This lesson:• All students will identify the key facts about the Euro. (D-G)• Most students will analyse the arguments for and against theEuro in the UK. (B-C)• Some students will make judgments about whether the UK shouldhave the Euro. (A/A*)Key economic terms: Euro
Euro Essentials• Monetary Union is a deepening of economic integrationbetween participating countries• A single currency requires a common interest rate for theEuro Zone – i.e. A common monetary policy• Countries have locked the currencies together forever &adopted 1 currency as a medium of exchange• Euro as a currency floats against US dollar & sterling• Member nations are also required (in principle) to keepcontrol of government borrowing i.e. They are not allowed torun large budget deficits >3% of their GDP (in normal times)
Reasons for joining the Euro1. Removal of transactions costs – people trading within theeuro area will not need to exchange currency, which meansthey do not have to pay commission so trade is cheaper2. Reduced uncertainty – the removal of exchange rates withinthe euro area reduces uncertainty caused by changing rates,thereby encouraging trade between euro nations3. Greater competition and EU trade – prices can be moreeasily compared between countries in the euro area,encouraging competition, which should bring prices closerand perhaps lower. This should promote higher levels oftrade in the euro area.
Reasons for joining the Euro4. Independent ECB – inflation in the euro area couldbe lower and more stable, encouraging moreinvestment and faster economic growth.5. Inward investment – euro area countries couldattract more investment from countries outside (egJapan and USA), creating more employment andgrowth• Note: ECB European Central Bank
Reasons against joining the Euro1. Regional imbalances – different countries in the euro area are likely todevelop at different rates, which could mean that their trade cycles getout of step.2. Some countries could want a low interest rate to ease risingunemployment, while others want a high interest rate because ofmounting inflationary pressure. The ECB can only set one interest ratewhich might not be appropriate for all members.(this occurred during the boom years of 2001 – 2008 when Ireland andSpain grew too rapidly partly because the interest rate was ‘too’ low)3. Loss of sovereignty – the loss of control over the economy’s interest ratemeans that the government only really has fiscal policy and supply sidepolicy with which to control its economy to address problems likeunemployment and inflation.
Reasons against joining the Euro4. Loss of devaluation as weapon of economic policy –the country cannot use devaluation to correct abalance of payments current account deficit becausethere is no exchange rate for its own currencyanymore.5. Changeover costs – adopting the euro means thatcosts are incurred changing vending machines andother equipment, catalogues, accounting systems,etc. These costs could lead to higher prices forconsumers.
Conduct research on the internetGroup 1: The case for entry intothe EuroGroup 2: The case for staying outDEBATE!
• You will given a post itnotes each• You must not hold yourpost it note at the end ofthe discussion• You can give post it notesaway by:– Contributing– Giving a post it note awaywhen you have a validquestion about a pointthat has been raised
Activity 1• British newspaper article – see handout
• Your Question: Do you think that the UKshould enter into the Euro? Discuss.12 marks• Use your ingredients to create your answer!
• Ingredient pack 1: The Euro is, therefore, because, however,and, furthermore, this means that, overall, depends on• Ingredient pack 2: The Euro is, therefore, because, however,and, overall• Ingredient pack 3: The Euro is, therefore, because, and• Your Question: Do you think that the UKshould enter into the Euro? Discuss.12 marks