since the launching of the Euro, the amount of foreign direct investment towards Britain has reduced significantly. In addition, the main reason for not joining the monetary union is to use the monetary policy as a mechanism for addressing economic shocks, which can be implemented using the fiscal budget and domestic policies. This means the British economy will be better off with the euro compared to the pound in the present global financial crisis. Additionally, the significant cause of economic shocks can be attributed to the floating and fluctuating exchange rate is eliminated by the use a single currency, which is the euro (Blanchard 2000).

REFERENCES
Baumol, W & Alan, B 2006, Macroeconomics: Principles and Policy, Thomson South-Western, New York.
Blanchard, O 2000, Macroeconomics, Prentice Hall, Englewood Cliffs, N.J.
Levitt, M & Lord, D 2000, The political economy of the monetary union, Mac Millan Press Ltd, London.
Mankew, G 2008, Principles of Macroeconomics, Cengage Learning, New York.
Marsh, D 2009, The Euro: The politics of the New Global Currency, Yale University Press, London.
Norris, F 2011, ‘Crisis is over, but where is the Fix’, New York Times.
O’Sullivan, A 2003, Economics. Principles & Tools, Mc Graw-Hill, New York.

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