The Euro

Question 1

What is the Euro?

Answer 1

• Is the single European countries adopted by 18 out of 28 EU countries.

Question 2

What does the Euro involve?

Answer 2

• Common currency
• Common monetary policy – Eurozone interest rates set by the ECB in Brussels.
• Some fiscal rules, e.g. The Fiscal Compact (2012) limiting the amount of government borrowing (a balanced budget of less than 3% of GDP)

Question 3

How big is the Euro worldwide?

Answer 3

The Euro is the second largest reserve currency in the world after the US Dollar.

Question 4

What are some of the benefits of the Euro?

Answer 4

• Lower transaction costs for trade, tourism and consumers.
• Greater price transparency (leading to more price competition and lower prices for consumers)
• Eliminates exchange rate volatility, encouraging trade and inward investment.
• In theory, lower inflation and lower interest rates.

Question 5

Problems with the Euro?

Answer 5

• Common monetary policy not always suitable for all 18 members.
• Uncompetitiveness. Countries in the Euro cannot devalue their currency against European neighbours.
• Fiscal compact has created pressure for austerity, leading to lower growth. Countries in the Eurozone have few policies to increase aggregate demand (AD) in a recession.

Question 6

Reasons why the UK should join the Euro?

Answer 6

• Reduce exchange rate volatility

- Encourage trade and inward investment with main trading partners

Question 7

Why the UK should join the Euro?

Answer 7

• UK would suffer from losing independent monetary policy, e.g. no quantitative easing could have made recession worse.
• UK housing market very sensitive to interest rates.
• UK exports could end up becoming uncompetitive lack Southern Europe
• Growth likely to be lower.
• Past five years suggest membership of the Euro could contribute to very serious recession.