Secret Squirrel

Firstly, there are grave political problems, the fallout could affect the economies reputation and lead to less confidence and less investment e.t.c in the long term.

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.

1. No Devaluation. In the Euro, you can’t 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. Since the start of the Euro, several countries have experienced rising labour costs. This has made their exports uncompetitive.

Usually, their currency would devalue to restore competitiveness. However, in the Euro, you can’t devalue and you are stuck with uncompetitive exports. This has led to record current account deficits, a fall in exports and low growth. This has particularly been a problem for countries like Portugal, Italy and Greece,and could easily become a problem for Britain.”

2. No Independent Monetary Policy. 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, I believe the UK recession of 2008-11 would have been even deeper, if we didn’t 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 UK’s 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. An increase in interest rates would have been very damaging for the EU economy

3. 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.

4. No Lender of Last Resort. The Current Euro debt crisis shows that countries in the Euro are more susceptible to rising bond yields. Countries in the Euro have no central bank to act as a lender of last resort. This means, if government is struggling to sell sufficient bonds in a particular month, investors will panic and sell bonds. In the UK, the Bank of England would step in and buy sufficient bonds
to avoid a liquidity crisis. Therefore, countries in the Euro are facing much higher interest rates to reflect the nervousness of investors about liquidity fears. (see: lender of last resort)

5. ECB overly concerned with inflation. The ECB have an over-riding objective of low inflation. Arguably this is at the expense of promoting economic growth and inflation. In response to a small degree of cost push inflation, the ECB raised interest rates, showing to markets they were willing to risk core-inflation falling below target, despite low growth or recession in parts of the Eurozone. The Bank of England by contrast, tolerated a higher rate of inflation because they felt more important to avoid a double-dip recession.

6. Irreversible Decision. Once in the Euro, it is very hard and very costly to reverse the decision.

7. Lack of Incentives. It is argued that being a member of the Euro protects a country from a currency crisis. Therefore, there is less incentive for countries to implement structural reform and fiscal responsibility. For example, in good years Britain MIGHT able to benefit from very low bond yields on its debt because people felt the British debt would be secured by rest of Europe. But, this wasn’t the case in Greece they were lulled into a fall sense of security.

8. Limits Fiscal Policy. With a common monetary policy it is important to have similar levels of national debt, otherwise countries may struggle to attract enough buyers of national debt. This is a growing problem for many Mediterranean countries like Italy, Greece and Spain who have large national debts and rising bond yields.

9. The Euro is not an optimal currency area. If a state in the US, such as New York ,was in recession, workers in New York could move to New England and get a job. However, in the Eurozone this is much more difficult; it involves moving country and possibly learning a new language. There are more barriers to the movement of labour and capital within a diverse region like Europe. Therefore, an unemployed Greek can’t easily relocate to Germany.

10. Interest rates not suitable for whole Eurozone. A common monetary policy involves a common interest rate for the whole eurozone area. However, the interest rate set by the ECB may be inappropriate for regions which are growing much faster or much slower than the Eurozone average. For example, in 2011, the ECB increased interest rates because of fears of inflation in Germany. However, in 2011, southern Eurozone members were heading for recession due to austerity packages. The higher interest rates set by the ECB were unsuitable for countries such as Portugal, Greece and Italy.That means a loss of separate national monetary policies –
interest rates and exchange rates. Should Britain want to introduce an economic policy to fight back against unemployment, it cannot do so as this can only come from the European Central Bank.The UK is more sensitive to interest rate changes than other EU countries – in part because of the high scale of owner-occupation on variable-rate mortgages in the UK housing market.Since there is a Europe-wide
interest rate, individual countries that increase their debt will raise interest rates in all other countries…in short, Greece,Spain,Italy as examples, take the whole down.

11. Currency unions have collapsed in the past. There is no guarantee that EMU will be a success. Indeed the Euro may be a recipe for economic stagnation and higher structural unemployment if the European Central Bank pursues a deflationary monetary policy for Europe at odds with the needs of the domestic UK economy.It is
quite possible that the monetary union will not be sustainable.

12. In a recession, a country can no longer stimulate its economy by devaluing its currency and increasing exports.

13. There are almost no instances in modern times of a newly formed fixed exchange rate regime surviving for more than five years.

14. GREECE.The entire EEC,EU,ECB, exist and are controlled by, rules, regulations,laws, monetary policy, by and for and serve GERMANY and FRANCE,mostly enitrely, the rest of the European nations are subservient satraps,slave nations.

15. THE POUND, is viable,secure,stable…actually the Euro entirely isn’t.One nation, they claim, threatened The Euro, endangered the Euro, and all…………and there are many sick nations within the Euro, such as Spain, and Italy most directly……

-Secret Squirrel,
MRL.