Is it wise for the UK to continue on the anti-Euro pattern?

By Stavroula Kousiappa

 

The decision of accepting the Euro or not by the UK is a national decision, about 70% of the people are against it and the government seems to align its policy with the people’s wish.

The UK’s denial for adopting Euro might be a factor for increasing the country’s exchange rate risk. The European Union is the UK’s major commercial partner, thus the use of two different currencies for the completion of a large number of transactions between the UK and the Euro-area increases the risk that traders are exposed to. On the other hand, Dun & Bradstreet (D&B), the world’s leading source of commercial information and insight on businesses, informs us that the degree of external economic risk for the UK is not higher than the risk that Germany and France face. Although the exchange rate between the Euro and the British Pound is floating, D&B’s opinion seems to be correct because the range of fluctuations, between Sterling and Euro has been very narrow since 2003, so these variations are very limited and are not major threats.

The good macroeconomic performance, the low inflation, the stable interest rates, the high rate of employment and the importance of the UK in the global economy as a core financial center also help in keeping the exchange rate risk in low levels.

But what makes the British not wanting the Euro as their national currency? According to the Economist, “the British Pound ranks third in official foreign exchange holdings”, therefore they are very proud about their own currency due to its remarkable esteem in international markets. They believe that by giving up their national currency will lead to the loss of their economic independence and their monetary policy tools. All the decisions regarding currency issues will be taken from a single central body and this may work in favor of one member-state and against another. Furthermore, losing the ability to influence the national exchange rate against foreign currencies makes competitiveness harder for the British products in international markets. Another concern is whether the countries will be able to react freely to economic shocks since these shocks may have a different effect on each economy.

The adoption of the Euro by the British will also have its economic benefits. For example, the transaction costs will be reduced, there will be no costs for converting money into foreign currencies and there will be no need for managing several currency accounts. In addition, consumers will enjoy competitive prices since there will be price transparency on goods and services provided within the UK and other euro-area countries. This will lead to enhanced competition, lower prices and better quality. Furthermore, the euro will stimulate the country’s strength in international financial markets as the UK will be a member of a large single market with a single currency and investors will be able to do business throughout the euro area with minimum disruption in a more stable economic environment.

The British need to reconsider how the rejection of Euro can hurt their country in the future, economically and politically. Being marginalized is not the answer to prove how strong an economy is. It would be much easier to compete and exceed their rivals in international markets in the future, under a united economic power, instead of acting on its own.

 

Stavroula Kousiappa has an MA in Industrial Economics and is currently a Research Executive at Creditinfo Cyprus.