Joining the euro: what would it mean for you?
The UK is ‘closer than ever before’ to joining the Euro, the president of the European Commission José Manuel Barroso has claimed. Speaking on French radio, Barrosso said that some British politicians were considering signing up to the single currency in a bid to beat the effects of the global economic crisis.
He said: "We are now closer than ever before. I'm not going to break the confidentiality of certain conversations, but some British politicians have already told me, 'If we had the euro, we would have been better off.'"
Although the government says it still has no plans to join the euro, Peter Mandelson, the recently appointed business secretary, recently said "our goal should be to enter the single currency."
There is an argument that joining the euro could help the UK beat the current global economic crisis. Over the past year the value of the pound has plummeted against both the dollar and the euro - £1 will now only buy you $1.48 or €1.16, compared with last December when it would have bought $2 or €1.33.
Dr Stephen Barber, head of research at Selftrade, believes that it could help. “Being part of a big single currency means that the UK would be better placed to handle big global shocks,” he says.
But Howard Archer, chief UK and European economist at Global Insight, doesn’t think a single currency is the answer.
“Many of the problems that are facing the UK economy, such as high inflation and rising unemployment are facing the Eurozone too,” he says. “In addition there are problems that are specific to the UK that need to be solved, such as the overextension of its housing market and the problems created by its reliance on the financial sector.”
The fact that the British housing market was deemed non-compatible by the Treasury in a recent review also appears to rule out the adoption of the euro.
What would joining the Euro mean for you?
Joining the euro would have an immediate effect on homeowners as interest rates would be set by the European Central Bank in Frankfurt, rather than the Bank of England.
Unlike Europe however, homeownership is high in the UK, so even a small movement in interest rates can have a big impact on the housing market and consumer spending. Historically the UK has seen the high street suffer if interest rates are too high and house prices boom if they are set too low.
“Interest rates have tended to be lower in Europe than they have in the UK, but that’s simply not the case today,” says Barber. “Adopting the Euro could actually help to stabilise house prices for the long-term.”
However Archer disagrees. “Interest rate moves play a huge part in the UK economy. What is good for the European economy may not always be good for ours.”
There are many arguments for adopting the euro - business confidence could improve and this could lead to greater trade and economic growth.
According to Archer it would also remove the uncertainty of currency swings – making goods much more easily traded. “It would also mean that UK businesses would be better placed to serve other markets, and this would attract more foreign investors,” he says.
Barber agrees. “In terms of stability the euro is the only currency that comes close to the dollar. Being part of that is key when it comes to trade.”
On the other hand, UK businesses could lose a certain amount of independence. “Businesses could lose a certain amount of flexibility if they had to conform to uniform interest rate cuts imposed upon them from Frankfurt,” says Archer.
3. The high street
A single currency could be good news for consumers, as a common currency should mean cheaper goods and make it easier to compare prices. Many goods, such as ‘big ticket’ items like cars are much cheaper in the Eurozone.
“In the long-term joining the euro should help bring down prices and increase transparency,” says Barber. “In fact you could say that not being in it imposes an additional tariff on the UK consumer in the form of the exchange rate mechanism.”
And, should the UK join the single currency, jetting off for two weeks in the sun would certainly be much simpler.
But Archer believes that it’s unlikely that the UK will join the euro anytime soon.
“The government couldn’t take the UK into the euro without a referendum, and public opinion is dead against it. I certainly can’t see us joining in my lifetime.”
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).