Economics Unit 3- The Single Currency

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What is the single currency?

This is a group of 19 EU members who have joined together to use one single currency; the Euro. The Euro is now the second most traded currency in the world after the US dollar. 

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What are three advantages of joining the single cu

1. Removal Of Exchange Rate Risk: This is an advantage because if your main trading partners all use the same currency then there is no risk that the payment you receive from selling your exports will change when the exchange rate changes. This means that businesses feel more confident which stimulates investment and growth.

2. Price Transparency: This is an advantage because consumers and businesses who all use the same currency can easily compare prices across all Eurozone countries. This means that they can buy goods and services or supplies from the cheapest source.

3. Ease Of Employment: This is an advantage because all EU citizen can already work freely in any EU country but if that country uses the Euro it is even easier since their salary will be in the same currency as their own. This means that workers will be more free to move to where there are skills shortages.

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What are 3 disadvantages of joining the Single Cur

1. Lose Control Of Monetary Policy- This is a disadvantage because once you join the Euro, the ECB controls your monetary policy. This means that the country will not be able to change its interest rate for its own country. It will also mean that the Bank of England no longer needs to exist.

2. Lack Of Flexability- This is a disadvantage because if one Eurozone country enters a recession then it will not be able to lower its interest rate to help its economy recover. This means that a country may stay in a recession for a longer period of time, especially if other Eurozone members are enjoying economic growth and so the rate of interest is extremely high.

3. Contagion- The Eurozone countries are all interdependent on each other because they all trade together and share the same central bank. This means that one economy fails, then all the other Eurozone countries will also suffer. This happened when Greece’s economy collapsed after the crash of 2008.

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Evaluations to joining the Single Currency

1. However, the Eurozone is predicted to grow more slowly compared to other countries outside the Eurozone eg MINT’s. Also, actual and predicted growth rates are much lower in the Eurozone than in The UK (1.7 in the UK and -0.4% in 2003). This suggests that the UK is better off outside of the Eurozone.

2. However, at the moment fig 9 shows us that the Euro is weakening against the pound. This means that the UK can benefit from cheaper exports to other Eurozone countries. This provides a boost to UK businesses and helps create economic growth since 50% of our exports go to Eurozone countries. This suggests the UK should not join the Euro.

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