Hypothetical UK Euro questions

[Delta]

(Mods: Couldn't find a better place to put this, feel free to move it if necessary)

 

So I was thinking today about how the Pound is sliding towards parity with the Euro and a few thoughts came to mind.

 

Firstly, when currencies are tied to the Euro, is this a process which can be done instantly? Can the government for example say "we're tying the pound to the euro" and that be it?

 

Assuming that this is some way possible, could Brown freeze the exchange rate when it is near enough 1:1?

 

Assuming again that this happened, and that the exchange rate was now in effect non existent, would this in effect allow a near seamless and instant transition to the new currency?

 

A 1:1 exchange rate would in effect mean all that would be required is changing a symbol, shoppers would not need any time to adjust to new numeric values, business would not need to have dual pricing or update any systems to cope with dual totaling, and physical euro could step in directly in replace of the pound from day one.

 

It won't happen, not least because we would 'require' a referendum and people would vote against it because they simply don't like Brown. Unless I am overlooking things though it seems a switch at 1:1 would save a whole lot of effort and money.

[Brett]

I didn't think the UK wanted to get rid of the pound.

 

Are they now looking to join the EU??

[tabbs]

Anything that has the words "UK" and "euro" in one sentence is an extremely hypothetical question indeed which does not really deserve an answer. That being said ...

 

when currencies are tied to the Euro, is this a process which can be done instantly? Can the government for example say "we're tying the pound to the euro" and that be it?

Not really. There are basically two ways of "euroizing" a country: The regular path would be to join the Exchange Rate Mechanism (ERM-II) and participate in that for at least two years. Let's say some currency joins at a central rate of 0.585274 per euro (this was the case for the Cyprus Pound). In ERM-II you have a "fluctuation band" of +/- 15 percent, so that currency could freely fluctuate between 0.673065 and 0.497483. At these points the central banks would intervene (both the ECB and the national central bank of the "candidate" country). Also, the country that plans to join would have to meet certain other convergence criteria.

 

The second option - which neither the ECB nor the EU as a whole really support - is to unilaterally tie a currency to the euro. Bulgaria for example does that. So the British government could theoretically say, once we reach an exchange rate of 1:1, that rate will be "frozen". However, the Bank of England (or some kind of UK Currency Board) would then be responsible for keeping that rate; the ECB would not intervene.

 

That second path a country can follow even without joining ERM-II; even a non-EU country could do that. But unless a country is in the EU and in the Eurosystem, it cannot participate in or influence the ECB's monetary decisions. Thus a unilaterally frozen rate would be the worst option in my opinion ...

 

Christian

[tabbs]

I didn't think the UK wanted to get rid of the pound.

Correct. About two weeks ago, president Barroso said in an interview that "some British politicians" had told him "If we had the euro, we would have been better off". But that should not be taken too seriously. Maybe he was referring to politicians in the UK who plan to commit political suicide, hehe.

 

Are they now looking to join the EU??

Umm, the UK has been a member of what today is the EU since 1973. Don't know why, and they may leave the European Union one day. But joining the European currency union is pretty much the last thing the UK would do.

 

Christian

[geordie582]

Although I agree with Tabbs, this government has a history of doing things 'by the back door' and ignoring the populace who, I suspect, they think are too ignorant to make such weighty decisions. Hence reneging on their promise to have a referendum on the whole Europe thing. At the moment, their rating has improved because of the economic situation and the populace are desperate for a 'saviour'. However, as John Major said today, relying on a government who spent the reserves of the country to bail them out of this mess is like asking the burglar who broke into your house to fit new security locks!!

Sorry to be so heavy.

[YeOldeCollector]

However, as John Major said today, relying on a government who spent the reserves of the country to bail them out of this mess is like asking the burglar who broke into your house to fit new security locks!!

 

So true, so true...

[SlavicScott]

The second option - which neither the ECB nor the EU as a whole really support - is to unilaterally tie a currency to the euro. Bulgaria for example does that. So the British government could theoretically say, once we reach an exchange rate of 1:1, that rate will be "frozen". However, the Bank of England (or some kind of UK Currency Board) would then be responsible for keeping that rate; the ECB would not intervene.

 

Christian

 

Bosnia, in effect, also did this. They tied their currency to the German Mark, and by default, when Germany converted to the euro, the Bosnian "convertible mark" became a "convertible euro."

 

Montenegro also uses the euro as their "official" currency, since they broke from Serbia in 2006.

[tabbs]

Yep, and Andorra and Kosovo also use the euro without being part of the currency union or having a monetary agreement with the EU. But I find it hard to imagine that such a unilateral use would work for a big country such as the UK.

 

The problem these days is that, in various countries which are not parts of major currency areas, this idea of avoiding extreme volatility by being under some kind of "umbrella" has become somewhat popular. Iceland is an extreme case, but to some extent such issues are discussed in the Persian Gulf countries or in Central America as well. However, you cannot be part of currency union on a bad weather day and a little later work against further integration ...

 

Christian

[mgk920]

Yep, and Andorra and Kosovo also use the euro without being part of the currency union or having a monetary agreement with the EU. But I find it hard to imagine that such a unilateral use would work for a big country such as the UK.

 

The problem these days is that, in various countries which are not parts of major currency areas, this idea of avoiding extreme volatility by being under some kind of "umbrella" has become somewhat popular. Iceland is an extreme case, but to some extent such issues are discussed in the Persian Gulf countries or in Central America as well. However, you cannot be part of currency union on a bad weather day and a little later work against further integration ...

Essentially, for those places that go that way, that 'new' money is very analogous to a gold standard - if you don't directly control it and you don't have it, you can't spend it - period. It instills a form of fiscal discipline that is not otherwise possible. That is why countries like Panama, El Salvador and Ecuador now use the USA Dollar as their local scrip, too, apparently with very favorable results.

 

Mike

[luke_idk]

Yep, and Andorra and Kosovo also use the euro without being part of the currency union or having a monetary agreement with the EU. But I find it hard to imagine that such a unilateral use would work for a big country such as the UK.

 

The problem these days is that, in various countries which are not parts of major currency areas, this idea of avoiding extreme volatility by being under some kind of "umbrella" has become somewhat popular. Iceland is an extreme case, but to some extent such issues are discussed in the Persian Gulf countries or in Central America as well. However, you cannot be part of currency union on a bad weather day and a little later work against further integration ...

 

Christian

 

Also Montenegro uses Euro as a unilateral decision, but the situation, is completely different, from Britain and quite different from the other two countries, too.

Kosovo is uder a UN administration and Euro was chosen as currency for a place that had no currency at all, since refused to use serbian coins.

Andorra has a long tradition in dealing with French and Spansh coins, without any kind of agreement with the two countries. The principality asked to be admitted in the Eurozone, but received no reply, since They didn't accomplish with UE laws and procedures, for "fiscal transparecncy". Its borders with Farnce and Spain and the fact that French president and Urgel bishop are the two co-princes lead to use Francs and Pesetas and now Euro.

Montenegro stated to use Euro from the birth of the Serbia-Montenegro confederation, being authorized to use a new different currency, but no agreement was signed with UE and the decison was (as said) unilateral.

Britain's a full member of UE. Could British Government take such a decision, despite statued agreemnts? As you just said before, it's quite difficult, if not impossible, to imagine such a thing. it wuold probably mean to leave Euorpean union, that's not possible to figure, now.

Anyway, the possibility that UK could join Euro now, is just rumors.

Except Slovak Republic, that has just joined Euro; next country could be Denmark, since Danish Corwn is linked to Euro by a demi-fixed chenge rate, so that keeping out of Euro, in this moment, is quite a nonsense.

 

I apologize for my raw English, but I've not been speaking it, for a long time and this is my first post.

[ccg]

Welcome! That was quite well written.

 

Regarding Bulgaria, when did it fix the leva to the Deustchemark, and how did it affect the country's economy?

[tabbs]

Regarding Bulgaria, when did it fix the leva to the Deustchemark, and how did it affect the country's economy?

The old Bulgarian Lev (BGL) was unilaterally tied to the Deutsche Mark in July 1997. Since July 1999 the new lev (BGN) has thus been tied to the euro at a fixed exchange rate. Bulgaria became an EU member state in January 2007, and currently meets the convergence criteria except the inflation rate.

 

Note that the Bulgarian lev is not in ERM-II. However, the Estonian kroon and the Lithuanian litas are, and yet both currencies are (on top of that, so to say) unilaterally tied to the euro at a fixed rate. Basically there is nothing wrong with doing that, and Bulgaria for example does have enough currency reserves to back the fixed exchange rate. Whether such a currency board system is wise to have in these difficult times, I don't know. On one hand, as a relatively small country you don't want your currency to float freely (see Iceland), then again it may get costly to use (or be tied to) the currency of some other country without being able to participate in monetary decisions. Bulgaria has an inflation rate of more than 10 percent these days.

 

By the way, in December there was some discussion in Bulgaria about whether the country should unilaterally introduce the euro. Interestingly, the Minister of Economy supported the idea while the Finance Minister was against it. As the ECB, the Commission and the Council do not endorse such plans (on the contrary), I guess that Bulgaria will stay on the "official" path, ie. join ERM-II some day and later become a euro area member state.

 

Christian

[tabbs]

I apologize for my raw English, but I've not been speaking it, for a long time and this is my first post.

Benvenuto, Luca! Parla (Lei o tu nei fori?) inglese molto bene. And yes, I also think that the recent "series" of 1 or 2 new euro countries per year (SI, CY, MT, SK) has come to an end for some time now. But this is a difficult phase for the euro area too, so there is no reason to add any new members which either do not meet the convergence criteria, or simply regard the euro as a nice haven in stormy times but are not committed to the further integration that would be necessary.

 

Christian

[luke_idk]

Benvenuto, Luca! Parla (Lei o tu nei fori?) inglese molto bene. And yes, I also think that the recent "series" of 1 or 2 new euro countries per year (SI, CY, MT, SK) has come to an end for some time now. But this is a difficult phase for the euro area too, so there is no reason to add any new members which either do not meet the convergence criteria, or simply regard the euro as a nice haven in stormy times but are not committed to the further integration that would be necessary.

 

Christian

 

Thank you Christian.

"Tu" is ok; "lei" is too formal and is going to disappear in a few years, I guess.

 

As you said, Euro can't be a refugee. It's too easy, to join the common currrency to be saved from a state of crysis, without accomplish to economic and legislative integration, too.

In this period, also Britain joining euro would be quite a nonsense, I fear, even if it wuold be important, for economic strenght and integration. British economic, monetary and legislative policy's still too idependent and isolationist, for a real integration.

[ccg]

The old Bulgarian Lev (BGL) was unilaterally tied to the Deutsche Mark in July 1997. Since July 1999 the new lev (BGN) has thus been tied to the euro at a fixed exchange rate. Bulgaria became an EU member state in January 2007, and currently meets the convergence criteria except the inflation rate.

 

Note that the Bulgarian lev is not in ERM-II. However, the Estonian kroon and the Lithuanian litas are, and yet both currencies are (on top of that, so to say) unilaterally tied to the euro at a fixed rate. Basically there is nothing wrong with doing that, and Bulgaria for example does have enough currency reserves to back the fixed exchange rate. Whether such a currency board system is wise to have in these difficult times, I don't know. On one hand, as a relatively small country you don't want your currency to float freely (see Iceland), then again it may get costly to use (or be tied to) the currency of some other country without being able to participate in monetary decisions. Bulgaria has an inflation rate of more than 10 percent these days.

 

By the way, in December there was some discussion in Bulgaria about whether the country should unilaterally introduce the euro. Interestingly, the Minister of Economy supported the idea while the Finance Minister was against it. As the ECB, the Commission and the Council do not endorse such plans (on the contrary), I guess that Bulgaria will stay on the "official" path, ie. join ERM-II some day and later become a euro area member state.

 

Christian

 

Thanks! I didn't know that Bulgaria is not a ERM participant.