An idiot's guide to monetary union

To join or not to join? Yvette Cooper weighs up the pros and cons

It's the topic of the week. Market turmoil and the Conservatives' technical loss of their majority on Friday, may have caused a temporary eclipse, but it's still the biggest political hot potato around: Europe and the single currency. And with MPs wrangling in the Commons and government heads slugging it out in Dublin, we can soon expect to hear a lot about EMU.

For most people the entire debate is baffling, the reason being that there is no easy answer to what Britain should do about a single currency. And, the only thing the economists agree on, so far, is that there are valid arguments on both sides - as shown by our guide below.

The case for staying out

The single currency will not bring significant advantages above and beyond the single market. ( A controversial claim.) q Britain would suffer by losing control of its fiscal and monetary policy. Economists disagree passionately about how much control we would really lose, and about how much we would suffer, or benefit, if we did. Interest rates would be set by a European Central Bank, rather than the Chancellor.There would be constraints on how much governments could borrow.

It is not sensible to have a single rate for all European countries, since they differ. Interest rates and exchange rates are useful tools for adjusting to shocks. Response to economic change depends on the country affected. For example, the British economy is more closely linked to the US than other European economies. If the US has a recession, Britain - but perhaps no other country - might need an interest rate cut to help her companies and prevent a recession. But with a euro-based economy, that kind of adjustment would not be possible.

Britain should not have the same interest rates as other European countries because our economy reacts in a different way when interest rates alter. Britain, far more so than France and Germany, is heavily dependent on mortgages. If interest rates go up, mortgage repayments rise, and consumers scream. An increase in interest rates could choke off inflationary pressures far more severely in Britain than in other European countries.

The case for going in

No more currency speculation - at least between Britain and Europe. Hooray.

A truly single European market is impossible without the euro. (So say the single-cur- rency enthusiasts.) Firms would benefit from significant productivity gains, operating freely within a huge market.

EMU will go ahead whether we join or not. Being outside could put us at a competitive disadvantage. France and Germany may be so annoyed at Britain's failure to join the single cur- rency they might renege on their commitment to allow us the privileges of the single market. Legally, they cannot discriminate against British companies, but covert barriers could put our firms at a disadvantage. Inward investment might start to seep outwards, as the foreign-owned car plants and electronics factories in Britain move into the European market.

We will not lose any real freedom to manoeuvre on fiscal policy. Britain can still tax and spend as much or as little as she likes. Borrowing is already constrained by the financial markets.

We would not lose a huge amount of genuine freedom over monetary policy.We will be heavily affected by European interest rates anyway.

A single currency will force us to confront our long-term economic failings. In the past, when British goods have been uncom- petitive compared with foreign goods, we have devalued the pound to let our goods become cheaper on foreign shelves. Many economists say this has led Brit-ish companies to avoid investing and making improvements to remain genuinely competitive with foreign firms. Devaluation is an easy short-term solution if British inflation is running higher than inflation abroad. If we cannot devalue - for being locked into the euro - we will have to face our inflationary problems.

Joining will make it easier to convince the financial markets we are serious about keeping inflation low. The markets will view sterling as a weaker currency compared to the euro, and a greater inflationary risk. They will demand higher interest rates to protect their assets against inflation. But higher interest rates will reduce investment by British firms, be bad for jobs, and may deter inward investors.

A regional policy could counteract some of the problems of having a single interest rate for various countries. Countries could run higher deficits while their economies were undergoing difficulties. Other nations could share the burden by transferring resources towards the country in trouble. However, taxpayers would have to consent to paying lots of money to help people in other countries.

The case for delay

Chances are it won't work. Let other countries take the risk.

Better to wait until the British economy is better integrated with Europe so that it can cope with the same level of interest rates for most of the time.

Better to wait until pro- European sentiment increases. Given that the euro will only work if there are big fiscal transfers from affluent regions to suffering regions, people need to believe there is a European public interest worth the sacrifice. All very well Croydon paying higher taxes to help the unemployed in Liverpool, but will Brits pay higher taxes for people out of work in Italy?

The case for joining the first wave

If we do not go in straight away, we lose all influence over the setting up of the European Central Bank, and over all kinds of important structural questions. The European Community was set up without us and in a way which didn't suit us. Why make the same mistake again?

If we delay, our entire economic policy debate will be dominated by speculation over when, whether and how sterling should join the single currency - just as economic policy in the 1980swas heavily affected by speculation about the ERM.

The British economy will only become thoroughly integrated with Europe if we go ahead with a single currency and force ourselves to make the difficult decision to adapt. In other words ... jump straight in and get the pain over with.

News
peopleHowards' Way actress, and former mistress of Jeffrey Archer, was 60
Sport
Romelu Lukaku puts pen to paper
sport
News
Robyn Lawley
people
Arts and Entertainment
Unhappy days: Resistance spy turned Nobel prize winner Samuel Beckett
books
PROMOTED VIDEO
News
people
Life and Style
Troy Baker and Ashley Johnson voice the show’s heroes
gamingOnce stilted and melodramatic, Hollywood is giving acting in video games a makeover
News
i100
Life and Style
Phones will be able to monitor your health, from blood pressure to heart rate, and even book a doctor’s appointment for you
techCould our smartphones soon be diagnosing diseases via Health Kit and Google Fit?
News
people
Extras
indybest
Travel
Ryan taming: the Celtic Tiger carrier has been trying to improve its image
travelRyanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Sport
Usain Bolt confirms he will run in both the heats and the finals of the men's relay at the Commonwealth Games
commonwealth games
Life and Style
Slim pickings: Spanx premium denim collection
fashionBillionaire founder of Spanx launches range of jeans that offers 'thigh-trimming construction'
News
Sabina Altynbekova has said she wants to be famous for playing volleyball, not her looks
people
News
i100
Life and Style
tech'World's first man-made leaves' could use photosynthesis to help astronauts breathe
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior Investment Accounting Change Manager

£600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

BA/PM,EMIR/Dodd-Frank,London,£450-650P/D

£450 - £650 per day + competitive: Orgtel: My client, a leading bank, is curre...

Senior Analyst - ALM Data - Banking - Halifax

£350 - £400 per day + competitive: Orgtel: Senior Analyst, ALM Data, Halifax, ...

Java developer - Banking - London - Up to £600/day

£500 - £600 per day: Orgtel: Java developer - Banking - London - Up to £600/d...

Day In a Page

Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices
Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

Could smartphones soon be diagnosing diseases?

Health Kit and Google Fit have been described as "the beginning of a health revolution"
Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

Can we learn to love Ryanair again?

Four recent travellers give their verdicts on the carrier's improved customer service
Billionaire founder of Spanx launches range of jeans that offers

Spanx launches range of jeans

The jeans come in two styles, multiple cuts and three washes and will go on sale in the UK in October
10 best over-ear headphones

Aural pleasure: 10 best over-ear headphones

Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel
Commonwealth Games 2014: David Millar ready to serve up gold for his beloved Scotland in the end

Commonwealth Games

David Millar ready to serve up gold for his beloved Scotland in the end
UCI Mountain Bike World Cup 2014: Downhill all the way to the top for the Atherton siblings

UCI Mountain Bike World Cup

Downhill all the way to the top for the Atherton siblings
Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

A former custard factory, a Midlands bog and a Leeds cemetery

Introducing the top 50 hidden spots in Britain
Ebola epidemic: Plagued by fear

Ebola epidemic: Plagued by fear

How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

From 'Parks and Recreation' to 'Guardians of the Galaxy'

He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star