AM Online

Euro membership would 'clarify pricing structures'

In January the next phase of the European single currency project will begin, involving the introduction of euro notes and coins in participating countries. Across the euro-zone there will be a transition period where use of national currencies will be phased out by March.

UK membership of the European single currency has been under the spotlight and continues to be one of the major uncertainties for businesses engaged in pan-European operations. Business leaders are the main supporters of UK membership.

The advantage is clear – a fixed and stable exchange rate allowing greater certainty for conducting business across Europe.

For example, in the area of pan-European leasing, UK membership would clarify pricing structures by removing the rapid fluctuations of the exchange rate.

Other areas of the motor industry would also benefit. Vehicle manufacturers that use the UK as an export base would welcome the lower and fixed exchange rate to help profitability. The risk of currency hedging losses within the EU (which can be substantial) would also be eliminated.

UK membership raises the prospect of increased profitability through a variety of mechanisms.

There remains, according to the media, widespread opposition among the UK public to entering the single currency – a result of the Exchange Rate Mechanism fiasco in the 1990s.

There are also economic considerations to take into account. The Government would want to assess whether the UK economy has converged with that of the euro-zone – although even within the euro-zone the performance of individual nations varies enormously.

For example, growth in the German economy is expected to be less than 1% this year, while France will exceed 2%. Even though these are the two largest economies in the euro-zone, their economic prospects continue to differ under membership of the single currency.

One of the major questions to be answered is what exchange rate to use, since once the rate is chosen, it cannot be changed under the conditions of entry. Selecting the correct rate is crucial for the success of any membership bid.

The big debate concerns how strongly the value of sterling should be set against the euro before adopting the new currency.

The Deutschmark is dominant in Europe, which means sterling would be benchmarked against it.

Some city analysts believe the UK could enter the single currency at around DM3.00.

However, although the exchange rate has been around DM3.00 since 1996, most believe that the pound is over-valued and that this rate is unsustainable in the long term. Similar optimism regarding the ability to sustain high exchange rates contributed to the recession of 1990-92. A substantial fall in the exchange rate – to at least DM2.70 – would be needed before the UK could realistically enter the single currency.

Any attempt to sustain a much higher exchange rate would risk a repeat of Black Wednesday in 1992, when the UK's membership of the ERM ended in failure.

If you are not a registered user your comment will go to AM for approval before publishing. To avoid this requirement please register or login.

Login to comment


No comments have been made yet.