by cameo

Created on: July 17, 2007   Last Updated: September 05, 2011

The Euro was launched with immense anticipation. Every previous currency union in history has ended in tears. The Euro is a step, a necessary step towards full political integration. Only with a common currency can a single economy come into existence and only with a single economy can a single political entity come into existence.

The Euro has many macro-economic and micro-economic arguments in it's favour. It would reduce transaction costs for business dealing with Europe; it would provide price transparency as goods and services are directly price comparable. Also, and most importantly, the Euro would complete the single market, linking all EU member states intimately. The problems are that attempting to impose a single currency, with a single interest rate, on divergent economies is doomed to fail. A single currency also comes with a single exchange rate which may or may not suit a particular country, removing a key economic lever for stabilisation. Removing the ability of a county to let their currency depreciate in bad times or appreciate in good times places strain on areas such as inflation, labour cost, employment and many more.

The Pound Sterling is a strong currency. It has become vastly more stable in the past decade and grown in stature as a reserve currency around the world. Ironically it has benefited from being outside the Euro. From the start the UK economy was not compatible with the Euro: the UK housing market is significantly different with many more homeowners; the financial services industry in the city of London has a large impact on the Pound; a dwindling manufacturing base also puts us on a divergent path with Europe.

Perhaps the biggest argument for keeping the Pound is the booming city of London. The financial sector is the engine of the British economy, and by the nature of the vast international trades which occur every day, the Pound has very different pressures on it than other economies with different drivers. The internet is also breaking down the currency barrier with items priced in multiple currencies at the push of a button, and in any case the transaction costs of a large trader are a fraction of one percent of turnover.

There are advantages to joining the Euro, but these require such a significant loss of sovereignty that they are outweighed by the benefit of retaining the Pound. One could argue just as well for a separate currency for both northern and southern England to enable the north to depreciate and stimulate their economy, while enabling the south to appreciate as is necessary. The Euro is a concept which can only ever work with convergent economies and the diversity of Europe makes that impossible.

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