Should the UK Adopt the Euro as Their Currency?

Twelve countries in western Europe adopted the euro as their currency in 2002. Several countries in eastern europe would like to join. The first will be Slovenia in January, 2007.

But there are other countries in western Europe that have declined to join the euro. The United Kingdom, Sweden, and Denmark decided to keep their own currencies. Norway and Switzerland are even further removed from the euro. They are not even members of the European Union.

There is an ongoing debate in Britain as to whether they should keep their Pound Sterling or dump it and adopt the euro. There are some obvious advantages to switching to the euro. When doing business with the rest of europe, they would not need to exchange currencies and avoid the obvious transaction costs. They would avoid foreign exchange risk when doing business in the continent.

But many Brits do not want the euro. A recent article in the Sun Online crows that they are better off without it. Britain's economy has certainly done better than the anemic economies of the continent but not because they kept the pound. The monetary policies of both the European Central Bank and the Bank of England have both been excellent. I think that both of them have done quite better than the US Federal Reserve, which has overreacted to the changes in the economy with excessive increases and decreases in its target interest rates.

The reason why Britain's economy has done so much better than those of most of the countries in the eurozone is because of its labor policies. In Germany, France, Italy, and many of the other countries in the eurozone it is very difficult if not impossible for a company to lay off an employee if they are no longer needed. Although this is a very good thing for the employees, it has the unfortunate consequence of forcing a company to think twice before they hire someone in the first place. The result has been that the unemployment rates in most of the continental economies have been much higher than in the UK. It has been particularly bad for people in their 20s and 30s, many of who have never worked.

The Republic of Ireland adopted the euro in 2002, and their economy has been the best of any of the countries in the euro. This shows that the monetary policy of the European Central Bank has not held them back at all.

The Brits do have some important reason for keeping the pound. Their economy's business cycle has historically not been in sync with those of the continent. If they joined the euro, the European Central Bank would find it difficult to adopt a monetary policy that would be suitable for all. Above all is the issue of national pride. If the Brits were to adopt the euro, they would be giving up their sovereignty to some extent. They have always considered themselves to be something apart from the rest of europe. An island off the continent that is close but not a member of the immediate family.