| EURO |
The Euro
Currency:
History and Adoption (continued) |
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First, Great Britain was afraid that switching to the euro would mean giving
up control of their economy. As a result, they would lose flexibility to
switch their own interest rates if economic conditions warranted movement
of the rate. Instead of being able to respond quickly to the economic environment
these countries would have to wait for the EMU to review and decide on each
the situation.
Case in point, the British economy is different compared to the rest of
the European countries.
"Britain does more of their trade (57 percent) with countries
outside the Eurozone. They also receive large amounts of their investment
from the United States. The Bank of England currently sets interest
rates according to the needs of the British economy. Inside the euro
we would have to accept a single interest rate set by the European
Central Bank in Frankfurt which would usually be wrong for us" (Ref).
As a result, Britain was adamant that they needed different policies in
order to set policy on interest rates, taxes and spending.
Another consideration was the economic performance of the country. According
to the Organization for Economic Cooperation and Development (OECD), as of
2002, Britain had the best outlook of any country. They also had the highest
gross domestic product (GDP) per head than both Germany and France. Additionally,
they had the lowest inflation in the European Union (EU) along with the highest
take home pay. Obviously, they did not want to put the positive aspects of
their economic environment at risk. The risks associated with adopting a single
currency far outweighed the proposed benefits.
| As an example, there was a strong sentiment in the British community
that it was not necessary to adopt the euro in order to trade with Europe.
For two years beginning in 1990 the British pound was linked with Europe
in the Exchange Rate Mechanism with disastrous consequences; unemployment
doubled and 100,000 businesses were lost. When contemplating adopting
the euro they did not want to make the same mistake again. |
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The reality of multiple countries adopting the
euro required each country to assume the same tax base. This was required
regardless of the each
country's economic environment at that time. Without a doubt, some countries
benefited
while others did not. Taxes in some product categories such as cigarettes
and alcohol lowered but overall they increased by over 16%. The British
economy was thriving in its own right. Unemployment was lower in Britain
than in
the countries
that adopted the euro. Great Britain's economy experienced lower
inflation. Also, Great Britain received more foreign investment than
both Germany and France
combined.
Assuming the same tax base would have a negative impact on Great
Britain's favorable economic environment.
Great Britain does more of their
trade in dollars than euros. At the time the euro was being considered
for adoption, it was believed that doing
so would destabilize British trade.
Another argument against Great
Britain adopting the euro had to do with the financial solvency of other
countries. For example, several of the major
euro economies had bankrupt state pension systems. Adopting the euro
would dilute the
solvency of Great Britain's pension systems and therefore would not
be
economically viable.
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