The Impact of UK Not Joining the Euro

1. The UK has lost out on various benefits of being in a single currency. These include:
Firms and tourists have to pay transactions cost in converting currencies. However, it is worth pointing out this is a very small % of a firms costs. The spread between buying and selling euros for big companies is very small, they get much better deal than tourists. It hasn't impacted on a macro scale.

UK exporters face exchange rate uncertainty. An appreciation in sterling can make their exports un competitive. (However, UK firms have benefited from the strength of the Euro) However, firms can hedge against exchange rate movements to insure against rapid fluctuations.

Less Inward Investment. It is argued that staying out of the Euro means that the UK attracts less inward investment because foreign firms want to invest in the Eurozone.

Benefits of Not Joining Euro

The UK's growth rate has been better than the Eurozone. Also this growth has not led to higher inflation. This suggests the UK has not lost out by being out of the Euro. However, this high growth could be due to other factors such as more flexible labour markets. If the UK had been in the Euro, it would have had an even more impressive growth rate.

The UK has needed an independent monetary policy. UK interest rates have been persistently higher than Eurozone interest rates. This is because of the higher growth rates. If the economy had the lower ECB interest rates, it may have caused a bigger housing boom and inflationary problems. This would have been a significant problem much more important than the relatively unimportant.

Eurozone economies are starting to experience problems through membership of the Euro.

The collapse of the dollar and rise of the euro mean that European exporters have become more un-competitive. The UK has avoided this because it retains flexibility in its currency.

Many southern European countries such as Spain and Italy are experiencing rising levels of national debt and this is putting strain on the Euro project.

Conclusion

The UK has missed out on some benefits that come from membership of the single currency. However, these lost benefits appear to be relatively small and do not interfere with the general economic performance.

Membership of the Euro could have caused serious problems in the UK. It would have struggled to deal with ECB interest rates. Also as the UK economy heads towards recession, the UK main need the flexibility of monetary and fiscal policy. This is particularly important in the UK because of the sensitive nature of homeowners to interest rates.