Transcript The Euro
The Euro Objectives • Discuss Monetary Policy and the Eurozone. • Analyse the advantages and disadvantages of the UK joining the Euro for consumers, businesses and the UK Economy • Prepare to debate whether the UK should adopt the Euro • Identify Gordon Brown’s five tests. The Vision • The idea behind the single currency is that getting rid of national currencies would make the operation of a single market easier- ease of trade due to less volatility The Background • The euro is the official currency of 19 member states of the European Union (EU) • The currency directly effects close to 340 million Europeans Monetary Policy • The euro is managed and administered by the Frankfurt-based European Central Bank • As an independent central bank, the ECB has sole authority to set monetary policy • All EMU members adhere to the same Interest rate Euro • You have 10 minutes to write down the advantages and disadvantages of a single currency – use your text book (page 275) Advantages Disadvantages Advantages • • • • • Price Transparency No exchange rate fluctuations Reduced transaction costs Increased Foreign Direct Investment Increased intra-EMU competition Disadvantages Loss of Monetary Policy • Limit on use of Fiscal Policy due to stability on growth pact • Menu costs - One off costs of changing everything into Euros • May limit the operation of automatic stabilisers The Euro Debate • You have 10 minutes today to prepare in groups for a Euro debate. • Consumers and businesses for and against joining the Euro will debate the prospect of the UK joining the Euro. • Each side must allocate a spokesperson who will give an opening and closing speech. The spokesperson must ensure that everyone on their side contributes to the debate with justified arguments. • The government will direct the debate and maintain order. The government must listen to both sides before making its decision and presenting it to all consumers and businesses. Gordon Brown and His Tests! The Five Tests • Should the UK join the Euro- No, Not yet anyway! • Convergence- Business cycles of Euro Zone countries must converge • Flexibility-Flexibility to adjust to economic shocks • The Financial Sector- It must improve the position of the UK financial services • Investment-Joining the EMU should Improve investment conditions • Growth, Stability and Employment-Should encourage higher growth, stability and employment- achievable only if we have increased trade Convergence Criteria • All countries in the Eurozone should keep their annual budget deficits below 3% of GDP and keep total public debt below 60% of GDP. • A countries inflation rate should be no more than 1.5% above the average of the lowest EU countries • Interest rates should be no more than 2% above the average of the lowest EU countries • A country must have been a member of the ERM for at least two years prior to adopting the EURO • Stability and Growth Pact-Countries that ran high levels of government debt, would be subject to penalties- Unless in severe recessions Convergence & Macroeconomic flexibility • The two most important tests are Convergence and Flexibility The UK must have some flexibility when concerning Macro Economic policy esp., Fiscal Policy- 3% rule is too rigid Flexible labour Markets If Eurozone Economies have similar rates of Growth, Employment and Inflation, then there are gains to be made from Inward Investment Business cycles should be similarChanges on interest rates should have the same impact on one eurozone country as it does any other A deflationary nature ! Why? • Why were such stringent conditions imposed before adopting the Single Currency? • Inflation in countries would ultimately lead to the ECB raising Interest rates for all EMU members • Why would high levels of government borrowing also lead to Inflation and higher rates? Summary • What are the problems with a one size fits all Monetary Policy ? • The ECB has held its Interest rate at 0.05%, while the UK interest rate is 0.5%. If the UK joined the single currency it would face the lower rate. What might the be the consequences? • Why might the government fear loss of monetary control if the UK joins the single currency? Homework: Revision So to join or not to join….