The European Single Currency: Pros and Cons

It is expected that there will be at least two waves of countries joining the single currency; the first in 1999 and the second around 2002. Both Robin Cook and Tony Blair have all but ruled out joining in 1999, saying that it is highly unlikely that Britain will join then.

Following is a list of some of the advantages and disadvantages that the government will need to consider carefully before joining the single currency.

Advantages

Stability

A single currency should end currency instability in participating countries by irrevocably fixing exchange rates and reduce it outside them. Because the Euro would have the enhanced credibility of being used in a large currency zone, it would be more stable than individual currencies are now against speculation.

An end to internal currency instability and a reduction of external currency instability would enable exporters to project future markets with greater certainty. This should mean a greater potential for growth.

Consumers

Consumers would not have to change money when travelling and would encounter less red tape when transferring large sums of money across borders. A few years ago, it was estimated that a traveller visiting all 12 member states of the then EC would lose 40% of the value of his or her money in transaction charges alone.

Once in a lifetime a family might make one large purchase or transaction across a European border such as buying a holiday home. A single currency would help that transaction pass more smoothly.

Commerce

Likewise, businesses would no longer have to pay hedging costs which they do today in order to insure themselves against the threat of currency fluctuations. Businesses involved in commercial transactions in different member states, would no longer have to face administrative costs of accounting for the changes of currencies, plus the time involved.

It is estimated that the currency cost of exports to small companies is ten times the cost to the multi-nationals, who offset sales against purchases and can command the best rates.

Interest Rates

A single currency should result in lower interest rates, as all European countries would be locking into German monetary credibility. The stability pact (the main points of which were agreed at the Dublin summit of European heads of state or government in December 1996) will force EU countries into a system of fiscal responsibility which should enhance the Euro's international credibility. This should lead to more investment, more jobs and lower mortgages.

Disadvantages

Fifteen separate countries with widely differing economic performances and different languages have never before attempted to form a monetary union. It works in the United States because the labour market is mobile, helped by the common language and transferability of pensions etc across a large geographical area.

Language in Europe is a huge barrier to labour force mobility. This may lead to pockets of deeply depressed areas in which people cannot find work and areas where the economy flourishes and wages increase. While the cohesion funds attempt to address this, there are still great differences across the EU in economic performance.

Fiscal Straightjackets

If governments were obliged through a stability pact to keep to the Maastricht criteria,/A> for perpetuity, no matter what their individual economic circumstances dictate, some countries might find that they are unable to combat recession by loosening their fiscal stance.

They would be unable to devalue to boost exports, to borrow more to boost job creation or cut taxes when they see fit because of the public deficit criterion. In the United States, Texas could not avoid a recession in the wake of the 1986 oil price fall, whereas demand for Sterling changed in the light of the new oil price, adjusting the exchange rate downwards.

Economic Cycles

All the EU nations have different economic cycles or are at different stages in their cycles. The UK is growing reasonably well. Germany is having problems. This is the reverse of the position in 1990. Since the war the UK economy has tended to have an economic cycle closer to the US than the EU. It has changed because interest rates are set in each country at the appropriate level for it. One central bank cannot set inflation at the appropriate level for each member state.

National Sovereignty

Loss of national sovereignty is the most often mentioned disadvantage of monetary union. The transfer of money and fiscal competencies from national to community level would mean economically strong and stable countries would have to make decisions in the field of economic policy with other, weaker, countries, which are more tolerant of higher inflation.

Capital Costs

The one-off cost of introducing the single currency would be significant. The British Retailing Consortium estimates that British retailers would have to pay between £1.7 billion and £3.5 billion to make the necessary changes. Such changes include educating customers, changing labels, training staff, changing computer software and adjusting tills.