Produce a study of the benefits and costs which might be result for UK-based firms should the UK adopt the EURO

The Euro is a single currency arrangement adopted by the members of the European Union. It is the second largest currency in the world, after the US Dollar. Adopting the Euro by the country has both: advantages and disadvantages.

I refer to the fact that a proper operation of a single currency regime entails the dissolution of any internal monetary barriers to the free flow of economic activity and thus encourages the movement of capital, labor and enterprise away from the more slowly growing member countries of the regime to the more rapidly growing ones. In short, if barriers to the mobility of the factors of production are eliminated or reduced, the more rapidly expanding economies should gain at the expense of the less rapidly growing ones till some sort of balance has been reached. It is in this way that the prosperity of the regime as a whole processes with each member state free to complete for its share of it.

The reality of the situation, however, is that while capital is highly mobile both inside and outside the EU, there are still formidable social, economic and cultural barriers to the mobility of labor. Cross-border labor migration remains low and tends to be focused on highly paid professionals. Without greater wage flexibility the flow of capital to areas of high unemployment is likely to be inhibited [2].

Existing labor mobility limitations notwithstanding, Euro entry could mean that over a thirty-year period British trade with the Euro-zone would increase by 50 %.

With about 60 % of UK merchandise trade, both export and imports, presently accounted for the EU, entry to the Euro at the appropriate Sterling-Euro exchange rate is likely to be beneficial to that trade because it would remove the uncertainty and distortions which can spring from a floating exchange rate. By this I refer to the unsettling and exaggerated influence which fluctuations in the Sterling exchange rate can have on Britain’s trade and financial flows vis-à-vis the rest o the world and hence one of the cyclical behavior of its business activity.

During phases of exceptional Sterling strength this can pose particular difficulties for those parts of Britain’s manufacturing industry that are heavily involved in exports. The issue of timing is important. If Britain enters when its economy is in a strong boom compared to Europe, the pound would be high against the euro, and that might in the long run put Britain at a competitive disadvantage; the opposite would be true if Britain’s economy was relatively weak. Based, however, as it is, on the assumption of Euro entry at the right exchange rate level, the growth in the country’s national income could be increased by up to 0.25 % per annum over the period of thirty years. In other words, in real money terms, at today’s prices, UK national wealth could be boosted by up to £ 3 bn. a year [4]. This seems a fairly cautions estimate given the contention of Professor Andrew Rose of the University of California, one of the independent expert, that in the event of Euro entry Britain’s trade with the Euro-zone could eventually triple with the result that over a thirty-year period the growth in the country’s gross domestic product could be raised by as much as 20 %

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