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The Possible Effects Of The Uk Entry Into The Euro On Foreign Trade And Foreign Direct Investment In The Country.

1491 words - 6 pages

The Euro has been in years in the making. The Treaty of Rome (1957) declared a common European market as a European objective with the aim of increasing economic prosperity and contributing to "an ever closer union among the peoples of Europe". The Single European Act (1986) and the Treaty on European Union (1992) have built on this, introducing Economic and Monetary Union (EMU) and laying the foundations for our single currency. The third stage of EMU began on 1st January 1999, when the exchange rates of the participating currencies were irrevocably set. Euro area Member States began implementing a common monetary policy, the euro was introduced as a legal currency and the 11 currencies of the participating Member States became subdivisions of the euro. Greece joined on 1st January 2001 and so 12 Member States introduced the new euro banknotes and coins at the beginning of this year. The successful development of the euro is central to the realization of a Europe in which people, services, capital and goods can move freely. The introduction of the Euro is the largest monetary changeover the world has ever seen.12 Member States of the European Union are participating in the common currency. They are Belgium, Germany, Greece, Spain, France, Finland, Ireland, Italy, Luxemburg, Netherlands, Austria and Portugal. Denmark, Sweden and the United Kingdom are members of the European Union but are not currently participating in the single currency.International trade takes place between countries, it takes place because of specialization, and hence, because of comparative advantage. Countries will specialize in the production of those items in which their comparative advantage is greatest. A country has a comparative advantage over another in the production of an item if it can produce that item at a lower opportunity cost. No barriers to trade exist in free trade, no protections exist, and such means of protection includes tariffs, taxes, restrictive practices such as cartel, subsidies, quotas, opportunity cost and factor-endowment, etc. Advantages of free trade are: jobs can be saved as imports would be reduced; protectionism can cause inflation, e.g., tariffs, less competition; free trade is more efficient including allocative and productive efficiency; consumer sovereignty remains as consumers would have a wider ranger of goods in the market.So what effects will it have on foreign trade with the UK joining this single currency? Will trade be boosted? If the UK decides to join the Euro, it will be joining the largest single market in the world outside the US. As a result of this, business can be sold more widely, achieving economies of scale. It also allows families and businesses to buy from a wider, and so cheaper, range of suppliers. These are factors to boost trade and increase our prosperity. *A previous study has shown that two countries sharing the same currency trade three times as much as two countries with different currencies. Having a...

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