Should Britain Join the European Union
With the change over to the Euro notes and coins now complete across the "Euro-zone", twelve countries that have adopted the Euro as their currency, the debate over whether to adopt the single currency in Britain continues. There will be those who argue that the introduction of the single currency is merely the next logical step in the development of a truly single market, and that by joining, Britain would gain a voice in what could eventually become the world 's most powerful economic zone. Others believe that a successful common market is not dependant on the adoption of a single currency, which they see as merely another irrevocable step towards the political union of Europe. But the main focus of the debate centers on the parameters of macro economic objectives.
So, assuming exchange risk is a big factor, consider whether joining the Euro will actually reduce it or not and if so by how much. Here we immediately trip over the key point that joining the Euro is not to join a world currency but a regional one. Unfortunately for our exchange risk we trade very heavily with the dollar area. Let us not get tied up in the vexed question of the exact shares of our trade with Europe and with the USA, and what sorts of trade should be counted (in goods? in goods and services? or in all cross-border transactions including foreign investment and earnings on them?). The point is that if we regard exchange risk as a sort of tax on transactions involving exchanging currency, then it is plain that the broadest definition should be used for the trade ' affected by this tax. Most of the world outside Europe either uses the dollar or is tied to it in some formal or informal way. We might then say, in a rough and ready way, that we trade and invest half with the Euro area and half with the dollar area.
It so happens that the Euro/dollar exchange rate has been highly variable for a very long time - see Figure 1 which shows the DM/dollar rate up to January 1999 and
So, assuming exchange risk is a big factor, consider whether joining the Euro will actually reduce it or not and if so by how much. Here we immediately trip over the key point that joining the Euro is not to join a world currency but a regional one. Unfortunately for our exchange risk we trade very heavily with the dollar area. Let us not get tied up in the vexed question of the exact shares of our trade with Europe and with the USA, and what sorts of trade should be counted (in goods? in goods and services? or in all cross-border transactions including foreign investment and earnings on them?). The point is that if we regard exchange risk as a sort of tax on transactions involving exchanging currency, then it is plain that the broadest definition should be used for the trade ' affected by this tax. Most of the world outside Europe either uses the dollar or is tied to it in some formal or informal way. We might then say, in a rough and ready way, that we trade and invest half with the Euro area and half with the dollar area.
It so happens that the Euro/dollar exchange rate has been highly variable for a very long time - see Figure 1 which shows the DM/dollar rate up to January 1999 and
Bibliography: R Baldwin & C Wyplosz, 2006; "The Economics of European Integration"; New York: McGrawHill. R Mundell and A Swoboda ed., 1969; "Monetary problems of the International Economy"; University of Chicago Press, Chicago I Maes, 1992; "Optimum Currency Area Theory and European Monetary Integration"; H I. Walter and R. Smith, "High Finance in the Euro-Zone:Competing in the New European Capital Market" Financial Times/Prentice Hall, London, 2000. R McKinnon, 1963; "Optimum Currency Areas", The American Economic Review (Vol. 53 No.4 (Sept. 1963)), accessed 18/12/06, available at: F Mongelli; ""New" views on the Optimum Currency Area Theory: What is EMU telling us?"; ECB Working Paper 138; accessed 20/12/06; available at R Mundell, 1961; "A Theory of Optimum Currency Areas", The American Economic Review (Vol. 51 No. 4 (Sept. 1961)), accessed 18/12/06, available at: