The interminable debate in Britain over whether to join the European Monetary Union reached a fever pitch in early 2003. That was when Chancellor of the Exchequer Gordon Brown had promised to make his recommendation to Prime Minister Tony Blair as to whether economic conditions were such as to warrant the move. Although Prime Minister Blair was likely to accept Chancellor Brown's judgment, he also had to pay attention to the intense debate over the euro. This debate went way beyond party lines, splitting political parties and raising passions in a way few other issues do. Business was similarly divided over the merits of EMU. The economy, and how it could be affected by adopting the euro, was central to this debate. Euro-skeptics pointed out that by adopting the euro, Britain would trade control over its own interest rates and monetary policy for a single vote on the governing council of the European Central Bank in Frankfurt, which sets interest rates for the Euro zone as a whole. Shocks to the economy, such as the terrorist attacks of September 11 or a drop in the housing market, make it harder for the ECB to find the right rate. After euro entry, given the limitation on deficits, the British government could face

a stark choice between cutting public spending or raising taxes. For many opponents, monetary union would also mean more EU-generated regulation. Moreover, skeptics argued, the benefits of EMU were not readily apparent insofar as Britain had lower unemployment, lower inflation, and higher growth than the Euroz one. Despite this dismal view of Britain's prospects if it joined EMU, equally passionate euro enthusiasts argued that Britain was paying a high price for its economic isolation. They pointed out that foreign investment, a cornerstone of Britain's economic prosperity, was in jeopardy. Thousands of foreign businesses, employing hundreds of thousands of workers, had brought new skills and innovations to Britain, raising productivity and boosting prosperity. However, since the advent of the euro, Britain's share of foreign investment in Europe had fallen precipitously. The pro-euro camp's explanation for this sharp decline was that multinationals locating in Britain now had to bear transaction costs and exchange rate uncertainty that they could avoid by basing themselves in EMU countries. Similarly, euro supporters argued that Britain's trade with the European Union, half its overall trade, was stagnating because of these same currency costs and risks. Meanwhile, euro countries were seeing their trade with one another rise dramatically. Supporters, therefore, argued that joining EMU would lead to greater stability and shared growth in the EU. Joining EMU would also facilitate greater economic efficiency and increase competition by allowing British companies and consumers to compare prices and wages more easily with their Euro zone counterparts. Skeptics, on the other hand, argued that Britain's lighter regulatory and tax burden was more important for investors and businesses than the euro and these advantages would be lost if Britain joined EMU. The debate whether to adopt the euro ebbs and flows with the pound/euro exchange rate. The plummeting value of the British currency in 2009 again sparked fresh debate among entrepreneurs over whether Britain should join EMU. Many small- and medium-size businesses reported profit losses due to sterling weakness. However, more recent troubles with the euro in late 2010 sparked relief and vindication among many in policy circles that Britain had stayed out of EMU.

Questions

1. Discuss the pros and cons for Britain's joining the EMU.

2. Commentators pointed to the fact that many people in Britain have variable rate mortgages, as opposed to the fixed-rate mortgages more common in Europe. Britain also has the most flexible labor markets in Europe. How would these factors likely affect Britain's economic costs and benefits of adopting the euro?

3. What types of British companies would most likely benefit from joining EMU?

4. Some large multinationals warned that they only chose to invest in Britain on the assumption it would ultimately adopt the euro. Why would multinationals be interested in Britain adopting the euro?

5. What type of British businesses would have been hurt by a falling pound in 2009? Are there any that would have benefitted?