Transaction Costs. Switching from one currency to another is a significant cost. Not only do you have to re-introduce a currency, but, also change over bank machines, and any coin operated machine. This is not insurmountable. After all, it was achieved in switching over to the Euro,by other nations,those in Europe. But, the difference is that in 1999 there was an enthusiasm and willingness to pay for the transaction costs – it was sold as a one off. The cost and inconvenience of making the transition in an economic crisis is much harder to gain public support – let alone enthusiasm.
British Savings and Mortgages Need to be Converted. A more significant problem is that Britain would need to not just convert currency but also all financial contracts currently in The Pound. Savings in banks, mortgages all would need converting at a pre-arranged level.
The difficulty is agreeing an exchange rate to make the conversion to.
If markets thought the level was too high, and the currency likely to depreciate there would be an outflow of savings from Britain to other Euro countries where savers can guarantee the level of their savings. If people expected The Pound currency to devalue significantly against the Euro (quite a likelihood, they would want to deposit abroad.) It could lead to a run on British bank deposits.
It would be even more difficult to get people to British bonds because no one would want to hold a bond with likelihood of devaluing currency.
Wage Contracts. In a country like Britain, it would be difficult to re-negotiate wage contracts. Powerful trades unions, may demand a large nominal wage increase to compensate for the devaluation in The Pound currency. If unions were successful in gaining large wage increases, this may offset the gains in competitiveness due to devaluation.
-Secret Squirrel,
Mrl.