Finance

Britains refusal to adopt the Euro as its currency is not entirely unfounded. It is true that the pound is on the brink of sinking below with the euro. However, this is temporary. It is estimated that the pound will recover in five months. This increase is estimated to be significant, as the British economy is set to improve in a years time. The predicted recovery is both long-term and stable.

The common problems with the proposed adoption are as follows 1) disparity of foreign equity, 2) differential interest rates among member-countries, and 3) differences in GDP growth among member-countries. Disparity in foreign equity is a forestalling issue. By adopting the euro as its main currency, Britains foreign debt will continue to increase. Increasing the quantity of euro circulating in the British economy will result to an increase in pound-denominated assets. As such, payment of foreign debt becomes more tenuous. Britain has to pay more with little effect on GDP growth.

Interest rates differ across member countries. This is rational because GDP growth differs across countries. Countries with high economic growth have high interest rates. Britain at present sets interest rates below the prescribed rate. This is done to encourage individuals to invest more in the market. If Britain adopts the euro, it is required to set interest rates at the prescribed value. Thus, although the adoption would increase the pounds parity, it will decrease GDP growth.

The nature of foreign and domestic assets can potentially increase or decrease the pounds parity with the euro. An increase in domestic assets can increase the pounds position against the euro (or a reduction of foreign assets). This will also lead to a minimization of foreign debt accumulation. If Britain wants to improve its position in Europe in terms of currency parity, it must either increase its domestic assets or lower prevailing interest rates. This is, of course, at the cost of potential government revenue.