Will the UK ever Be a Member of the Euro?

Why Euro Membership would be a bad idea for the UK

The first problem with the Euro is that it involves a Common Monetary Policy. This involves interest rates being set by the ECB for the whole Euro area (at the moment 11 countries). However, the Euro area from Spain to Germany is quite diverse and may have different stages of the economic cycle. Therefore, the interest rates set by the ECB may not be helpful for the UK economy.

For example, if the UK entered recession before the other Eurozone members, the UK would need lower interest rates to stimulate the economy. However, the ECB may not cut interest rates because other countries were still growing and inflation is a problem. If the UK was in recession and interest rates were too high because of the ECB, it would make the UK recession deeper and more protracted - something very damaging for economy. This potential danger for the economy far outweighs the minor benefits of lower transaction costs and greater exchange rate stability.

The UK is particularly sensitive to interest rates. This is because of the nature of the UK housing market. British consumers have, typically, large variable mortgages. A small increase in interest rates can have a big impact on disposable income. Therefore, if interest rates are too high or too low, it would cause serious problems in the UK Housing market and UK economy. To join the Euro, the UK would need to reform its housing market, reducing impact of variable mortgages, but, this is unlikely to be achieved with fundamental supply shortages.

Gordon Brown devised 5 economic test to see whether membership of Euro is a good idea. But, this is generally a smoke screen to hide the real issues - UK will never benefit from having interest rates set in Brussels?

See also:

• Impact of not joining