Too High German Interest Rate example essay topic

One of the primary reasons any European country might have for joining the EMU is a sense of economic stability that it would provide. Since the Euro was first conceived in '92, The UK has opted against adopting the currency. Before the UK or any country should join "Euro land" they must ask themselves: "Will it provide stability? Will it be a zone of growth?" Is Britain's focus facing too far away from its neighbors, leaving them out of an economic prosperity that is ascertained for the future of the EMU?

I propose that Blair is wise not to sprint toward the euro. That the economic and growth differentials between the countries in the EU are too great to provide a secure enough prediction of the euro's future. To start with the question of stability. There will be one European Central Bank. This ECB will set one interest rate across a vast area of Europe, from Lisbon to Berlin.

What we can say with certainty is that, whatever rate the Bank sets, for many countries it will be wrong for most of the time. For some countries it will be too high, for others too low. In the European Exchange Rate Mechanism Europe had to adopt a too-high German interest rate. This produced an economic slump which showed no sign of ending until the pound finally broke free of the ERM and was devalued by 20%. Were the UK to enter the single currency zone when European interest rates were a lot lower than in the UK, the effect would be sharply accelerating inflation followed by several years of recession since British goods would have become priced out of European markets. The only weapon a British government would retain against inflation would be savage tax increases.

The Eurozone's interest rates are at their lowest level since 1950. But this does not help Ireland and Greece, where rates should be higher since strong economic growth has increased inflationary pressures in those economies. So those countries where interest rates are too high will be depressed by the unified European interest rate; whereas others where rates are too low will be de stabilised in the opposite direction. Moreover, economic growth in Britain has outpaced growth in the Eurozone since the euro's introduction in 1999. This is undoubtedly due in large part to the Bank of England's ability to tailor to the needs of the British economy. As the ECB moves the European interest rate, the impact of the changes will vary between countries.

In 1997, the Pennant Rea committee calculated that because of the high level of variable-rate mortgage debt in Britain, The UK's GDP is four times as sensitive to change in interest rates as the average of the other EU countries. My conclusion is that the UK continue to monitor the progress of the euro before deciding to convert. The interest rates of the countries of the EU are not yet well enough converged to allow the single currency area to be assumed as a zone of more stability or growth than the UK's current system..