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.

Start your day with The Independent, sign up for daily news emails
There will be a chance to bid for a rare example of the SAS Diary, collated by a former member of the regiment in the aftermath of World War II but only published – in a limited run of just 5,000 – in 2011
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm today
Arts and Entertainment
Bianca Miller and Katie Bulmer-Cooke are scrutinised by Lord Sugar's aide Nick Hewer on The Apprentice final
tvBut Bianca Miller has taken on board his comments over pricing
Life and Style
Approaching sale shopping in a smart way means that you’ll get the most out of your money
life + styleSales shopping tips and tricks from the experts
Elton John and David Furnish exchange marriage vows
peopleSinger posts pictures of nuptials throughout the day
in picturesWounded and mangy husky puppy rescued from dump
David Silva, Andy Carroll, Arsene Wenger and Radamel Falcao
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

SThree: Graduate Recruitment Consultant

£20000 - £25000 per annum + OTE £35000: SThree: SThree are a global FTSE 250 b...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K - £45K: SThree: SThree Group have been we...

Day In a Page

Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'