2 (c) Extract D (lines 32-43) concludes that UK adoption of the

euro at such an economically unstable time remains highly

unlikely, whatever the potential benefits.
Using the data and your economic knowledge, to what extent do
you agree with the view that the uk economy would benefit if the
euro were to be adopted by the Uk at some point in the future.
(25 marks)
The Euro is the single currency launched in 1999 and used by 17 members of the
European Union, the UK opted out of joining and Estonia was the most recent
country to join.
The introduction of euro as the currency in the UK would have a direct effect on
Macroeconomic performance. Macroeconomic performance refers to an
assessment of how well a country is doing in reaching key objectives of
government policy. The main aim of policy is usually an improvement in the real
standard of living for their population. When a country has close trading links as
apparent in the EU countries often become inter dependant and external
economic stimulus can have huge effects on the macroeconomic performance of
an individual country, external stimulus could be lower oil prices, or an economic
boom in another country leading to an increased demand of export from your
country.
A potential benefit for the UK economy of joining the Euro is that it would help
to reinforce the benefits of the single market, which the UK has been a member
of for many years. Trade creation could occur as a result of the fact that the
Euro removes the transaction costs associated with switching between
currencies to undertake trade. Thus trade becomes cheaper and more likely to
occur. Allowing the UK to wreak more of the benefits of for instance an external
economic stimulus such as a boom in an EU country as it will be more likely the
country seeks exports from the UK having a positive effect on the microeconomic
objective of a decreased trade deficit. This is further emphasised, as there are no
exchange rate fluctuations between the member states of the single currency, so
it could be seen as a safe haven from the volatility of the pound. Such
fluctuations pose risks to traders and can render a profitable contract
unprofitable, so there removal would encourage more trade and more
investment into the
UK having the effect of increasing
Aggregate demand
and having the following effect on an
AD/AS diagram.

In terms of macroeconomic performance this has the effect of increased growth

(real GDP increase of Y2-Y1) decreased unemployment as output has increased.
However it would have the effect of increased inflation which in the most case is
a bad thing, this will again be referred to in the evaluation.
Another positive is that UK firms will be able to benefit from price transparency.
With a common currency it will be easier to compare prices in different European
countries because they would all be in Euros. This enables firms to source
cheaper raw material and consumers to buy cheaper goods For example,
arguably new car prices are higher in the UK than elsewhere, a single currency
could help reduce these price differentials or make it easier for UK consumers to
buy from the Eurozone. Within the Eurozone, there has been a degree of
convergence in car prices since the Euro was introduced. This transparency will
allow firms to grow quicker due to decreased costs and Aggregate supply to
increase, Having the following effect on AD/LRAS diagram.

Having the macroeconomic effects of increased economic growth (real GDP

increase of Y2-Y1) and thus reduced unemployment. In this case there will also
be no increased inflation. However this shift is likely to be small, again will be
mentioned in evaluation.
Although there are also negatives of the UK adopting the euro. Such as No
Devaluation; In the Euro, you cant devalue if your currency becomes
uncompetitive. This has been a significant problem for Euro countries like Spain,
Italy and Greece. Compared to Germany, these countries have seen higher wage
growth, higher inflation and lower productivity growth. This means their exports
become uncompetitive leading to lower demand and lower growth. This is
reflected in large current account deficits in these southern EU economies. By
contrast, the UK has been able to devalue, restoring our competitiveness and
giving our economy more flexibility and had the uk been in the euro it would be
in the same situation as the likes of Greece and Spain. No Independent Monetary
Policy is also a huge issue; In the Euro, interest rates are set by the ECB for the
whole Eurozone area. However, this monetary policy may not be good for the UK
economy. In 2008, the UK was very hard hit by the financial crisis. In response,
the UK could cut interest rates very quickly. Also the Bank of England were able
to pursue quantitative easing to try and stimulate economic activity. If the UK
were in the Euro, it would not be able to do this. Therefore, the UK recession of
2008-11 could have been even deeper, if we didnt have an independent

monetary policy. In an economic cycle, if the Euro economy recovers before the
UK economy, ECB interest rates may increase too quickly and harm the UKs
recovery. For example, in 2011, the ECB raised interest rates because of fears
over inflation. Yet, in 2011, the UK economy was slipping back into recession and
had the UK had the euro this would of further crippled the economy. Also the UK
Housing Market; The nature of the UK housing market means that the UK is very
sensitive to interest rates. In the UK, many home-owners have high variable
mortgages. This means a small increase in interest rates has a big effect on
consumer spending. Therefore, it is even more important that interest rates are
not unsuitable for the UK economy.
The introduction of the euro would have both clear positives but also clear
negatives. IN terms of the positives these are not totally reliable. With reference
to the point of the UK having greater gains from positive external stimulus the
UK, it is overlooked that the UK would also have a greater fall from adverse
economic stimulus such as an economic crash in Europe as the UK would not
have an individually tailored monetary policy and even if the UK was not in
recession it would soon be pulled into it. Furthermore in reference to price
transparency this gain is reliable but not likely to be large as mentioned as firms
already operate in many countries in order to source the cheapest raw materials
and cheapest labour. However there is an undoubtable advantage in increased
trade and increased investment but even this leads to inflation. Overall in
conclusion I agree that the UK is likely to see some benefit if it were to join the
euro however the negatives would far out way the positives and although there
would be some positive for the UK it should not join the euro.