ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

To what extent do the benefits of membership of a Monetary Union such as the Eurozone outweigh the costs.

Updated on January 15, 2016


A monetary union such as the Eurozone is the use of a single currency and the monetary control of the currency (monetary policy) is run by a central bank (The ECB - European Central Bank). Fiscal policy requirements are put in place such as member countries not having a budget deficit larger than 3% of GDP.

UK's Financial Heart

Transaction Costs

A possible benefit to the UK of monetary union is lower transaction costs. Trading between countries will become easier as there are no forex costs or fluctuations which might reduce a firms ability or willingness to trade, this is highly important to the UK as 60% of its trade involves the Euro. A single currency also means that comparative advantage is able to be further refined between member countries as it might not be fully exploited presently. In addition to this, there is a positive effect on consumer welfare as firms cannot price discriminate.

However, presently, forex charges are already being considered by UK based firms who trade with the EU. This is done by purchasing 'options' (which is future insurance against forex fluctuations) which can be effective and sometimes increase profits. Also, the 'options' which are usually purchased by both UK and EU firms are purchased through the UK financial sector. So a major income stream would be lost here which would likely worsen the current account on the balance of payments as the finance industry in the UK (service sector) helps to balance the usually negative Balance of Goods on the current account.

In addition to this, the £ has appreciated against the € recently which has provided firms and consumers with cheaper EU imports, which for firms can be used to produce cheaper exports for the world market as raw materials such as french electricity are cheaper. This benefit would be lost in a monetary union.

Finally, the UK economy's productivity is likely to be maximised when comparative advantage is at its freest rein i.e. outside of a monetary union with higher levels of protectionism.

Nissan's highly efficient UK plant

A Possible Increase in FDI

Another possible benefit for the UK of monetary union is a possible increase in the FDI from TNCs. These TNC's would look to take advantage of the UK's highly skilled human capital and productive capital stock along with its position inside the monetary union in order to have greater trade with the rest of Europe. This would also help balance the capital account on the balance of payments for the UK.

However, it could be argued that the UK has received FDI despite not being in the Monetary Union e.g. hosting Nissan's most productive factory in Europe, along with Japanese car firms in the 1980s who moved due to the UK's fairly unique combination of EFTA access and the rest of the world access, along with the £ being weaker than the € at the time against the ¥.

In addition to this, the freer trade the UK has now outside of a monetary union means UK industries may be operating more efficiently now and the FDI would simply try to fill the gap left by falling productivity of UK industries inside the monetary union.

The Monetary Policy Control Issue

Finally there is the issue of Monetary Policy Control. One benefit could be that inflation would be controlled and limited; given the UK's history of high inflation and Germany having very stringent control in recent history. This centrally controlled Monetary policy may also provide firms and consumers with high levels of confidence and therefore increase AD and LRAS

However the UK has now very low controlled inflation of circa 0% after the Monetary Policy Committee was formed in 1996 for the purpose of inflation to be kept at 2% (+/- 1%).

Importantly for the UK it would not be able adapt interest rates for its own economic needs in a Monetary union e.g. if the economy needs a boost from lower interest rates, France and Germany may not want lower rates this is because the UK is a highly consumption driven economy (60% of AD) whereas Germany is an (X-M; net exports) economy with a high marginal propensity to consume. The reverse of this is also true , that a country may need deflationary monetary policy such as the Republic of Ireland historically.

Despite this it could also be argued that the UK is a microcosm of this situation, whereby Wales, Scotland, Northern Ireland and England all have different economy structures yet the Monoetary Policy committee is able to manage all of these simultaneously.

The UK's Monetary Policy Committee

Illustration of differing short term trade cycle


In conclusion, it could be said that the UK is a strong economy independently and its structure is suited to this and more recently (2014-2015) the UK has seen low levels of unemployment (5.7%), positive growth and a reducing Balance of Payments Deficit so the joining is unnecessary.

A final larger problem would be that for currency union to work, "convergence" is needed with countries having very similar inflation, interest rates and position in the trade cycle. However a position in the trade cycle is hard to identify, the UK's budget deficit is higher than 3% of GDP (5.7%) and its economic structure is not similar enough to the core countries of France and Geramany.

Just A Quick Poll...

Should the UK join into a Monetary Union

See results


    0 of 8192 characters used
    Post Comment

    No comments yet.


    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

    Show Details
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)
    ClickscoThis is a data management platform studying reader behavior (Privacy Policy)