The single European currency - Business Environment

On 1 January 1999 the single European currency the euro was introduced. In order to qualify for membership of the single currency, EU members had to full fill strict convergence criteria with respect to inflation rates, budget deficits and the rates of interest. In the end all countries qualified except Greece, where there were problems with high inflation rates. The UK, Denmark and Sweden decided not to join the single currency, so Euro land comprises 11 members. Greece has since joined. Each of the currencies of these members is fixed to the euro at a specified rate, but each is a sub-unit of the euro rather than a separate currency. Even though the UK has not joined the single currency, many businesses in the UK have already adapted to its existence. Many large companies are using the euro for accounting purposes Marks & Spencer stores are fully equipped to accept the euro. Even without entry, preparation is necessary for practical reasons, since many large companies have started to invoice and pay bills in euros computer systems will have to be adapted to allow for this. There will also be a cost involved in the UK as banks are charging fairly high commission for converting euros, particularly for small users. Preparation is also a strategic issue for business. First, EMU will result in greater competition, as price differences will be more obvious to consumers.
The cost of converting currencies serves to increase the costs of UK businesses and make them less competitive. Second, EMU will probably result in more mergers and acquisitions across Europe and this will have dramatic effects on the structures of industries. In the UK the debate over the single European currency continues, although as previously noted this issue has been pushed into the background by the problems encountered by the new constitution. The pro single currency camp claims that theUK will be further marginalized in Europe if it does not join in the single currency.It also argues that there are great benefits to membership a reduction in transaction costs like the cost of currency exchange, a reduction in the uncertainty caused by changing exchange rates, lower interest rates and the continuance of London as a financial center in currencies. The anti camp argues just as vociferously that all of this would be at the expense of the loss of sovereignty the UK would be unable to change its exchange rate in order to boost the competitiveness of UK goods. In addition to this, there is also the high value of the pound against the euro to consider.In October 2005, €1 was worth 67p, which represents a 6 per cent fall in the value of the euro since January 1999. The performance of the euro since its birth has been variable. Figure shows the value of the euro against sterling sinceJanuary 1999 when €1 was worth 70p.There are a number of problems brewing in Europe. First, there are the problems associated with the lack of agreement on the new constitution which have already been discussed. Second, it seems that the imposition of a single interest rate across

Exchange-rate-of-euro with sterling

Europe has caused problems as some countries are growing and could bear a higher rate of interest while others are in recession and therefore could not. Third, member countries have to act to reduce the size of their budget deficit if it exceeds 3 per cent of GDP. Again this might be acceptable in a booming economy but not in an economy heading for recession. At the end of 2005 there is not much evidence of economic convergence and there is a strong anti-euro feeling in parts of the EU. Rumours that some member states are considering leaving the single currency have not helped.


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