Will the UK ever join the euro?

Saturday July 4, 2009

Any traveller who goes to Europe and travels extensively will find that the euro is used throughout mainland Europe.  However, when you travel to the United Kingdom you will find that the currency in use remains as the British pound.

So, while all of Europe use the euro, Britain still uses its national currency, that has been around for over 1000 years and is greatly loved by the British people.  Somehow it makes Britain seem all the more quaint and eccentric, that little island, clinging onto its little pound, as many of the other countries in the world seem to be considering joining the euro and some of them are not even members of the European Union, as Britain herself is.

The euro meanwhile goes on from strength to strength and is actually becoming a serious contender to the dollar in terms of being an influential and powerful currency.  Meanwhile, the British pound remains strong but it is losing the significance it once had and to a large extent has been usurped by the euro as it gains more and more influence in the global financial markets.

This begs the question as to whether the UK can continue to ignore the euro and pretend that it is nothing to do with them, or whether they will eventually have to join the euro and abandon the pound forever.

The British and their pound

Many British people are very fond of their currency and the British pounds and pennies, that they have got so used to over the last 1300 years or so.

When the concept of the euro was first introduced, there was significant opposition in the whole of Britain.  The British people have always had an ambivalent relationship with the European Union.  Prior to the European Union being formed, the European Economic Commission and the United Kingdom always had quite a turbulent relationship and even when the European Union came into being, the relationship was not to improve.

In 1998 to 1999 when the euro as a concept was first being talked about, the British media were fiercely opposed to the concept and were a vociferous group who tried to ensure that Britain did not join this euro.  It is true that not all newspapers were opposed to Britain joining the euro but those who were opposed certainly made their voices heard and as a result of the sustained opposition in the media, the British public were fiercely against the concept of the euro.

People felt that if Britain were to abandon the pound it would be tantamount to losing its national identity and Britain as a nation would simply cease to exist as it became swallowed up by Europe.

The United Kingdom is actually a constitutional monarchy, which means that it has a monarch in the form of the Queen, but it is a democracy and the Houses of Parliament make all the decisions that affect the people.  Many British people felt that it would not be possible to be part of Europe and use the euro and still have the Queen as the head of the country.

The Queen is featured on all British coins and notes and this is one of the reasons why the British are so fond of their currency.

British history is littered with instances of trying to resist European invasion, even as recently as the 20th century.  This has resulted in not just a distrust of Europe, but a reluctance to let the European Union have any more power over Britain than it needs to.

There has also been some opposition in Britain to some of the laws that have been introduced by Brussels.  Since being a member of the European Union Britain has seen an increase in the amount of legislation that is passed and as a result has much tighter health and safety laws as well as much more defined human rights legislation.  There has to some extent been a back lash against this legislation and some people view Brussels in a very negative light, because they feel that the British way of life is under threat from the European Union and so they feel resistant to adopting the currency that is such an integral part of the European Union.

If Britain were to use the euro as its form of currency, it would also have to adopt the Monetary Policy, which is created, regulated and monitored by the European Central Bank.  This is not something that is appealing to a great many British people.

However, there is also another major reason why Britain could not join the euro and that is because Britain could not fulfil the monetary criteria that the European Union had set down for joining the euro, so even had she wanted to join the euro, it is unlikely that she would have been able to do so.

Nevertheless, since the euro has come into use throughout Europe, the British have done little to try and ensure that it can join the euro. 

But increasingly businesses are saying that not being part of the euro can be quite frustrating in terms of doing business.  Indeed, a survey that was carried out in the UK in 2007 found that over 60 %of people felt that joining the euro was actually inevitable.  They also felt that Britain should do this sooner rather than later, because there is always a risk that if Britain leaves it too long, the European Union will not let her join.  This is actually a significant change in public opinion because historically the amount of people who wanted to join the euro was much less than 50%.  So it looks as if more and more people in Britain are actually becoming resigned to the fact that the introduction of the euro is inevitable.

But there is a very real danger that the European Union will tire of Britain's continued procrastination and will simply revoke the offer of joining the euro.  In other words, Britain may miss the boat in terms of joining the euro unless it makes a firm decision.

 

Due to the fact opinion in Britain on the euro, is becoming ever more divided, one way to sort out whether or not Britain it should join the euro would be to have a referendum.  However as of June 2008, the British prime minister has not actually set a date for the referendum.

So it is difficult to actually gauge the real feeling in Britain as to whether or not the pound should be abolished and the euro adopted or whether the British pound should be used forever.

Advantages to joining the euro

If Britain were to join the euro then it would find that there would be some advantages.  Currently, any transaction that takes place with the rest of Europe involves an exchange fee being levied to exchange British pounds and euros.  This costs money and can be viewed by some countries in Europe as being quite bothersome and as a result, if they have the choice of coming to Britain for some products or attaining them elsewhere in the European Union, then they will just go elsewhere and so Britain loses out.

One advantage would be that the exchange rate would also be more stable due to the fact that the euro is actually a very stable currency.  Whilst the British pound has remained stable over the last few years, because it is a currency on its own it is much more likely to suffer volatility in terms of its exchange rate. Thus if Britain were to join the euro, it would actually be given protection by the euro.

This is a very sound economic argument, however it is not very palatable to some people in Britain because they do not like the idea of being protected by Europe and its currency, this feels as if they are giving away their rights to be a country. 

But increasingly Britain is becoming aware of the fact that the dollar is very weak and as a result it is suffering whilst the euro is actually in the ascendancy.  The dollar is also a currency on its own and the British people can see just how isolated the dollar is and so the euro is starting to look more appealing than it did previously.

Britain may also find, were it to join the euro, that it would soon be in receipt of a great deal more inward investment, as it would be easier for European countries to invest in British manufacturing and production as well as British financial products.

People who are in favour of Britain joining the euro cite Britain's history of inflation as being a very good reason for Britain to join the euro.  Britain has had a long history of inflation and it has experienced quite volatile booms and busts in its economy and this has resulted in long periods of rampant inflation.  Inflation has been under control for some time, but the credit crunch in the United States as well as the increasing price of oil means that inflation could well take hold of the British economy.  If it does then Britain will find itself, in serious difficulties because it will not have the protection of the euro when inflation hits.  Nor will it be able to hide behind the monetary policy of Europe, it will simply be isolated and alone and the fact that the dollar is so weak, means that the US will not be able to help it out and the European Union may well feel that Britain has brought this on herself and so would offer only limited assistance.

Worldwide, the price of oil does not seem to be stabilising and the price of food is estimated to rise significantly and consistently from 2008 until potentially 2015 or even later.  It would seem unlikely that Britain will be able to shield her economy from inflation given that oil and food are staples and people will not be able to do without them.  So what will happen when the next period of inflation happens is anyone's guess, but the situation would not be good for Britain and may severely impact on the British population.  However, the crux on this argument hinges on the British economy suffering this isolation alone, with no other country experiencing it.

Disadvantages of joining the euro

The main disadvantages of joining the euro would be that Britain would lose its financial independence and it would no longer be able to dictate its own Monetary Policy. However, given the fact that Britain would find itself very isolated if it did experience a downturn in the economy, losing its own Monetary Policy, may not be the end of the world and it may actually help stimulate the British economy and make Britain more prosperous.

Potentially there is one negative aspect to joining the euro and that is due to the fact that oil prices are rising and food prices are rising.
If inflation does hit the whole of Europe then it will be very difficult for Europe to regain its strength, the fact that the currency is so widely used means that for the currency to become strong again every country in the European Union will have to do well.

To some extent this demolishes the argument that Britain would be isolated if she were to experience a period of inflation.  It is likely that this inflation would hit the European Union as well and so it is reasonable to think that Britain may not experience any more turbulent times than the rest of Europe would.

So will Britain join the euro?

There does seem to be some kind of growing acceptance that Britain will in fact join the euro and that it will do so before 2015.
Unless Britain joins the euro she will find it increasingly more difficult to remain an active member of the European Union.

The European Union and the European Central Bank have been patient with Britain, however they do not like the fact that Britain has not joined the euro and it is starting to show in terms of the relationship between Britain and the rest of Europe.  In short they are getting frustrated with Britain and wish that she would make her mind up and do something, rather than this continued procrastination.  If Britain is to continue to have an influence in Europe, then she may well find that she has no choice; she will simply have to join the euro, like it or not.

Due to the fact that Britain has a relatively new prime minister and that he is not exactly popular, the decision about joining the euro is simply being put off and the Prime Minister does not seem to be addressing the issue, since he knows that opinion is to some extent divided.  Many people are strongly in favour of joining the euro, but many are not.  The Prime Minister represents the Labour Party, which is traditionally a party that derives much of its support from the working classes in Britain.  Many working class people are quite traditional.  Then the main opposition party, the Conservatives tend to be quite in favour of retaining the pound and British independence from European Monetary Policy.  So although some people are very keen to join the euro, there is sufficient opposition to make it clear to the Prime Minister that he will be criticized and potentially quite severely criticised whatever he does.  In short he is damned if he does and damned if he doesn’t.  There is simply no easy way out for him, so he does what all politicians seem to do: he puts it off and hopes that it will go away.

But putting off this decision, could in itself, be quite dangerous.  How long the European Union will actually wait for Britain to make its mind up, no one yet knows. The European Union may simply issue an ultimatum that will force Britain to make her mind up and then the debate will likely be a knee jerk reaction to the ultimatum, rather than a considered debate, based on informed evidence.

So, for the foreseeable future, or at least until around 2015, it looks like the pound will continue to be used in Britain, but hopefully someone will actually force the issue to be resolved and Britain will at least have a clearer future, in terms of how its economy will be managed.  The current uncertainty makes it very difficult to actually plan for the future.

Perhaps the most succinct answer and the closest we are going to get as to whether or not Britain will join the euro is ‘Yes, probably, but not for a bit’.  In other words, no one quite knows!

 

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