BRITAIN & EURO Was Britain right to stay out of the euro?

TABLE OF CONTENT

INTRODUCTION1

DISCUSSION1

UK Balance of Payment1

Exchange Rates3

Hedging Pounds Sterling and Euros4

The UK perspective: limited benefits and higher risks5

Reduction of transaction costs5

Disappearance of currency risk in relation to the euro5

Increased price transparency6

The membership of the Euro does not risk, does not affect the strong results posted by the British economy?7

The entry of Britain into the euro area means a loss of independence and flexibility for the UK economy:7

A single interest rate:8

The rigidity of rules on fiscal policy is also denounced by London:8

What exchange rate?8

The good results of the UK economy in terms of growth and employment could they be affected by the entry into the euro?9

Growth:9

Unemployment:9

A Membership Unintended But Desirable9

The weight of non-economic considerations (A refusal more political than economic)9

An opinion largely hostile to the adoption of the euro10

Disadvantages for Great Britain and EMU maintenance of Britain outside the euro area11

CONCLUSION12

REFERENCES13

Was Britain right to stay out of the euro?

Introduction

In 2005, Gordon Brown, Chancellor of the Exchequer spoke before the House of Commons on the possible accession of Britain to the Economic and Monetary Union. In October 1997 he had defined "five tests" subsequently taken up by Tony Blair in 1999; the study should assess the ability of the UK economy to adopt the euro. These five criteria are: convergence, flexibility, investment, financial services, growth and employment. In terms of convergence, for example, much progress has been made (interest rates are converging British and European long-term and short-term near 1.15% in Britain in 2003, against 3.7% in 1997).

Discussion

UK Balance of Payment

Balance of Payment is the difference between exports and imports of goods and British services. The Trade Balance is one of the major components of the balance of payments in the UK, giving valuable information about pressures on the value of the pound sterling.

A positive balance (surplus) indicates that exports are greater than imports. When imports exceed exports, the UK experiences a deficit trade. Because foreign products must be purchased with foreign currency, the trade deficit reflects emerging over £ abroad. Outputs such currency can lead to a depreciation of the pound naturally, unless it's countered by similar capital inflows. That is, the deficit in the trade balance will have a negative effect on sterling (Economic Online, 2010, pp. N/A).

The component of UK balance of payment comprise of Transfers, investment income, current account, Trade in goods and Trade in services. The above graph shows the trend of these components which has been widely fluctuation throughout 10 years.

Looking at the above graph, the trade in goods and trade in services is moving in opposite direction, this shows that the contribution of Trade in service is more than goods.

UK Current account is in negative trend though 5 years. This is due to the economic recession which has impacted on the Current account of the UK.



Exchange Rates

Exchange rates can be defined simply as the price of foreign currency expressed in terms of national currency can similarly express the price of ...