Disadvantages of UK Joining the Euro
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1. Loss of Independent Monetary Policy. On joining the EURO interest
rates would no longer be set by the MPC. They would be set by the European
Central Bank. The ECB look at the whole EURO economy and not what is best for
the UK. Thus if the UK joined now interest rates would fall from 5.25% to the
ECB rate of 2.25%. This fall in interest rates could cause and further boost the
buoyant Housing Market and cause future inflationary pressures.
2. Difficulty in getting out of a recession. On the other hand if the
UK suffered a recession they would be unable to cut interest rates. It would be
difficult to boost demand and get out of the recession. To an extent this
occurred in 1992; the UK was in a recession but because they were in the ERM (2)
they were trying to maintain a high value of the £. Thus interest rates were far
too high (15%) these high interest rates exacerbated the UK’s recession.
3. Sensitivity to interest Rates. The nature of the UK housing market
means the UK economy is sensitive to changes in interest rates. Unlike European
countries most UK householders own their own house, their variable mortgage is a
high % of their income. Thus even a 0.25% change in interest rate can
significantly affect disposable income. If the UK were to join now and interest
rates were to fall by 2% it would very likely cause a further boom in the
housing market which would feed through into higher inflation.
4. Loss of independence of Fiscal Policy. The growth and stability
pact limits the levels of government borrowing to 3% of GDP. This is another
difficulty in getting the economy out of a recession. However it would not
affect the UK at the moment. Also France and Germany have conveniently been able
to sidestep this rule when necessity demanded.
The UK economy is doing relatively well, by historical standards the UK
economic performance is quite remarkable. Thus there seems little incentive for
a British politician to take on the entrenched Euro scepticism prevalent in
British media and society. There is little to be gained by joining and there are
many potential problems, the Queen’s head is safe for the foreseeable future.
About the Author
Richard Pettinger studied Politics and Economics at Lady Margaret Hall,
Oxford University. He now works as an economics teacher in Oxford. He enjoys
writing essays on Economic and he edits an Economics Blog focused on UK and US
economies:
http://www.economicshelp.org/econ.html
Follow us @Scopulus_News
Article Published/Sorted/Amended on Scopulus 2007-03-17 00:22:18 in Economic Articles
