Unit 4: Single Currency

Question 1

What is meant by Convergence Criteria?

Answer 1

Criteria which EU members are required to meet to adopt the euro as their currency.

Question 2

What is the Convergence Criteria?

Answer 2

1. Inflation Rates-
   No more than 1.5% points higher than the average of the top 3 best performing members of the EU
2. Government Finance
   The annual gov. deficit to GDP must not exceed 3%
   The ratio of gross gov. debt to GDP must not exceed 60%
3. Exchange Rate
   Applicant countries should have joined the exchange-rate mechanism (ERM II), under the European Monetary System for 2 consecutive years, and should not have devalued its currency during the period.
4. Long-Term Interest Rates
   The nominal long-term interest rate must not be more that 2% points higher than the 3 lowest inflation members

Question 3

What are the Microeconomic Reasons for Britain not using the Euro?

Answer 3

Changeover Costs from joining the Euro:
It will cost money to change the currency for all machines, accounting systems, etc. and will also cause confusion for many

Higher Prices:
Potential loss of consumer welfare if suppliers increase prices

The vast majority of consumers will continue to Buy Locally; making the switch less effective

Question 4

What are the Macroeconomic Reasons for Britain not using the Euro?

Answer 4

Britain loses Instruments of policy adjustment:
A ‘one size fits all’ monetary policy may not work with the UK

Fiscal Policy:
The EU growth and Fiscal Stability Pact is a weakness of the current system

UK economy has Out-Performed Euro Zone:
The UK has achieved low inflation and sustained growth (macro stability)
Continued high levels of FDI

The UK still benefits from the EU market

The UK tends to be more sensitive to interest rate changes

The UK may join at an inappropriate exchange rate- could worsen the business cycle